Q1 2014 Canadian Tire Corporation, Limited Earnings Conference Call
May 08, 2014 AM EDT
CTC.A.TO - Canadian Tire Corporation Ltd
Q1 2014 Canadian Tire Corporation, Limited Earnings Conference Call
May 08, 2014 / 04:00PM GMT
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Corporate Participants
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* Stephen Wetmore
Canadian Tire Corporation Ltd - CEO
* Michael Medline
Canadian Tire Corporation Ltd - President
* Dean McCann
Canadian Tire Corporation Ltd - CFO & EVP
* Chad McKinnon
Canadian Tire Corporation Ltd - COO of FGL Sports
* Allan MacDonald
Canadian Tire Corporation Ltd - COO of Canadian Tire
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Conference Call Participants
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* Irene Nattel
RBC Capital Markets - Analyst
* Chris Li
BofA Merrill Lynch - Analyst
* Peter Sklar
BMO Capital Markets - Analyst
* Derek Dley
Canaccord Genuity - Analyst
* David Hartley
Credit Suisse - Analyst
* Mark Petrie
CIBC World Markets - Analyst
* Keith Howlett
Desjardins Securities - Analyst
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Presentation
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Operator [1]
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Good afternoon. My name is Paul, and I will be your conference operator today. At this time, I would like to welcome everyone to the Canadian Tire Corporation Limited 2014 first quarter results conference call.
(Operator Instructions)
Earlier today, Canadian Tire Corporation Limited released their financial results for the first quarter of 2014. 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, CEO. Stephen?
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Stephen Wetmore, Canadian Tire Corporation Ltd - CEO [2]
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Good afternoon, everyone, and thank you for joining us. I'll leave the results of the quarter to Michael Medline and Dean McCann to address with you in detail in a moment. And I'll just take this opportunity to expand on the announcement we made this morning concerning our Financial Services business. It was late August when we announced our intention of finding a financial partner for this key strategic asset, and I am extremely pleased that we have found not just a financial partner but a strategic business partner in Scotiabank.
When we first announced that we would pursue a transaction for our Financial Services business, we outlined several objectives that were important to us. There were precedent transactions out there that we understood, and likely could have pursued, but we feel strongly that our strategic partnership with Scotiabank is truly unique. Our Financial Services business is an integral part of our family of companies, an important earnings generator, and now closely integrated with our retail businesses. Preserving this relationship and our ability to operate our unique Financial Services business was key to this successful agreement.
These considerations were challenging to our potential bank partners; however, it was our negotiations and discussions with Scotiabank that resulted in the creation of a strategic partnership that has more than met all of the objectives we began with. Allowing us to further reduce our potential funding risks, service the value of the asset, increase our future financial flexibility, and operate our credit card business, in a manner that preserves our unique operational expertise, while continuing to support our brand and our customers.
In fact, I'm pleased that there will be very little change for the team at Financial Services going forward. And we know they will continue to serve our customers with the industry-leading service that customers have come to expect from them, and for which they are continually recognized. Scotiabank's relationship with Cineplex and their Scene program is an example of how two great companies can work together and provide value to each business. Their arrangement has resulted in the acquisition of new customers for both companies, and we are confident that we will be able to utilize our new strategic partnership with Scotiabank to also drive unprecedented growth opportunities for both companies.
I'd certainly want to thank both negotiating teams for creating one of the most innovative retail and banking relationships in the industry. And with that, we expect to close the transaction by the end of September of this year. We also announced some capital allocation initiatives this morning. As you know, we have been taking a balanced approach to capital allocation that we believe supports our drive to be a leading Canadian retailer over the long term.
Our initial priorities remain, investments in our existing businesses, managing our debt and credit ratings, returning capital to our shareholders through dividends and share buybacks, and pursuing inorganic and organic growth opportunities in businesses that we belong in. The initiatives announced today were: firstly, an annual dividend increase of approximately 14% to CAD2 per share; an increase of CAD100 million to our previously announced share repurchase, bringing the minimum amount of shares we intend to repurchase beyond our normal anti-dilutive practice to CAD200 million. And our intention to pursue early retirement of a portion of our outstanding corporate debt, subject, of course, to appropriate market conditions.
Before I pass things over to Michael, I'd also like to acknowledge CT REIT. Two days ago, we -- I had the pleasure of attending CT REIT's first annual general meeting. I'd like to congratulate Ken Silver and his team on the great work and momentum we're seeing in that business. Capitalizing on CT REIT's expertise and real estate in the future is going to be a further source of growth and value of Canadian Tire Corporation. And with that, I'll now turn the call over to Michael.
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Michael Medline, Canadian Tire Corporation Ltd - President [3]
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Thanks, Stephen, and good afternoon, everyone. We had a good quarter, considering that Spring didn't arrive. Across all of our banners, we were extremely strong in January and February. However, the weather that we benefited from in December through February persisted, and you don't sell a whole lot of patio sets, barbecues or baseball mitts when you have snow on the ground and it's freezing outside. So our sales took a kick in the pants in March. But as a whole, the quarter stood up well.
So I think that's about enough whining about the weather, but Spring is coming, just a little later than usual. It's also important to note that Q1 is our smallest quarter. Historically, only about 5% of our income comes from Q1. Canadian Tire had an exceptionally strong start to the quarter. In fact, our same-store sales results were positive, right up to Week 12 of our quarter, but we lost that traction over the last week and ended Q1 with our comps, sales in CTR down 0.5% over the previous year. Revenue across all of the retail businesses in the first quarter was strong, reflecting higher volume shipments to Dealers and higher sales at FGL and Mark's Banners.
Our retail margin rate was also strong, up 158 basis points, due to a higher margin mix of sales across the FGL Sports and Mark's businesses, the addition of PHL, and some costs related to timing of payments at Canadian Tire, which will unwind over the course of the year. Our key automotive business was actually slightly up in the quarter, despite not having the traffic and sales from tire changeovers that typically occur in the latter half of Q1. Canadian Tire is profiting from thinking less like a general merchant and more like specialty retailers under one big roof. That's an important distinction to us, and has led to our improved customer experience and results in automotive.
That is the mindset we're bringing to other areas of our store, like fixing and playing. These are businesses we know we can grow, as we did automotive. Earlier this quarter, we had our Dealers together, and I am happy to say we heard very positive feedback on the changes we've made as part of the new dealer contract. Implementation of the new terms is going smoothly, and there is good morale. The partnership between the Corporation and the Dealers has never been better, and we continue to focus on strengthening our brand.
In fact, a recent Ipsos-Reid study tells us that Canadian Tire ranked second among the most trusted Canadian companies, neck and neck with a certain iconic purveyor of donuts and coffee. And we were the company most likely to be recommended to family or friends. Interestingly, Mark's tied for 6th overall in the most trusted category, out of 108 Canadian companies in the survey. At FGL Sports, we saw continued momentum, with comp store sales up 6.4%, with Sport Chek comps up 11.9%. We were really pleased with sales of Adidas Olympic wear, and Nike Olympic hockey jerseys, but even without those sales, Chek would have been up double digits.
Sales were strong across all apparel categories, and in our hard goods business. At the end of January, we opened our first flagship store, an 80,000 square foot Chek Atmo store in West Edmonton Mall. Customer reaction results have been outstanding, and our next flagship will open in the fourth quarter in Burnaby. We're also planning to open shortly what we're calling a CTR showroom store in the Spring, at our Laird and Eglinton location in Toronto, that will provide an opportunity to showcase our seasonal assortments.
We're moving towards being more of a test and learn company, and we will continue to try out new ways of bringing exciting shopping experiences to our customers. This store is not the next iteration of Canadian Tire. We are treating it as a retail lab store, and are not planning to expand this concept beyond this location. But we will take aspects of this store and embed them into our new and existing Canadian Tire stores.
At Mark's, we saw solid comps of 2.9% in the quarter. While we continued to grow our Hero private label brands, Denver Hayes, Dakota and Wind River, we will be looking to expand our national brand selection at Mark's, including Merill, and much more Columbia and Helly Hansen work wear. Our customer studies show that the Mark's customer would like a little more brand choice when shopping. We believe that there is much more growth for us at Mark's, given the incredible resonance of the brand with Canadians.
And as we announced earlier in the quarter, we have made some leadership changes in Calgary. We wanted Harry Taylor to return to his senior post in Finance after serving a highly successful two years at Mark's. In his stead, Rick White is now COO of Mark's. Rick was formerly Chief Merchant at FGL Sports and Mark's. And we have promoted Chad McKinnon to my previous job as COO of FGL Sports. Both of these leaders have proven and extensive retail and operational backgrounds.
Financial services had another strong quarter; IBT was up 6.4%. We are particularly pleased with new account acquisition. Over the last couple of years, we have redesigned our customer acquisition processes. Just to point to two successful process improvements, we revamped our in-store acquisition to improve quality and customer guidelines, and implemented new instant credit technology, so that customers can use their new card immediately to make purchases in our stores.
We are extremely pleased with the marketing and advertising we have seen across all of our banners. For instance, recently, the COO of Facebook mentioned on their quarterly call the great work Sport Chek is doing in digital, with advertising on the social media site. And you all saw our Ice Truck advertisement for Canadian Tire, which is now up for a Cannes Award, which is actually one of three awards we've been nominated for this year in Cannes.
There are two areas where you will see heightened emphasis over the next 24 months: e-commerce and data analytics, which can be translated into tangible actions that will improve customer experience and drive our sales. Over the last two years, we have been putting into place the infrastructure necessary to grow e-commerce and take advantage of data. These are important areas of growth for us going forward, and we are deploying the necessary resources to be world class.
Lastly, I would like to reiterate what Stephen said about our just-announced partnership with Scotiabank. This strategic financial services partnership will benefit both partners, and is set up to drive sales to our retail banners. And with that, I'll now turn the call over to Dean.
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP [4]
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Thank you, Michael, and good afternoon everyone. Before I speak about our results for the quarter, I'd also like to comment briefly on the exciting partnership with Scotiabank we announced earlier today. I'm extremely pleased with the agreement that sees Canadian Tire trading 20% of its earnings of the Financial Services business for the price of CAD500 million. This translates into evaluation of about 10.6 times trailing earnings. The financing risk of funding our credit card receivables has been reduced, with the new funding facility from Scotiabank of CAD2.25 billion.
This may mean some rationalization of our existing financing facilities, and we also gain the opportunity to grow our businesses together, benefiting our Financial Services and retail customers. Similar to what we did with the REIT, and once the transaction has closed, we will walk you through the accounting details and impacts on our financials.
Now turning to the results, I'd remind you that our first quarter is our smallest quarter, in terms of retail sales contribution, with our Q1 earnings typically representing about 10% of our consolidated annual net income. This can have the impact of magnifying variances, if analyzed without an eye to the big picture. So I remind you to look at Q1 results while keeping its relatively small magnitude in mind. Diluted EPS of CAD0.88 reflects the expected impact of the first quarter of CT REIT's operations, which have been included in our consolidated results, and which reduced EPS by CAD0.06. As promised, we posted the segmented Q1 results with the CT REIT and CTC eliminations broken out on our Investor Relations website, to make the accounting consolidation process easier to follow.
Last quarter, I mentioned that we were looking at ways to make our financial disclosures easier to interpret, especially as many of our analysts and investors have moved to valuing our business using a sum of the parts methodology. So along with the segmented information I just referenced, in our MD&A beginning this quarter, we have also included our calculation of adjusted net debt on a consolidated and segmented basis, which I know is an area that has typically caused confusion.
For those following along, I'll begin with slide 4, covering consolidated results. Revenue increased 3.8% versus the first quarter of 2013, and diluted EPS attributable to owners of CTC were CAD0.88, down 2.2% over the prior year. This reflects the leakage to earnings from the minority interest attributable to public unit holders of CT REIT, amounting to CAD0.06 this quarter, and should come in around CAD0.23 for the full year. As expected, our selling, general and administrative expenses, excluding depreciation and amortization, were up over the prior quarters due to the planned investments we made in marketing, advertising, and sports, and Olympic activities during the quarter. As well as higher personnel costs related to stock comp expenses, and costs associated with owning approximately 50 more corporate stores than a year ago. I anticipate that our full-year expenses as a percentage of revenue will be in line with 2013.
Turning to our retail segment on slide 5. Income before income taxes decreased 28.2% in the quarter, reflecting the increased operating expenses and the impact of CT REIT, which I spoke about earlier, as well as lower gains on the sales of redundant properties. Our consolidated corporate inventory position continues to be very healthy across all categories, with the extended winter weather providing the added benefit of clearing out seasonal products at both the company and retail levels. We are also well stocked with Spring and Summer products, as we gear up for these important selling seasons. Turning to slide 6, Q1 revenue for CT REIT was CAD82.7 million, of which CAD80.3 million came from CTC's retail segment. Net operating income for CT REIT was CAD58 million, and Q1 results for CT REIT were largely in line with the IPO financial forecast.
Moving to slide 7, Financial Services, as is typical for our first quarter, contributed the bulk of earnings performance, stemming from its integration with the retail businesses. Gross average accounts receivable growth was 6.8% for the quarter, driven by continued efforts for account acquisitions, and reflected in an increase in the number of active accounts and higher average account balances. First-quarter ROIC was 7.32%, a decrease of 1 basis point over the prior year, and down 10 basis points from Q4 on a restated basis.
The decline from the year end reflects the expected impact of CT REIT, and reflects growth in the amount of earnings attributable to public unit holders, as Q4 was a partial quarter for the REIT. You will see in our disclosures this quarter that we brought -- that we have begun investing in our planned capital expenditures for this year, with Q1 CapEx up almost 20% over the prior year.
As we mentioned previously, our capital spending will be higher as we continue to invest in our businesses through initiatives such as the FGL Sports growth strategy, and as we invest in information technology and digital initiatives to support future growth. Finally, I'll remind you about our plans to hold an Investor Day in the Fall, and we will provide additional details as we get closer to the date. 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)
The first question is from Irene Nattel from RBC Capital Markets.
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Irene Nattel, RBC Capital Markets - Analyst [2]
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Thanks, and good morning or good afternoon, everyone. I really appreciate the schedule of the debt by segment, very helpful, and it also helps to shine the light on the net cash adjusted at CAD1.5 billion for the retail segment. So just was wondering if you could share your thoughts around what is the appropriate capital structure for that business? What kind of leverage ratios you might feel okay with? And how you might reverse that net cash position?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP [3]
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So Irene, it's Dean speaking. I think maybe we should take some of that offline. But I would say, from a balance sheet point of view, as we think about capital structure, right? As we've mentioned many times, we're very committed to protecting our credit ratings and debt metrics. And that's what really drives what we would like to see with respect to a capital structure. There's no question that our balance sheet is exceptionally strong right now.
We're in a very good position from a cash point of view, we're in a very good position in terms of our corporate debt position. And as we go forward, that's what we've been talking about here is that we wanted to have the financial flexibility to be able to continue to invest in our business share, if you will, the cash generated by our businesses with shareholders in the forms of dividends and moderate buybacks. And be in a position to do both organic and inorganic growth. And in terms of the detail, Irene, I think it's better to do that offline with you, if that's okay.
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Irene Nattel, RBC Capital Markets - Analyst [4]
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Absolutely, thank you.
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Operator [5]
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Thank you. The next question is from Chris Lee from Bank of America.
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Chris Li, BofA Merrill Lynch - Analyst [6]
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Hi, good morning. Stephen, you mentioned this in your opening remarks but I'm sure you've looked at different structures before today's announcement. Can you share with us why you believe this is the optimum structure? And is there any significance with respect to the 20% level?
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Stephen Wetmore, Canadian Tire Corporation Ltd - CEO [7]
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Chris, the -- I think when you take a look at some of the precedent transactions relating to retailers, credit cards and banking cards, we saw them moving into this world to relieve themselves of the kind of financing requirements associated with the card. A lot of it came out of the 2008-2009 economic downturn, and it freed up their capital and equity. And they ended up taking some earnings as well, as long as -- along with financing receivables. That type of transaction, to me, while potentially attractive, I think it accomplished -- would have accomplished a couple of things, in terms of relieving our requirement to fund the receivables. Gave us a little bit of concern, however, moving forward, because those transactions have a life span; they have to be unwound. They involve the involvement in your business as well, in the credit risk department. So you're managing the businesses together. And we were concerned about, over the long term, continuing to be able to attract the quality of the executives and management within our Canadian Tire Financial Services, if we had done a transaction like that.
So we kind of stepped back and said, how can we preserve -- achieve everything that we would like to achieve objectively, as our stated objectives at the beginning, yet have a situation that preserves the operational integrity and excellence of Canadian Tire Financial Services. That can drive a partnership-type of relationship, which the other precedent transactions don't. How can we partner with someone who can give us access to their customers for the sake of our -- both our credit card and for the sake of our retail businesses, and move forward through the coming 5 and 10 years with an extremely dedicated and focused large bank in Canada, with a great brand.
So we'll develop things together, technology, we can look at it together, and its forward development opportunities. We saw all that in an equity ownership position. We did not see that in a sale of receivables situation. So we -- while I said, as well, that some of the banks we talked to had had a bit of trouble with this concept, Scotiabank saw the vision, understood the vision. Very much in line with what they had, from a marketing concept, done with Cineplex. And so we started to flush it out from there. And that's why I believe this is -- and say that this is, in my opinion, one of the most unique and innovative arrangements in retail and banking, and additionally gives us the option to move up from 20% to 29%.
There is no magic in the 20%, Chris, I don't think. The -- traditionally, if you did a sale of receivables transaction, you'd probably give up around that percentage of earnings. And so from that aspect of it, it's kind of quid pro quo between the two transactions. So -- but in terms of, the more ownership Scotiabank has, you could probably say the tighter the relationship may become in the future. But this is a very strong partnership relationship, as it currently stands. And Dean's constant reference to financial flexibility, it certainly enhances that, and so it's got all of the aspects of a tremendous relationship, I think.
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Chris Li, BofA Merrill Lynch - Analyst [8]
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Okay, thanks for the detailed answer. And I guess the follow-up to that would be, the agreement to move up to 49% over the next 10 years? Does that mean that you have -- your intention is still to maintain a majority control over the next 10 years? Or is there a possibility that you might consider selling even more?
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Stephen Wetmore, Canadian Tire Corporation Ltd - CEO [9]
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No, it's our intention to maintain control at this stage of the game, Chris. Yes.
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Chris Li, BofA Merrill Lynch - Analyst [10]
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Okay, and maybe couple of quick ones for Dean. Just the proceeds you're getting, is that net of taxes and transaction cost, the CAD500 million?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP [11]
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Yes, Chris, it's CAD500 million that comes in the door. The tax -- there is no tax impact on this, because of, if you just think about it simplistically, we've made money and earned taxes over time. We've built up a tax base that's appropriately available in terms of the cost base, in terms of calculating it.
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Chris Li, BofA Merrill Lynch - Analyst [12]
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And are there any other incremental ongoing costs from this transaction? I'm thinking, in particular, the CAD2 billion of standby commitment facility done at Glacier, especially when you have to pay a little bit of money on that facility? Is that material?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP [13]
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It's a little bit. And then, what I would say, Chris, is we'll also look at our lines corporately, as a result of putting this together. And one of the things we'll do is just do some rationalization, probably. So I wouldn't think of that as a big deal.
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Chris Li, BofA Merrill Lynch - Analyst [14]
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Okay, thank you.
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Operator [15]
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The next question is from Peter Sklar from BMO Capital Markets.
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Peter Sklar, BMO Capital Markets - Analyst [16]
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Thank you. On Sport Chek, you've had some very strong comps over the last couple of quarters. So I'm just wondering if you could elaborate what's going on at Sport Chek? And does it have anything to do with the digital ad spend that you did with Facebook? I wasn't too sure of the timing of when you did that program; maybe you could elaborate a little bit on that program?
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Michael Medline, Canadian Tire Corporation Ltd - President [17]
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Peter, it's Michael. In the room today, we have our two rookie COOs, Chad McKinnon and Rick White, so instead of them just sitting here, why don't we ask Chad to answer your excellent question, and -- in terms of why Chek has been on fire? So Chad?
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Chad McKinnon, Canadian Tire Corporation Ltd - COO of FGL Sports [18]
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Hi Peter, it's Chad here. We did have great success with that digital ad campaign. I'm going to talk about it later today. But we dropped a -- typically, we would do a flier ad. We dropped it altogether, went just to media. We were up double digits for the week, and I've never seen that before in my time. Typically, when we drop a flier, we're down 15% for the week. So very encouraging on that.
But leading up to that, all our businesses are performing very well. We had a halo around the Olympics and a tremendous February period. And then when you look at the overall results of the stores, 95% of our store base right now is comp year to date. So it's coming from a number of areas right now, just not around that digital element.
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Peter Sklar, BMO Capital Markets - Analyst [19]
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Right. And can you explain the -- can you elaborate a little bit on the Facebook program? When you did it, how many weeks? Did you completely eliminate your flier, et cetera?
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Chad McKinnon, Canadian Tire Corporation Ltd - COO of FGL Sports [20]
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We ran it for a two-week period, week six and seven for us. We ran a couple test markets, as well, because a key for us is not just to walk away. So we did pick a few markets that were isolated, due to impact like weather in different parts of the country. So we did do a couple test markets. But essentially, we did -- we walked right away from the flier for a two-week period, never done anything like that before. Had double-digit comp increases. And actually, the ad items had a 23% lift, as well, to over typical sell-throughs. So the items that we're targeting are checking at a much higher rate.
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Michael Medline, Canadian Tire Corporation Ltd - President [21]
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It's Michael here. And at the other interesting part of it was, I called Chad and the marketing guys, because the weather was just horrible. So I thought okay, they're doing the test, but they couldn't have picked a worse, really, couple of weeks in order to be able to do the test, and we still saw the results there. The other beauty of this is that our Head of Marketing, Duncan Fulton and Freddy Lecoq out in Calgary, saw that there were going to be huge blizzards in the maritimes.
There were going to be stores that were going to be closed, or difficult for customers to get to stores. And for -- and then pulled spending overnight for the next few days, and put that into the Ontario market, where it would have bigger bang for its buck. So you can see the flexibility, as we continue to think this through, and test it and roll it out, and what that's going to be able to do for our business.
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Peter Sklar, BMO Capital Markets - Analyst [22]
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So given that you've had great success with this digital ad program, what are the implications for Sport Chek and the other Canadian Tire banners? I assume you're not going to eliminate your flier; that would be pretty dramatic. But what are the implications of all this?
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Allan MacDonald, Canadian Tire Corporation Ltd - COO of Canadian Tire [23]
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Peter, it's Allan here. We're taking a whole bunch of learnings from this stuff that FGL is doing across the board, with regard to technology and merchandising, and vice versa, quite frankly. We're working really hard to unpack the specifics of the positive impact. And part of this has to do with the breadth of our customer base.
The digital -- how digitally savvy the customers are. The -- there's a little bit of variance, when you think of breadth of product and assortment we have. So there's some areas, we think, where this learning is going to be hugely valuable for CTR. But they are very different businesses. So I wouldn't necessarily jump to a wholesale exchange of flier paper for digital, as you rightly suggest. But we have some learnings in there, and we're absolutely capitalizing on them.
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Michael Medline, Canadian Tire Corporation Ltd - President [24]
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And Sport Chek will continue to roll out and take more and more fliers out -- paper fliers out of the market and replace them with our new digital flier program. The thing we have to keep in mind, though, is we have to really -- it changes the way you do business. So the buyers have to buy differently. The operators have to operate a little differently. So that's what the other thing we're testing, and I don't think that will be insurmountable in any way. But that's why we wouldn't just go 100% digital flier right away.
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Peter Sklar, BMO Capital Markets - Analyst [25]
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Right. Okay. And I have one other question on another topic. You mentioned, in the Canadian Tire banner, you had a very late break for Spring weather that impacted your seasonal categories. How is Q2 shaping up in seasonal? And do you think you'll catch up for what you missed in Q1?
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Allan MacDonald, Canadian Tire Corporation Ltd - COO of Canadian Tire [26]
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Well we don't provide forward guidance. But what I would say is (laughter) -- the last thing Dean said to me before we got on the line. But you're probably outdoors as much as I am. Our stores -- the good news is, January and February treated us really well. Canadians responded to our offering, our dealer network was very optimistic, and our set up for Spring was as good as I've ever seen it. And as Spring arrives, and it will, I feel like we're going to be the retailer of choice for Canadians. And we've got the best offering we ever had. Our advertising right now, with some products we have in the market, is second to none. So we're ready when the weather hits, and hopefully it's going to be very soon.
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Peter Sklar, BMO Capital Markets - Analyst [27]
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Thank you.
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Operator [28]
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The next question is from Derek Dley from Canaccord. Please go ahead.
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Derek Dley, Canaccord Genuity - Analyst [29]
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Yes, thanks for taking my question. Just on your e-commerce rollout, can you remind us, what percentage of total SKUs are now available online? And where do you see that going? And if you could break it down, as well, in terms of automotive versus the rest of the store?
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Allan MacDonald, Canadian Tire Corporation Ltd - COO of Canadian Tire [30]
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Yes, hello, Derek. It's Allan again. Where we are right now was, we've morphed from our eight market test to the full Canadian Tire assortment that's stocked in store, is available right now. So if the product is available, if the products resident in the store in your market, or a store near you, it's available for sale. And where we will be going from here -- so we're very pleased, getting great response.
We've got a ways to go in terms of understanding the implications of expanding that into things like Endless Aisle, or full assortment in every store, and that stuff we're working through right now. For competitive reasons, I'm a bit reluctant to share specific plans. But what I can say is that this is a journey for us. You've seen us take two steps so far this year. I'm really pleased with the progress we're making, and the team is really energetic about building the best e-commerce offering in the country for the widest selection of products.
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Derek Dley, Canaccord Genuity - Analyst [31]
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Okay, that's great. And just following up on one of the last questions. Just to be clear, in terms of your positioning heading into Spring. Can you just comment on the inventory level, given that Spring was late to arrive? Are we going to see more mark-downs? Or are you comfortable with the inventory level heading into Q2?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP [32]
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Derek, it's Dean. So in terms of coming out of the winter season, I think we're as clean as we've ever been, both corporately and in store. And you saw, in terms of revenue or shipments, we're very strong to the Canadian Tire dealer system. So we're in a great position in terms of being ready, if you will, to meet customer needs in the Spring. So I'm not worried about our inventory position. Frankly, I'm very pleased with our inventory position all the way around, both from a Winter point of view and from a Spring point of view.
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Derek Dley, Canaccord Genuity - Analyst [33]
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Great. Thank you very much.
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Operator [34]
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The next question is from David Hartley from Credit Suisse.
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David Hartley, Credit Suisse - Analyst [35]
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Thanks, and thanks for taking my question. Good afternoon. Just on the -- first acknowledge that what's going on in FGL is fantastic, great growth, and you're really moving forward. Just thinking about the Olympics and the halo effect, how do you carry that forward into the rest of the year? And when you think about comparing it against next year? I think in the past, you've talked about World Cup and other events. But are we setting up next year for a bit of a disappointment in Q1, given how great it was this year?
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Michael Medline, Canadian Tire Corporation Ltd - President [36]
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(laughter) There's a loaded question. Hello, how are you doing David? It's Michael. (laughter)
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David Hartley, Credit Suisse - Analyst [37]
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Only the best.
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Michael Medline, Canadian Tire Corporation Ltd - President [38]
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No way -- there's no way we are heading toward disappointment. (laughter) Every year, there are things that come up, and this year we were blessed with the Olympics and -- but that's in February. It's a relatively small month, and we have the World Cup. But there will be other things you'll be seeing us doing. And the banners do not -- they -- we look forward in terms of what we're going to be doing, and we'll drive the business toward that. And next year, we may even get some Spring weather in March, and who knows? But no, that's not really a problem.
I think the halo effect of what we're doing in sports, whether it be the Olympics or with MLSC, or with the -- Ottawa in terms of the Canadian Tire Center, or a newly announced deal with the Habs, is giving us opportunities that we've never seen before that are creating a halo over our banners, but it's not a ephemeral halo. It's -- I think it's a halo that continues. All of the brand studies that we're seeing, before the Olympics, during the Olympics, and after the Olympics, are very, very strong, and the customer surveys as well. And so I'm not too -- I'm not upset about that.
We didn't invest in the Olympics, because we could sell some merchandise during the Olympics or get a small pop. We've done that as a long-term deal to grow our brand. And that's what we're all about. And you can see in our banners, and you see it in Sport Chek, what it means when you can take the brand up, especially with your targeted customers. And that's what we're doing. So I was joking at the beginning, but no, I don't expect there to be a fall-off because we don't have an Olympics in -- next year.
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David Hartley, Credit Suisse - Analyst [39]
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Okay fair enough.
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Michael Medline, Canadian Tire Corporation Ltd - President [40]
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Marketing -- our Marketing spend will be smaller in February, because there's not a big marketing spend, usually. So our expenses in Q1 may be a little lower, but I don't -- I'm not -- still going to expect sales to be good.
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David Hartley, Credit Suisse - Analyst [41]
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Okay, just switching gears a little bit on the Scotia deal. Who has the option, in terms of acquiring more of CTFS from you? Is it yourselves selling to them? Or can they come and say, okay, we want another 10%?
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Stephen Wetmore, Canadian Tire Corporation Ltd - CEO [42]
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It's our option to sell to them, David.
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David Hartley, Credit Suisse - Analyst [43]
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Okay, great. And is there trigger day -- trigger periods for that? Or --
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Stephen Wetmore, Canadian Tire Corporation Ltd - CEO [44]
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Not in particular. There's -- obviously, there's 10 years here. But I think any relationship like this, you have times that you sit down and assess the arrangement. And whether it's time for it to change for one reason or the other. So that would be on an ongoing basis. But it's not like we said 18 months from now, we'll look at anything, or anything like that. So -- I believe the moving from 20, if we decide to, will be a natural move for natural reasons, whether it will be apparent that it's a good thing to do.
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David Hartley, Credit Suisse - Analyst [45]
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Okay. Just thinking about -- I see the business rationale behind it, when you think about customer acquisitions, sharing of customers. Is there a further road to go down, in terms of loyalty? I note the Scene loyalty program and other things that Scotia has done. Would you share in those loyalty programs, or something like that, as you go forward?
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Stephen Wetmore, Canadian Tire Corporation Ltd - CEO [46]
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Loyalty is something that Mary and her team have worked hard at getting the max-value proposition out of it. And she's continually developing new products, even through the course of this year, to maximize that. And loyalty very much ties into Allan MacDonald's business at Canadian Tire Retail. And so we had originally built our loyalty platform, in fact, to hopefully some day encompass all our banners. And I think there's great value in doing so.
So I think it's the evolution. We'll get our national loyalty program extended electronically this year and on cards. We'll then start building data. The thing is, you can use it to drive some traffic. We're -- obviously. But I think we're also very much interested in what these loyalty programs generate in terms of learnings from high value, near high value. And so we're building the infrastructure to be able to handle that, as well. So I wouldn't preclude anything, but that's not the driving force behind a lot of the marketing efforts.
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David Hartley, Credit Suisse - Analyst [47]
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Okay great. Thank you very much.
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Operator [48]
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The next question is from Mark Petrie from CIBC World Markets.
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Mark Petrie, CIBC World Markets - Analyst [49]
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Hello, good afternoon. I wanted to ask about the categories of emphasis at Canadian Tire, which I think you mentioned were tools and sporting goods. And I wonder if you could just elaborate on what the plan is there? If there's capital investment required, similar to automotive? And I note that -- I guess it has been six years since Smart stores were introduced. Maybe you can fit all that answer into the context of, what I could presume would be a refresh on the stores, starting in the next couple years or so?
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Allan MacDonald, Canadian Tire Corporation Ltd - COO of Canadian Tire [50]
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Hello, Mark, it's Allan. As much as I would love to tell you our plans for sporting goods and hardware and fixing, there's a lot of people listening to this call. So what I can say, though, is that we see a lot of opportunity in these categories. Some of it because of just expanding markets and organic opportunities. And some of it because we see an area to improve our own business, and to capitalize on -- to be able to get to better growth. And if I use fixing as an example, we're going to take the same approach that we took in automotive, and that's really looking at the fundamentals.
Do we have the right product set? Are we set up right in stores? Are we chasing the right categories with the right promotion? Do we have the right quality levels? And in those -- fixing isn't just one category. As you know, it's everything from paint to sockets to home repair and power tools and everything. And we think there's opportunity in some of those segments, but it's very fundamental. It's about revisiting our assortment and the way we're bringing it to market. So look for continuous improvement in that, whether it be, work on the master craft brand, improving quality, expanded assortments, and whatnot.
When it comes to -- and of course, the other thing there, too, is we've been -- and I think Stephen and Michael both alluded to this in their comments today. We've been working really diligently on bringing in depths to the Canadian Tire retail team. So we've got some new staff that we're bringing in to -- that have a particular experience in this regard. And the introduction of things like the loyalty data Steve was talking to gives us more and more insight all the time, so we're really happy there.
When it comes to the question about the format, we're continually trying new aspects of improving the Canadian Tire retail store experience. And the work that we're doing at FGL is a great example of how the Corporation is working to understand technology, and how it resonates with our customers. The show room store we're about to open has components of that. So we're actually doing a lot of work in various parts of the business in this test and learn environment that we're trying to foster, to see where the opportunities are for us to continue to improve the network experience.
And over the course of time, as we get more and more comfortable with what the right solution is, then we'll be revisiting -- or we'll be visiting the decision to make that more of a national thing.
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Stephen Wetmore, Canadian Tire Corporation Ltd - CEO [51]
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Just to add two things there. The capital, Mark, is not -- there's not capital required in the tools and sports like there was in automotive. That's a radically different thing. And back to what Michael said, and combined with Alan, if we run our businesses with the idea that we want to be the best in that business in the country, and almost look at it as a standalone entity, then that's the focus. And that's the people aspect that Allan is bringing in to run it like that.
So we've -- when you -- one of our pet projects is paint, for example, you know? Used to always say, where is our paint expert? And I didn't want him to be the category business manager. I wanted to be a paint expert, who loves paint, and who is an executive, and would can compete head-to-head with the best paint retailers and producers in the world. That's what Michael and Allan are referring to, just to connect the dots there for you.
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Mark Petrie, CIBC World Markets - Analyst [52]
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Okay thanks. That's -- yes, that's very helpful. And my second question was just around -- I think you sort of articulated priorities in the marketing front for this year of e-commerce and data analytics. And wonder if you could give us a sense of what the investment has been over the last couple of years, in trying to set up those capabilities? And then, how we should think about the spend there over the next year or two, three years?
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Stephen Wetmore, Canadian Tire Corporation Ltd - CEO [53]
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In data analytics, and what was the other part?
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Mark Petrie, CIBC World Markets - Analyst [54]
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E-commerce.
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Stephen Wetmore, Canadian Tire Corporation Ltd - CEO [55]
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E-com? Okay. The nice thing about e-commerce was that it kind of was a larger extension of the infrastructure we were putting in place, right? So the expenditure hasn't been horrific, by any means, and -- but our choice of the way that we're going about it under Eugene Roman's leadership is really quite spectacular. And in many cases, we've been able to use older systems by effectively putting cloud computing on top of them, and then snapping on e-commerce tools attached to that, where necessary, which hasn't been extremely expensive.
We also want to evolve that, so that many of the common elements of the platform are then available for Mark's and for FGL. Ironically, when Michael and Allan were running the automotive business, Allan wanted e-com quickly with the tires. And so made a decision on e-commerce platforms that, again, wasn't a lot of money, CAD4 million or CAD5 million, I think, around then. But -- and we thought we would effectively have to throw it away after two or three years, which we accepted, because we didn't necessarily think it was the platform. Only to find out that what Allan and his team actually chose was maybe the best platform around. And we're expanding on that platform for the rest of the organization.
So it's not horrendous. The data center in Winnipeg costs money, obviously. I don't know if I'd put that in the data analytics category, but it cost us some money. It's paid for this year, but our computing capability now is absolutely spectacular. The data analytics side is going to come more from people understanding and analyzing on that part. That's a -- I would say that that's more of a people issue, as opposed to an IT spend. And it has to be a huge focus for us, to retrain a lot of people who are using different types of data before, and us being able to totally use Mary's team at Financial Services for this. So it's more in line with people than it is with capital.
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Mark Petrie, CIBC World Markets - Analyst [56]
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Okay, thanks very much. Very helpful.
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Operator [57]
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The next question is from Keith Howlett from Desjardins Securities.
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Keith Howlett, Desjardins Securities - Analyst [58]
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Yes, I was just wondering, on the deal with Scotiabank, in terms of the 10.6 times multiple that you sold your -- the 20% interest for. What were the parameters that got you to that valuation?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP [59]
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Keith, that's just looking at it from a -- backward-looking, in terms of the earnings generated at Financial Services that -- at an after-tax basis. And the CAD500 million was the value that BNS saw in the business. So I'm not sure if I'm answering your question, but I think we're backing into what that valuation is, relative to the offer that Scotia made. Because they saw, if you will, the opportunity, in terms of participating in our Financial Services business. So I'm not sure if that helps you or not. But we're pleased that people are seeing value of this business, and I think historically, in the marketplace, it hasn't been, if you will, recognized.
So we believe that, from a surfacing of value, it kind of puts the spotlight on, similar with the REIT. But just be clear that that's not why we did it. We did it because we saw the opportunity to accomplish a number of objectives going forward around our balance sheet, financial flexibility, all the things that we've talked about, and the future opportunities with Scotia, as Stephen has alluded to. In terms of access to their customers over time, our Financial Services customers, and very importantly, our retail customers.
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Keith Howlett, Desjardins Securities - Analyst [60]
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And in terms of the term, I understand they could sell their shares back to you after 10 years. So when you -- is this not a term-limited deal, in a way? It's a 10-year deal? Either party could exit or not?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP [61]
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The reality is yes, that's a term of the deal, that at the end of the 10 years, Scotia would have that right. I think what you're getting caught up is in the accounting, if you will, of a transaction like this. And the reality is, that's the way we will need to put it out there. I think quite frankly, if we're in that position 10 years from now, that will have been figured out far before 10 years, in terms of the value that both parties are seeing, as Stephen alluded to, in terms of increasing their interest over time is the option that we have to put more of the business to them. That's a far more likely outcome than after the 10 years. It's kind of a standard provision.
You have to have some kind of way, if you're on the other side of the table, to exit a provision, if it's not working. And that's so far out that it pains me to have to even talk about that. But it's just disclosure that I'm kind of up against. So I don't know if that's helping you, Keith, but that's, frankly, the way that we look at it is, it's necessary for the other party on the other side of the table. I think they would say the same thing. But the reality is, we see growing together and generating value together, as opposed to worrying about what's going to happen 10 years from now if things didn't work.
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Keith Howlett, Desjardins Securities - Analyst [62]
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And in terms of their commitment of CAD2.25 billion, is that -- if there if there was a 208 meltdown, do they have a force majeure out? Or they're committed to you, as the bank burns around them, or how does that work? Exactly, and hopefully, the bank isn't burning around them. (laughter) Canadian banks did very well through all of that madness, but it is -- the quote, if you remember the commercial paper crisis, and all those kinds of things, the market out clause, and those kinds of things. There's none of that. So we have a binding, firm commitment from Scotia that they're there, were there ever a reason that we needed to access funds.
So what it really accomplishes is that one of the foremost objectives that, certainly, I had going into this thing was that people should just should stop worrying ever about a retailer, Canadian Tire, being involved with s financial services business that might need funding some day in a disrupted market. This basically just gives us a rock solid backstop for that. And does it matter whether it's term-able? Because somebody mentioned this term to me. I don't really know what I'm talking about. But can you term this commitment out?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP [63]
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Yes, so the way it's designed, Keith, and maybe we should do this offline. But very quickly, it's designed as a backstop. So in other words, if you had a disruption, there are some -- effectively, if we had to access it, then you'd term out, if you will, that access to it over a period of a couple of years. So it's really designed as a backstop. That's what it's there for.
The bank, CTFS, a group of companies, the Canadian Tire bank, what we found in this transaction is even better than we thought, do an exceptional job of financing their business going forward, and that's not going to change. We're going to continue to finance our business using Glacier commercial paper, the Glacier term debt, and deposits. So it's all very well-designed, and it's going to continue into the future. The back stop is there, though, were there ever a disruption.
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Operator [64]
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Thank you. Unfortunately, we have run out of time for questions at this time. I will turn the call over to Stephen Wetmore, CEO, for any closing remarks.
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Stephen Wetmore, Canadian Tire Corporation Ltd - CEO [65]
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Thank you, Operator, and thanks everybody for joining us. If there are outstanding questions, you all know how to reach us, so please do so. But thank you all very much, on a busy day, for joining us.
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Operator [66]
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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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