Canadian Tire Corporation Ltd 2014 Investor Day
Oct 09, 2014 AM EDT
CTC.A.TO - Canadian Tire Corporation Ltd
Canadian Tire Corporation Ltd 2014 Investor Day
Oct 09, 2014 / 12:30PM GMT
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Corporate Participants
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* Stephen Wetmore
Canadian Tire Corporation, Limited - CEO
* Michael Medline
Canadian Tire Corporation, Limited - President
* Dean McCann
Canadian Tire Corporation, Limited - CFO
* Allan MacDonald
Canadian Tire Corporation, Limited - COO - Canadian Tire
* Rick White
Canadian Tire Corporation, Limited - COO - Mark's
* Chad McKinnon
Canadian Tire Corporation, Limited - COO - FGL Sports, Ltd.
* Michael Broderick
Canadian Tire Corporation, Limited - SVP - Automotive Business Canadian Tire
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Conference Call Participants
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* Peter Sklar
BMO Capital Markets - Analyst
* James Durran
Barclays Capital - Analyst
* Irene Nattel
RBC Capital Markets - Analyst
* Vishal Shreedhar
National Bank Financial - Analyst
* Patricia Baker
Scotiabank - Analyst
* Brian Morrison
TD Securities - Analyst
* David Hartley
Credit Suisse - Analyst
* Keith Howlett
Desjardins Securities - Analyst
* Mark Petrie
CIBC World Markets - Analyst
* Christopher Li
Bank of America Merrill Lynch - Analyst
* Kathleen Wong
Veritas Investment Research - Analyst
* Rosa van den Beemt
NEI investments - Analyst
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Presentation
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Stephen Wetmore, Canadian Tire Corporation, Limited - CEO [1]
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Well, good morning, everyone, and welcome to our Investor Day. It's been a while since we've hosted this type of event, so thank you for taking the time to spend with us this morning.
I should note that we will make forward-looking statements, as you can imagine, in today's remarks and have included the obligatory disclaimer in the presentation slides for your reference.
Now in just a few weeks, on December 1st, Michael Medline will officially assume his role as President and CEO of Canadian Tire Corporation. I couldn't be more excited for Michael, and he knows he has my full support and he is the perfect person to lead the company over the coming years. In a few minutes, you'll hear from Michael about our future, a future that will see rapidly changing retail techniques tailored to demographic changes with a proper balance of old and new.
The coming years will be the most exciting retail environment we have ever seen. And without creativity and focus, many brands will lose their way.
As you know, since our last Investor Day, we have invested billions of dollars in building the foundation to keep us relevant in the eyes of our customers and to generate an internal environment that the best and the brightest want to work in. Michael and his team are already taking those assets in a technology- and data-driven world to create the future of retailing.
Great retailing has to be part of running a complete business where equal focus is given to the balance sheet and cash flow versus bottom line profitability. There is a time when investing in financial systems and IT security is as important as in-store retail technology.
Michael and his team understand this balance and the need for a strong foundation in all aspects of the business. Our share buyback program announced this morning is a reflection of that. It's a balanced approach that has allowed us to acquire the Forzani Group and smaller acquisitions, yet have the financial capacity of an investment-grade balance sheet that is capable of financing the future.
I believe our Financial Services transaction with Scotiabank and the creation of CT REIT are two great examples of further strengthening our company for the future while surfacing value for our shareholders.
With our Canadian Tire Financial Services transaction with Scotiabank, we attempted to do something that hadn't been done before, and I'm extremely proud of what our team was able to accomplish. We have an incredible partner in Scotiabank. We will grow our Financial Services business together. Our retailing operation will benefit. We were able to surface the value of CTFS. And our cash injection from the transaction was greater than our share buyback announcement we made this morning. And as you know, we also have the option of selling an additional 29% of CTFS to Scotiabank, and we obtained the financial security of backup lines to finance our credit card receivables should we ever need it.
For those who focus on a price-to-earnings multiplier to value our business, then your question will be how are you going to replace the earnings loss from selling 20% of CTFS. Well, that's a relatively easy question to answer because we have the earnings sitting in our bank account in cash. We sold the earnings for more than the market was valuing them for.
The question, however, is how to value an organization like Canadian Tire requires differing approaches, which, I am pleased to see, have been endorsed by many of you. And yes, our earnings will be impacted in the short term from our partnership with Scotiabank, but this is a long-term play that has tremendous value to CTFS and to CTC.
The same can be said about CT REIT, a great transaction with flawless execution. We are just now approaching the one-year mark since its IPO. And to date, Ken Silver and his team have done an unbelievable job. CT REIT was created to surface the value of our real estate holdings and to play a strategic role for our Retail operations. It is not a vehicle to park CTC's excess cash as CT REIT is intended to be self-financing and has all the capabilities to do so. They have made great progress, and they are moving ahead as they originally outlined to their investors.
Now before I hand off to Michael, I'd like to touch on our Canadian Tire Associate Dealer contract, which was renewed in 2013 for an additional 11 years to 2024. Given the depth and breadth of our relationship with our Dealers, the contract is complex. And I could go on at length about it. But let me try to provide you with a brief overview of its terms, recognizing that there is a limit beyond which I cannot go, even in the Q&A later, because of confidentiality arrangements with our Dealers.
First, let me say that each of our 490 Associate Dealers are members of the Canadian Tire family. We believe strongly in our business model at CTR, and our Dealers are obviously critical to its operation. They are the face and the voice of the triangle in every neighborhood and community we operate in. And they are motivated and dedicated entrepreneurs who tremendously assist us in adapting our stores and offerings to the local marketplace.
Our phones at head office ring off the hook when we make the smallest of mistakes or we waste a dollar that could have been theirs. Not many corporate store managers call the CEO when we disappoint a customer. Our Dealers provide a wonderful discipline to keep our company focused at all times. I call it wonderful, but our staff call it grueling. But you can't brush a mistake under the corporate carpet at Canadian Tire. Anyway, that's important context as I describe our relationship.
So as I have said, there are 490 Associate Dealers. The median age is about 53 and all of whom have individual contracts with us.
Dealer mobility is one of the most important elements of the Dealer contract. This is the ability of Dealers, if they wish to do so, to move from one store to another based on a number of factors including performance. You start in a small store somewhere in this vast country of ours. And after three or four moves or changeovers, as we call them, you end up in a high-volume and hopefully highly profitable store.
When a senior Dealer leaves the network and an extremely desirable store becomes available, it is possible that there will be a chain of seven or eight changeovers that will follow as a result. And what we have seen historically is that when a changeover occurs, there is a significant increase in store performance.
A Dealer can have only one principal store and up to two additional satellite stores. When a Dealer leaves the network, his or her store goes back into the mobility pool, and a Dealer cannot pass the store onto other members of his or her family.
Over the next number of years, mobility is expected to accelerate as the new contract requires Dealers to retire after 40 years in the system, which is consistent with our view that we want Dealers to spend their entire careers with Canadian Tire.
From a business model standpoint, the corporation is responsible for funding and building the stores, the distribution centers and the various systems outside of the stores. The Dealers are responsible for everything inside: inventory, fixtures and the operating costs of the store.
Not surprisingly, this model results in the financial aspects of our contract being quite complex. The basic financial premise is that the corporation and each Dealer share gross margin roughly on a 50-50 basis. Gross margin in this case means the Dealer's selling price less the corporation's cost of the inventory.
It's very hard to generalize anything at Canadian Tire. But because we split margin, it only makes sense to share many of our expenses on a 50-50 basis as well.
For example, we split the cost of advertising, which includes the promotional costs associated with product and items like the flyer and destination guides, as well as in-store and customer-facing technologies. The cost of special projects that fall outside the general financial framework, like the new in-store WiFi and the loyalty program, are typically shared on a negotiated basis.
The result is that we have and we strive for a financial relationship which aligns the parties and strikes a balance between the contributions that the corporation and the Dealers make to the enterprise and the return each receives on those contributions.
We believe our new Dealer contract accomplishes this. In terms of operations, the corporation has responsibility for making all product, pricing and merchandising decisions, all national advertising and flyer decisions and, in addition, all store designs and layouts.
But while we are responsible for all these areas, we also have a number of committees or working groups, which have jointly established -- have been jointly established with our Dealers, which enable us to work collaboratively with them and to benefit from their expertise and experience in operating stores.
The new Dealer contract also introduces standards to ensure our Dealers remain actively engaged in their businesses, consistent with our business model and the high-performance culture that both the company and the Dealers expect of each other.
And finally, the new contract has simplified many processes to achieve efficiencies and cost reductions. Decisions can now be reached and implemented much more rapidly as a result of the redesign of many of our processes, and our working relationship with the Dealers has never been better.
Overall, I would say that our new Dealer contract allows us to move forward to meet our competition and also provides the corporation with the flexibility it needs to grow and acquire other assets should that be part of our overall strategy.
Our associate Dealer contract is just one example, albeit a big one, where we have spent the time and resources to try and get it right. Don't cut corners. Don't put off a problem for someone else to deal with. This attitude has served us well, and we've built a foundation that will support the innovation and creativity to take our brand to the next level. And the person that is going to do it is Michael Medline. So let me hand off to Michael.
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Michael Medline, Canadian Tire Corporation, Limited - President [2]
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Thank you, Stephen, and thank you, everyone, for being here and taking the time to hear our plan for the next three years, the people in the room and the people who are on the webcast today. So hello to everyone out there as well, including hundreds of our employees who are watching online.
I'm not going to repeat numbers you already know and can read in our quarterly reports today. Instead, I want to give you as much of a flavor as possible about our goals, our strategies, our strengths, our flaws and our opportunities.
I can't go into detail on every aspect of our vast business. We'd be here all day. And I'm not going to go through Petroleum, PartSource, Pro Hockey Life or Atmosphere. But I'll be glad to answer any questions a little later on.
As Stephen said, we are clearly on offense. We're in a position of strength and expect to continue to grow and deliver results. We expect growth from within our four key businesses, businesses that are stronger than they have ever been in the past. Growth from advances we'll make in digital and customer insights, growth from market share we will take from our competition. And I'll talk about the possibility of growing through acquisitions a little later on.
We are on a journey. We have all sorts of areas to improve on, but we are on the right path. For me, the most important priorities over the next three years will be to -- first, continue to put up the results, put the numbers on the board; two, make wise capital allocation decisions; three, drive growth in our core businesses; four, transition from the old to the new world; and five, continue to strengthen our brands.
The retail industry is a great business for those willing to dream big, act quickly and embrace the future. And at Canadian Tire, that is exactly what we intend to do.
Today, I will walk you through how we expect to do that by covering four key areas -- first, I will give you an overview of the top three underlying initiatives that extend across all of our businesses; second, I will take you through the key growth drivers in each of our core businesses and our strategies to deliver the numbers; third, I will take you through our financial aspirations, our targets for the next three years; and fourth, I will talk about our use of cash and strategy for possible acquisitions.
Let me start with our top three strategic priorities that extend across all of our businesses. These are enterprise-wide priorities that will be critical to our success.
The first one is talent, attracting and retaining world-class talent that will drive our business, because the reality is, our financial aspirations will only be met if we have the right team and the right culture in place. And I really like the team we have today. It is the team Steve and I have built together over the past couple of years. And what's been exciting is that we've been able to attract top talent like never before because of our strength in brand, our strong assets and our aggressive commitment to digital.
We have honed talent from within -- CTR, our COO, Allan MacDonald; at CTFS, our COO, Mary Turner; and our CFO, Dean McCann. That's a lot of acronyms.
We've embraced talent through our acquisitions of the Forzani Group. Today, Chad McKinnon and Rick White run FGL and Mark's, respectively. We've gone outside to bring in talent where we had a need -- Eugene Roman, the most digitally savvy Chief Technology Officer; Mike Broderick, an innovative Automotive veteran; and Duncan Fulton to steer our brand work, our sponsorships and our Calgary marketing.
And although they've come from different backgrounds and bring different strengths, we are all aligned. We believe in the importance of creativity and innovation and driving growth. We are aggressive, we're an impatient group and we get things done.
Now these individuals I pointed out are only some of the talent we are proud of. When I've looked back over the past few years, we have made mammoth strides in growing our talent, especially in three areas -- our Retail operations, our marketing and our technology skills at the senior levels and below. But we are not done. We must continue to augment our skill sets in key areas like digital, marketing and data analytics. We have to be the best in the world in these areas, and we are on the hunt for talent.
New world expertise will be a strategic differentiator for us. And with it will come an important change in culture, a culture that's nimble, creative, innovative. The Sport Chek lab store on Yonge Street is a great example of how we are changing. In the past, we would have presentation after presentation, deck after deck and discuss it for months, if not years, before moving ahead.
But to compete in this new world, we did need to move faster. That's what we did, and that's what we're going to do. Was the lab store perfect? No, it was not. But we got it up and it was darn good. We learned a lot and then applied that learning to West Edmonton Mall. The new Canadian Tire loyalty program, the REIT, the digital flyer at Chek, the creativity in our sports sponsorships and the innovation online and in our stores are all examples of how things are changing and how teams are thinking differently at the Tire.
Let's now move to the second priority across all of our businesses: to attain world-class digital and analytics. Our transition to a digital organization has been a top priority for the company and for me personally.
I believe we are making strides, but our current online presence is disappointing and not up to our standards yet. In fact, it reflects poorly on our brands. To truly compete on a global basis and continue to be relevant and engaged with our customers, we need to invest in the future now while still ensuring the traditional means of reaching and exciting our customers are working in parallel.
It's not just about investing in any old digital trend. If we're going to invest in technology at the Tire, it must be world class and we need to think big. Our digital transformation has been a three-year effort with a complete rethink of what technology means to our business. And it's bigger than digital marketing, strategy, e-commerce strategy or back-end technology strategy. It's an enterprise-wide digital strategy. It's why we brought Eugene Roman in and built a world-class team in-house. It's why we are building a strong foundation that will successfully take us from the old world to the new.
Where we think about our digital strategy, enterprise-wide, from a customer perspective, customer perspective; the place where you truly see the power across our entire business; a place we want to be in the future; a place where if it's snowing here in Toronto and we run a digital ad online for Canadian Tire or Sport Chek, the ad knows it's snowing in the city and automatically promotes our shovels, winter boots or a new snow jacket. The ad then prompts you to go to the store or go online for a deal.
It all seems simple, right? Well, not exactly. To execute that transaction, you need the following. Updated images of all your products tagged with seasonal words like snow attached to them, all stored in a sophisticated content management system that can call up all snow products instantly.
You then need a system that knows it's snowing. So you need to deal with the weather network to use their feed to customize products by weather pattern and by region. That data then needs to link to your inventory management system to make sure you have enough product in stock.
You need a merchandising team that is buying based on seasonality, not a predetermined flyer printed six weeks in advance. And you're only seeing the ad online because we know roughly who you are through centralized data collection and analytics.
Eugene likes to call this pre-shop, shop and post-shop. He's right. But it's just shopping to our customers. They don't think of it as an omni-channel. It's shopping.
Our online experience must go further than a transaction. Our goal is to make our online experience a hub of interest for our customers, a place to be entertained, informed, engaged in a way no other brand is doing. The websites today all look the same, and ours need to be different. Whether it's auto, sports or any other key category, we will create a unique online destination that will inspire our customers to keep coming back.
And one of the least acknowledged benefits of online capabilities is its usefulness in helping us better serve customers in the store, no customers walking without making a purchase. That's going to grow in-store sales, a key priority for us over the next three years.
When customers visit at our stores, we will align with our online brand and create the most exciting and interactive experience on the planet, including lots and lots of screens, hundreds of channels of relevant content, RFID capabilities and so much more.
Are we there today? Not in every front, not yet. But we will be.
When Eugene first arrived, we had different, conflicting and obsolete technology systems across all of our companies. We were behind and needed to catch up fast. We needed to centralize everything. We ripped everything out, and we started fresh. New technologies, standard applications and consistent policies were put in place throughout the corporation. It's a bit like redoing the plumbing in a house. It's not sexy, but it's necessary.
I'm pleased to say that about 70% of our spend on the back end is already complete. We have spent the money and resources in our normal capital spend over the last couple of years because we knew we needed a strong foundation to support that vision we had for digital. Be wary of those who build on sand.
We invested heavily in some firsts that I believe will prove to be world-class benchmarks. We partnered with Communitech in Waterloo, a new R&D center, to help us tap into the wealth of the brightest young minds in Silicon Valley North. We were the first retailer to do so.
We upgraded our Brampton computer facility to hotlink it to our advanced Cloud Computing Centre in Winnipeg. We now have centralized data and content centers using the same level of computing power that Facebook's servers use.
We partnered with leading brands like Nike and Adidas to bring first in the world retail experiences in-store like the Adidas Shoe Wall.
We were the first in the world to revolutionize the digitization of the paper flyer at Sport Chek. We launched the most digitally advanced retail experience at West Edmonton Mall.
But we can't stop there. We have put the Ferrari engine in place, but we still are not racing the car. We will use Sport Chek as the tip of the spear, the brand where we test and we learn. And we will take those lessons and apply them across our entire family of companies.
We will look at different business models depending on the customer needs for that particular banner. Sport Chek may advance to a model where customers buy online and we deliver in an hour to the customer's home. Mark's may do the same. Canadian Tire Retail with a national merchant model may take a slightly different approach and look at shop online and pick up in store model.
Ultimately, and this is important, we will go where the customers want us to go, and that will be different for each of our banners. So with as much uncertainty as exists around who will succeed online in the future, we know we're on the right path and well into our digital journey.
Now let me move to our third strategic priority across all our businesses, brand. I think when we talk about our brand and the strength of our brand, people sometimes think it's something soft. But our brand is not soft. Our brand is our most important asset. It grows sales. It helps us attract great talent and, most importantly, creates an aura over the whole company. It brings tangible results. And I believe in it so much and we as a company believe in it so much that we created a Brand Committee of the board to ensure it is a top priority for us now and into the future.
I don't think it's a coincidence that our results of the last five years have followed a massive focus five years ago to strengthen our brands across the board. It was Stephen Wetmore five years ago who started us on our brand journey, making us a brand-conscious, brand-centric organization. We're fortunate to have him remain on our board as Deputy Chairman.
Although the triangle is our key and core brand, we have many strong brands like Mark's, Sport Chek, Sports Expert, Mastercraft, MotoMaster, Denver Hayes. Our ability to create and nurture great brands is a core capability at Canadian Tire. We did it at Canadian Tire Retail and also with each of our acquisitions. When we bought Forzani Group and Mark's, the brands were good but are so much stronger today. And we're being recognized for it.
In a recent study done by the Reputation Institute, Canadian Tire ranked fourth in reputation among Canadian companies, recognition that we don't take lightly.
From a CTC perspective, we narrowed in a space we could own and build a brand around in Canada. And we chose sports, a heritage business for our company and one that Canadians can truly rally around and support. That focus has not only enabled us to connect with our customers through our marketing but also in our communities. Since its inception, Jumpstart Charity has given back more than $70 million and helped more than 800,000 children live a healthier and more active life. It's a legacy that's important to us, but also one that matters to Canadians.
And as we've invested externally in entrenching our authority in sports, especially with our partnership with Canada's leading hockey teams, with amateur sport, as a top partner with Canada's Olympic team and Canada's top athletes, we've seen our customers increasingly gravitate toward us, telling us that they're proud of what we're doing in our communities.
And we've seen our brand investments pay off in a totally unexpected way through a groundswell of pride and excitement among our staff. We can call it staff productivity to make it sound more serious. But in my 14 years at the Tire, I've never seen such passion on our team. I've never seen our team so engaged and so proud to come to work. And it's directly tied to injecting the power of sport into all of our HR efforts and entrenching the Olympics and sport every day into our culture.
To come back to the question of return on investment, the brand journey of Sport Chek in the last three years has been instructive and exciting. Chek targeted just 27% of the country shoppers, the so-called achievers that drive about 59% of all sporting goods sales in Canada. We refined the Sport Chek brand to speak directly to those core customers. And in just three years, we've moved every single retail metric we track by 10 to 20 points more favorable. And the trailer indicator of success is more than a higher likelihood to shop or increase brand affinity. We see a material strength in week-to-week comp store sales that simply did not exist three years ago.
While we've made improvements to store operations, they were already strong. We've made improvements to our assortment, but they were quite strong to start with. The single biggest change at Sport Chek has been an ongoing and dogged investment in our brand. And three years later, we're seeing the significant financial payment for this journey in the strength of our underlying sales momentum.
Brand matters today more than ever, and we are seeing the returns. Together, these three strategic priorities, talent, digital and brand, will ensure that CTC remains a world-class organization on the cutting edge of retail.
Now let's move to the second main area I've said we would talk about today, an area I am most excited about and bullish on, where we will find growth, and that's from within our core businesses.
Let's start with CTR. We believe there's still significant growth to be had in Canadian Tire, a lot of runway. And that growth will come from two key areas -- successfully making a generational shift in the customers we are targeting, reaching those younger families; and two, acting less like a general merchant and acting more like specialty retailers under one big roof.
Let's start with the generational shift. Similar to what we did at Sport Chek, CTR is better targeting a key customer segment. Our strategy is anchored on significantly improving our strategy to appeal to 30- to 49-year-olds with a focus on young families because our research shows us that young families spend 60% on almost all of our key CTR categories and 66% say Canadian Tire is a brand they trust and a brand that understands life in Canada. So the opportunity is there. Our ads are changing. We're adjusting our products assortment to better align with young families. And we will be leveraging our powerful new loyalty program to deliver more personal product offerings, rewards and in-store experiences.
Earlier this year, we launched our new home decor line, Canvas, bringing a whole new level of style and design to our product offering. And this holiday, you will see a new lineup of unexpected gifts for young families ranging from indoor sleepover tents to snow paint and outdoor rink kits.
Our CTR ads are now hyper-targeted to young families and more on brand. Instead of ads showing dads staining a deck, you'll now see young fathers with their kids staining a tree house. You'll see chefs from Harbour Sixty cooking premium steaks perfectly on the barbecue. And our loyalty program is going to give us analytics and customer insight like we've never seen before. With this powerful weapon of data and analytics, I believe 2015 will be the year of information and insight for our Dealers to use, giving us and them the insight to help us on our journey to better target young Canadian families.
In the past, we've given Dealer financials and operational information to run their business -- pricing guide, flyers, delivery schedules. By 2015, we will be giving Dealers powerful tools to measure things like linear productivity and relative performance and rich data analytics on their local market, customer preferences and in-store experiences.
But nowhere will this generational shift come to life more than where it will in our new Canadian Tire showcase store. Today, we're announcing a new Canadian Tire showcase store at South Edmonton Commons. You can see it on the screen. We're opening a new 136,000 square foot of retail store that will showcase the best of the best of what Canadian Tire has to offer.
We got this idea in a funny way. We opened up our Dealer convention product parade to the public the last couple of years. The response was incredible. People wanted to see the full breadth and depth of what Canadian Tire had to offer. This inspired our showcase store, the Canadian Tire store, I think, will be one of the best retail experiences in the world. We are investing in new customer service capabilities such as way-finding tools to help customers find what they are looking for faster. A seasonal showroom to showcase the best of the season across CTR key categories.
Our showcase store will have high-impact digital in-store and exterior screens for celebrating great Canadian moments, exciting 3D experiences where customers can design their own indoor or outdoor living spaces, ultimately making it a destination for Canadians to see all of what Canadian Tire has to offer.
And I'm not talking about a pipe dream two or three years from now. Construction of the store is under way. On the screen, you'll see a picture we took earlier this week. The construction is happening, and we can't wait to take all of you for a tour of the store in the spring.
Of course, not every Canadian Tire will be this big and have this kind of assortment. And I'm not today going to give you a number of how many Canadian showcase stores will be going up. Could be a one-off. But I know it'll work. And the learnings from this store will enable us to develop new and innovative future store concepts and translate into ideas for all of our stores across this great country.
The second growth strategy within CTR is to successfully move from a general merchant to a group of specialty retailers under one big roof. I'm always preaching this. We did this well in Automotive, and we believe there is significant potential to do better in other categories.
Look at Playing, for example. Canadian Tire and FGL Sports combined are the fifth largest sporting goods retailer on the planet. 57% of Canadian sporting goods buyers have purchased from one of the CTC companies for sports in the past 12 months. Only 24% of those purchases are Canadian Tire, and we can do more. We brought over one of our top FGL merchants to run Playing at CTR. We created a halo around our sports brands with our Olympic sponsorships and partnerships with Canadian athletes and are putting in new hiring and recruiting strategies focused on ensuring that our in-store staff and category specialists in sports are sports enthusiasts. They got to love sports.
Fixing is another great example of where we can compete on a specialty retail level at CTR. While we don't plan to compete on major building projects, we have huge potential, huge potential, on home repair and innovation. We're going to be the kings of home repair and renovation. And sure, we lead in tools. 42% of Canadians identify our stores as their first choice for tools.
But only 10% of Canadians identify Canadian Tire as their first choice for small repairs and home maintenance. That has improved in the last year, but there is still a lot of runway for growth. We are now well positioned to take a significant lead -- larger share of the 80% of young Canadian families that participate in some form of home repair and renovation every year.
And finally, we can't talk about CTR without talking about Automotive, a business worth more than $2 billion in sales a year to us and one we believe still has tremendous opportunity to grow. Now that journey has already started. We have consistently grown our Automotive comps with growth in Automotive in comps over the last six quarters in a row. But we can do better. We're still coming off that bottom in tires, parts and service.
To grow Automotive, we're going to be focused on 3 things: improving auto service, increasing our tire market share and improving assortment and costing.
Let's start with service. Today, 18% of all Canadian vehicles, more than 3 million vehicles a year, are serviced by Canadian Tire. And 52% of category purchasers name Canadian Tire as a first choice for auto parts and accessories. That represents a significant market, but one we believe, with more of a focus on service, has room to grow, significant room.
And we'll start at the most basic levels with a laser-like focus on the service manager. We are challenging the entire customer service experience from the moment the customer walks in the door to when they leave.
Second, we will focus on increasing our overall tire market share. We are number one in our market but always need to be on offense. We know tires is a highly researched category, mostly online, so we are strengthening our e-commerce platform and adding new customer-facing features. There will be new online chat feature enabling customers to have their questions answered online in real time, and a tire testing program, which helps Canadians select the right tire for their vehicle and personal driving habits.
We are implementing a new predictive tire model using better analytic tools to help us better order and plan for our customer needs and increasing our in-stock positions on the tires most used by our customers and allowing us to service our customers on the spot with greater efficiency; adding new code readers and high-technology machinery required to service a broader assortment of vehicles than we are servicing today.
And third, in Automotive, we are improving our overall assortment and costing of products. On July 1, CTR joined the Federated Buying Group. And as a result, we are now seeing better margins, improved payment terms and have access to a greater amount of automotive data than we've ever seen before.
While admittedly not very sexy, the opportunity we see with accessing data from this relationship is going to be key for our Automotive business. Currently, we have access to data from roughly 490 CTR auto centers across the country. So we definitely see a lot of cars come through in a year. But the relationship with this buying group will give us visibility to over 4,000 outlets. It's going to allow us to think like a North American auto retailer for the first time.
Now let's move to FGL Sports. FGL is our pioneer. It's our shock troops, the one we send out ahead to test and learn. And it started with the acquisition. We did more customer research before we bought the Forzani Group than I've ever heard of before, more customer and brand research than Forzani Group itself had ever done before. And we came up with a simple two-part strategy which we have been executing on ever since -- grow our Sport Chek footprint and build an unassailable connection with our target customers.
We have achieved 12 positive comp quarters in a row since the acquisition of FGL Sports. And Sport Chek, our big growth driver at FGL, has put together three double-digit quarters in a row of comp. And there's more growth to be had.
Let's start with our footprint. We are on track to meet our 2 million square footage target we set in 2012. We will also invest in some of our existing Sport Chek stores to create 12 to 14 Hero stores in addition to the flagship stores, stores that will incorporate some of the best elements of West Edmonton Mall and ongoing upgrades to the chain over the next three years.
We will open our new Burnaby flagship this November. And today, I'm announcing a new 75,000 square foot Chek flagship at Square One and a smaller but no less exciting 45,000 square foot flagship at Yorkdale. Both are expected to open in 2015. We believe we can open at least two more flagships in 2016 and have room for 10 to 12 flagships across Canada.
We will also be leveraging our sports sponsorships and launching new stores in areas where major sporting events will be happening, bringing our brand and products even closer to our customers. When we announced our agreement with MLSE, we talked about taking over the Real Sports store in Maple Leaf Square and putting it in a Sport Chek store.
As of this spring, our Sport Chek store at Maple Leaf Square will be a true store destination for our customers. We'll have a virtual shopping environment and shoppable windows for 24/7 interactivity and online buying. And even better, we'll be offering 24-hour shipping for purchases from that store. We will dedicate the upper floor to our top athletic brands and build virtual shopping environments to promote these brands' latest offerings. We're also going to make the store even more of a destination for sports fans with Sport Chek broadcast kiosks that will show before and after game interviews.
When I joined Sport Chek, some of the best landlords in Canada would not rent space to us, to my chagrin. They didn't want anything to do with Sport Chek. Now we have the opportunity to put a store in any space. Our vital relationship with landlords has completely turned around, and our stores will continue to grow the top brands we are carrying for our customers. We have seen Quiksilver and Roxy, Arc'teryx and PING Golf and many others start selling to Sport Chek. We are getting the best products in the world from the best brands in the world -- the Nikes, Adidas, Under Armours, North Face, Columbias, Bauers.
I can't tell you everything we're working on. But we will not only have some of the best sporting goods vendors partnering with us, we will become the world-class destination for sport technology. You will begin to see new vendors and partners, many of which are considered global icons, selling their products in our stores. We've already started down this journey with the additions of technology-infused basketballs, tennis rackets and wearables.
The second goal of Chek will be to deepen our emotional connection with our customers. Sport Chek's brand reinvention started three years ago centered on a simple and concise mantra, inspire a very targeted group of active lifestyle enthusiasts to achieve their better. By connecting on a highly emotional level, this target group started to see Sport Chek as the enabler, the catalyst to help them live more active and healthier lives to find their better.
And we didn't just run ads. We've built that connection through social media channels, strategic sponsorships and digital marketing. We created an extensive digital footprint that engages consumers through Google, through Facebook and Twitter and YouTube. And our Blue Jay video celebrating players and their fathers achieved 9 million social impressions, 80% of which were organic, driven by one-to-one conversations with fans and influencers.
Our Olympic partnership is only getting started and one that Canadians care a lot about. The Sport Chek Olympic ad resulted in the strongest recall and brand link that we have ever seen.
And our digital flyer, which we like to talk about, will continue to evolve. Today, it enables us to target that highly sought-after 18- to 34-year-old demographic with inspirational marketing content that inspires Canadians to visit our stores and get onto the field. And that drives sales.
This year alone, we pulled the paper flyer completely and replaced it with a digital flyer four different times to test and learn. In each case, we drove significantly more sales and provided our stores with the flexibility to adjust for weather, geography and categories on the fly. This trend to digital flyers will continue as we aim to transition more than 20% of our print spend to digital in 2015.
Sport Chek will continue to be the banner where we test and learn, the shock troops for the rest of our business. And in the process, Sport Chek will lead the industry as one of the best retail experiences in the world. And our vision is that Sport Chek one day will become as iconic to sports enthusiasts as Canadian Tire is with Canadians.
Let's move to Mark's. This is one of the secretly great brands in Canada. Last I looked, Mark's was tied for the position of sixth most trusted brand in the country according to an Ipsos study. And I know we haven't gotten enough out of this brand. I don't think our sales growth has been nearly good enough for how good this brand is.
Under the leadership of Rick White, who is our Chief Merchant at FGL, I believe we can grow the business at a 5% comp or better. Rick is one of the finest merchants I've ever met and has better connections and understanding of private and national brands than anyone.
So you're going to see Mark's do a few things. Slowly but surely over the next three years, we're going to transition our overseas buying operations to our own in-house INA wholesale division.
The margins in this business are not high enough for a private label banner. We're going to fix it, but it's going to take some time. Expect us to get that done 1/3 each year for the next three years.
Our stores are getting a refresh. In many cases, they're tired. Rick will have the capital to update the fixtures, which may seem like a small thing but will make a huge difference.
We will also be moving our stores into malls. The brand is that good now, and we have an opportunity at Mark's to test and learn. Because of our strong landlord connections from Chek, we can increase our presence in higher-traffic areas. We like stand-alone stores, but good malls bring new opportunities for growth, and we'll be testing that over the next 18 to 24 months.
Third at Mark's, we're going to invest in marketing. The apparel market is fragmented. And despite a leadership position in many of the men's casual categories, we are not yet dominant. And we will do this by a hyper-targeting our core customer, the 35- to 50-year-old male. Are you seeing a theme here? We started with Sport Chek, hyper-targeting the young achiever. CTR is now laser-targeting young families. And for the last year at Mark's, we have been starting the same, targeting a 35- to 50-year-old male. And at Mark's, we'll not only be doing that through great seasonal campaigns but starting to own the shoulder seasons that we have not done so well at in the past.
Our recent jeans ad is a great example. From the start of the campaign on August 10 to present, jeans sales have increased 38%. And while jeans are driving traffic to our stores, we're also finding out that they're increasing basket size.
Now our marketing needs to be highly flexible, adjusting to weather changes and regional trends. Even Mark's is going digital. Taking the learnings from Sport Chek, we're revamping the digital engine at Mark's. You may remember in early September when Calgary had a massive snowstorm, Mark's was the first retailer to respond. Within hours, Mark's was promoting winter boots and outerwear through our new online and digital channels. And the result? A 403% comp increase on sales of winter boots and jackets in that time period at Mark's. Our best-kept secret is showing tremendous growth and will continue to put up the numbers.
Now let's move on to the fourth big division, Canadian Tire Financial Services, such a well-run division with a risk division that continues to be strong. Scotiabank can attest to our skills in risk management given the results of their due diligence that they undertook. And where we're going to grow here is our focus on new initiatives like instant credit, better rewards through our new loyalty program and co-marketing with our partners like Scotiabank. We have put in a completely new process for credit applications in-store, providing customers with near-instant credit in minutes.
Just last month, we significantly increased our loyalty value proposition, offering customers using our Canadian Tire-branded credit cards 10x Canadian Tire Money.
While others are pulling back and reducing the redemption rates on their loyalty programs, we are increasing ours and stepping forward. We know this will drive additional sales to our stores while generating increased receivables at CTFS.
We're continuing to build on our partnership with Scotiabank. There's a lot of co-marketing tests underway, new Canadians, mortgages, jean offers at Mark's, but none are the scale of the SCENE partnership, the SCENE partnership that Sport Chek that we're announcing today. In November, we will launch to our customers the opportunity to earn SCENE points on everything you buy in Sport Chek and, most importantly, Burn, the equivalent of free movies for $10 off of anything you buy at Sport Chek. Earn and Burn. And this isn't a limited time offer. This is an initial six-year relationship that helps create the most powerful entertainment and lifestyle program in the country.
Let me tell you how we see SCENE driving growth at Sport Chek. The SCENE program has 5.9 million customers, mostly under 40, mostly urban, mostly the exact demographic of a core Sport Chek customer. If we can drive just one incremental trip or just one or two incremental purchases by SCENE members at Chek, it's worth millions on the top line and material growth on the bottom line, all while giving our customers access to a loyalty program that fits their active and busy lifestyle.
You're going to see a material spend at marketing at launch, including active use of all of our own media and marketing channels and the Sport Chek stores. You're going to see it Scotiabank branches, on Scotiabank ATM machines, in-theater marketing, including pre-roll before movies. There are also countless opportunities to bring our vendors onboard to sometimes avoid just discounting product, to clear it and instead boost the SCENE value prop, like a free movie with every pair of shoes over $100, an example of what we saw in the Scotia partnership and why we are so bullish on the strategy we pursued rather than just the sale of receivables.
Now let me shift gears here a move to our three-year financial aspirations. We chose a three-year time frame because it makes much more sense to -- given how fast the retail industry and our businesses are changing. Five years ago, we were in a recession. Three years ago, we just completed the purchase of Forzani Group, and our stock price was at $53. Clearly, a lot has changed since then.
And it's hard to look out even three years given the complexity of taking CTC into the digital age. But we feel this time frame is appropriate for our strategic priorities. And I like targets. I want numbers that we can achieve through innovation, hard work and execution. I want to put up results every quarter, as does our team.
Our updated aspirations reflect this philosophy. Tough challenges but ones we take on completely. You saw the aspirations perhaps in our release today. But let me walk you through the rationale.
For POS, we set out annual targets for each of our retail businesses. These are numbers we want to hit every year. Canadian Tire's target is 3% plus, which reflects consistent comps and modest growth in the retail footprint. Our footprint at CTR is growing about 1% per year due to our already strong national presence. But there are always opportunities to build stores in new or expanding markets. 3% plus growth in bricks and mortar is strong growth and achievable as we have seen strength in this division over the last year with the recent changes we have made.
Also, there's a lot to be said for the stability and strong relationship we now have with our Associate Dealers. This alignment that Stephen spoke about will make our growth even more achievable. We are proud of the strategic advantage our Dealers give us in local communities across this country. Now Mark's POS annual growth target is going to be 5% plus. It's an aggressive target for Mark's, but one we can reach. FGL's POS of 9% plus reflects growth across all of our banners, not just Chek.
Secondly, we're also targeting diluted EPS growth of 8% to 10%, which is an average return over the three-year outlook period. We will strive to achieve this every year and it reflects the kind of earnings growth you should expect from a good retailer.
Now we set a ROIC target -- a ROIC target of 9% by 2017, and as you know, our aspiration for ROIC was 10% for the past five years. Now we didn't achieve that. And we continue to aspire over a longer term to a 10% or better ROIC, which is where we know we need to be. However, I want an aspiration we can hit by 2017 -- 9% on our way to 10% or better. Now to move this rock, we're going to need to do three things -- grow that bottom line, which we've talked about; prudently invest in our current businesses; and be more productive.
As for our capital spending, we will end 2014 at around $525 million, excluding the Bolton DC and non-CTR REIT projects. Over our three-year outlook period, you should expect CapEx of about $575 million per year, again excluding Bolton and the non-CTR REIT projects. We'll spend more in the outlook as we accelerate store builds and our technology spending, especially in customer-facing technology.
Now we're going to average $575 million we expect over this period, but CapEx will be higher than the average $575 million in 2015 for three reasons -- it's going to be higher because we're going to accelerate our Chek flagship build in 2015; we're going to invest in new world POS systems, e-commerce and data analytics next year; and we're going to finish up all material technology for business continuity, which is already in good shape, but we're going to finish it off in '15.
Now to grow ROIC, we also need a sustained program that's going to allow us to take costs out of the business. Dean is going to talk more about our productivity program, but let me say that these improvements will take some work and they're going to take some time and we know the best way to showcase these values to you is to execute them -- on them.
And fourth, return on receivables. Our ROR target range for the past five years were 4.5% to 5% and we blew past this back in 2011. Our target for the next three years is 6% plus per year. This is a 6% return on a much larger portfolio than where we were five years ago. As we know, this business will continue to be a strong contributor to the CTC family of companies going forward.
The fourth and final area, I promise I would address, is capital allocation and use of cash. Now I couldn't stand here today and give you my thoughts on how I think about the businesses and what we'll see from us in the near future without addressing our plans for allocating capital and how we propose to invest your money.
Let's face it, you're going to judge us on two things -- our results and whether we're investing your money wisely. Now we spent a lot of time thinking about how we should use your cash and what the right balance is. And we are fortunate -- we're fortunate to have a lot of financial flexibility, which we have built up over the past years.
We know we have a strong balance sheet and we know we have a lot of financial flexibility and it's a good problem to have. It really wasn't an issue five years ago and so we're spending a lot of time on it. And quite honestly, this is a new high-class issue for Canadian Tire Corporation. We are being thoughtful about how we spend capital and we have to think a lot about what a proper balance sheet looks like.
Now as many of you have heard, I've only come up with five meaningful ways we can use our cash. First, we can invest in our current businesses. You've just heard from me that our businesses are generally well invested in with a relatively moderate increase in CapEx over the outlook period.
Second, we can use our cash to pay down debt and we have. However, we intend to maintain our investment grade credit rating, which we're already good shape on, and our debt is in great shape as well. Third, we can ensure that our dividend payout policy is in line with our peers and especially with our strategy. We feel that we're in a pretty good place on dividends, committed to a payout range of 25% to 30%.
And we continue to pay annual dividends, which we have increased in 9 of the past 10 years from $0.40 a share to $2 per share. And you know as well as I do there are at least 2 ways to use your cash, share buybacks and acquisitions, and we've shown a propensity to do both. Until two years ago, as you know, share repurchases were not part of our arsenal. We have evolved from an initial $100 million of buybacks in 2013 to $200 million in '14 and now today's announced $400 million from now until the end of 2015.
Sure, we're going to want to keep some powder dry for acquisitions as good as Mark's, as good as Forzani, but I believe that we have shown that when our shares are undervalued and we don't have higher value investments, we will return cash to you in the form of share buybacks, share repurchases. And we also believe, however, we're pretty good at selectively and prudently buying companies. What we could possibly purchase has to be one of the most asked questions of me and my team. I think one of our analysts referred to speculating on our next acquisition target as one of Canada's favorite sports.
Today, I want to give you a little bit insight into how we think about acquisitions and what would make sense for us. Remember, remember that, to date, we have only closed two acquisitions of any significant size -- Mark's in 2002 and Forzani Group in 2011. We're extremely pleased with those acquisitions and we don't have to tell you how successful they have been. We are extremely particular about acquisitions and let me be straight with you, we have always been looking for acquisitions over the last 15 years, ones that would be good for our shareholders.
But as we'd like to say, we're slow to the trigger, we're vigilant and we're thoughtful in our process. We understand how a bad deal affects a company. We're not going to greenfield. We're not going to move Canadian Tire into the U.S. In fact, our Mark's business is the only one that I think could ever make sense to bring to the U.S., but that is not a focus for us right now. Mark's has a lot of runway here in Canada and so that remains Mark's focus for now.
A potential acquisition target would have to make sense strategically, would have to be a good fit within the company, would have to allow us to go deeper in existing key category or division. We like to talk about our heritage businesses like Playing and Driving. And of course, it has to make sense financially; it would have to be generating a strong return for the investment and would always be seeking opportunities to realize synergies with our other businesses.
It also has to be the right cultural fit. My experience is that if there's no cultural alignment then you do not, you cannot get the results you want from a deal. And we could never have seen the strong results in growth that we've been seeing post-acquisition at FGL unless the cultures fit together.
Of course, that does not mean the exact same culture. So Forzani Group certainly had a very different culture than Canadian Tire Corporation, but we knew that we could put them together and that the talent was there and that they dream big. We look for great talent in the companies we acquire. In fact, there were aspects of the Forzani culture that we borrowed and applied to Canadian Tire.
We also look for companies that are not broken. They need to be good. They need to be well-run, but we are looking for opportunities to make them great by using our skills and our expertise. Gems that need to be polished up. We are very good at building brands and understanding our customers.
We would also consider different types of structures. Go back five years and this wasn't something we've really done before. But our small partnership with Host Kilmer for the 400/401 series gas stations has been a great partnership and since then reflects the muscle a little more. We have great partnerships with the Canadian Olympic Committee, Scotiabank, the Ottawa Senators, so many more. We have a strong track record and know how to make these work.
Now would we go outside of Canada? We get asked that a lot. The answer to that question is another question, why would we restrict ourselves? We'll do what is right for our shareholders. We will consider acquisitions that meet all of our criteria, but we are picky as hell and I would rather stay in Canada, I guess, because it's our home market. Now importantly, I am not trying to signal you on anything here. We do not have an imminent transaction in the pipeline. The headline here is not Canadian Tire is moving south. That's not what I'm saying. But if we saw something great, we'd consider it.
In conclusion, on use of cash, it's a good problem to have. If you know us at CTC, you'll know that the money is not burning a hole in our pockets. What we do understand that having an efficient balance sheet is critical to our overall financial performance. As you've seen, we are open to purchasing back our stock where that makes sense. Three years ago, we hadn't done any share buybacks other than for anti-dilutive purposes. We hadn't created the REIT or contemplated the Scotiabank partnership. We have exhibited a pattern of evolving and considering the needs of our shareholders while we continue to grow the business.
And in conclusion, we've been on our journey now for the last six years and we have made tremendous progress. The world is moving at lightning pace. And while our strategies is going to evolve, is going to change, our foundation is in place to continue to grow. We are on the right path and we are on offense. When we do something, we demonstrate we can be the best in the world. We're creative, we're innovative and we strive for world-class digital in everything we do. I believe Canadian Tire can just do about anything it would like to do when it sets its mind to it.
Now over to Dean and then we'll have some Q&A. Thank you.
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Dean McCann, Canadian Tire Corporation, Limited - CFO [3]
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Thank you, Michael, and good morning, everyone. As you've been hearing, there's a very clear vision and a great strategy for the triangle and CTC is clearly on offense and Michael's done a great job of laying that out.
Today, I'm going to walk you through three areas, beginning with the financial strength of the company, our financial flexibility and how we view the world as we look out ahead to the foreseeable future. After that, I'll discuss a key operational issue that we're tackling head on. You can also think of it as a productivity initiative. And I'll end with giving you a view of some of the recent transactions that we've completed, namely, the REIT and the financial services partnership.
So as you saw today, we updated our aspirations. Michael did a great job of going through those for the upcoming three-year period. And sitting here in 2014, we had to look out and assess how the company and the economy could change over the next few years. Over the past few years here in Canada, we've been operating in a very low interest rate environment and you've heard us talk about our cautious consumer that has and is continually seeking value, all this in the context of a North American economy that has been expanding although at a very slow pace.
So from where we stand now, our assessment is we expect those themes to hold over the outlook period, the next three years. However, one headwind we do expect to face relates to the volatility of the Canadian dollar. This is not a new challenge for a retailer, and certainly not for us, for somebody who's been in business as long as we have. And historically, we've managed through varying currency situations by issuing a number of -- using a number of tactics, including our established hedging program. We have also been able to work with our Dealers and our vendors to ensure that our stores have the products and the prices that our customers have come to expect.
Now while we don't anticipate that, from an economic standpoint, Canada will be much different through 2017, we are very aware of the impact that global market uncertainty can have on our economy and our company. CTC has come a long way from the position that was in, in 2008, 2009. We, like most companies, faced an uncertain time when financial markets disrupted and then the economy slowed. And this brought home the importance of having the financial flexibility and a strong balance sheet with multiple sources of funding.
And for those less familiar with our balance sheet, I'll give you a few facts. CTC has a BBB (high) or BBB+ investment grade credit rating, the highest among Canadian retailers, giving us ample access to debt markets. We have committed bank lines of up to $1.5 billion available to us. And we have access to multiple sources of funding for our Financial Services business in the form of our Glacier Receivables Trust Program, our GIC broker funding program and high interest saving deposit products. And those three programs provide total funding of an excess of $3.5 billion today for our receivables portfolio with ample access to fund the growth of that portfolio going forward.
And then with the closing of the Scotiabank partnership, we now have the added security of a $2.25 billion funding facility to backstop financing of our receivables and that virtually takes away the risks of a market disruption for us.
And also, as I look ahead to the cash flow from operations from the various businesses over the next three years, we expect them to generate strong cash flows. But we will be investing a lot of that cash to drive future growth going forward.
We also remain committed to improving our working capital position, which continues to be well managed. And our business leaders have done a great job of making this a focus as they look at their results. And as Michael stated earlier, we're also committed to a balanced approach to capital allocation and we give these decisions a lot of thought.
We expect -- we have invested some $2 billion in our businesses over the last five years and we anticipate continuing to invest heavily in the business over the next three years for growth. We expect capital spending, excluding the new DC and external spend by CT REIT, to average $575 million a year over the outlook period, reflecting investments to -- required to support digital technology and our store networks.
We've also reiterated our commitment to our dividend policy and I'm very pleased with the announcement today of the $400 million share buyback. This reflects our commitment to our shareholders and our balanced approach to capital allocation.
Being in a strong financial position today compared to five years ago when the economy was weak cannot be underestimated, both in terms of the security it provides but also in terms of the opportunity to capitalize our growth options. Our overall financial strength, we believe, puts CTC in the driver seat to fulfill its strategy with the funds necessary to invest in our business.
Now the second topic I'm going to address is our enterprise-wide program to become more productive and efficient in everything we do. Addressing productivity versus straight cost-cutting will allow us to build yet another sustaining foundation for the future. We already have a dedicated team reporting to me that has already begun their work with our corporate center and our businesses. And detailed project time lines and targets are undergoing review with our board.
Now you've heard us talk about this before, and in fact, we've been quite successful in many of our previous efforts, but we have never been able to put this kind of scale into this effort. And this is largely because a number of critical initiatives needed to set us up for success were not yet in place, things like completion of the Dealer contract, integration of FGL Sports and putting our corporate services together to get a fully integrated view of our enterprise.
Our approach to our productivity initiative is pretty simple. It's a three-phased approach. Phase 1 goes after spending in non-merchandise areas, targeting more sophisticated procurement procedures. This is an annual spend of almost $2 billion for our company and an area where we see significant opportunity to reduce costs over time. In other words, we're going to look at each and every contract and the terms and conditions within them to ensure that we are working with the best vendors and getting real value for our investments.
The second phase will focus on our support areas, things like our overheads, marketing, supply chain and we will identify opportunities to reduce duplication, increase the effectiveness of spending, improve workflow and permanently eliminate costs for sustained savings.
The third phase, and by far the most complex, is we'll look at end-to-end business processes from the time a product is produced at source to when it's in our customer's hands. We're talking about making better ordering decisions, bringing products closer to our stores and utilizing our distribution centers better than we have in the past. This will involve all areas of the company and include Dealers as these type of comprehensive business process changes should be expected to benefit Dealers as well as the corporation by also reducing their costs.
We are well underway in terms of Phase 1 and just starting Phase 2, but this is a multiyear project and we're truly committed to it.
Michael outlined our growth strategy, and in order to support that growth journey, the rest of the organization will need to be aligned with this. We are using an organized and disciplined approach that is radically different from what we have tried in the past, but I honestly feel good about it. And I don't like the word productivity, I think it's a misused term and a misunderstood term. But the time for us to get disciplined about costs is now. And I wouldn't be talking about it today, if I didn't believe that we could make significant changes.
We have tackled some tough initiatives over the past few years and this one will be one of the toughest, but frankly, the timing is right. And I know many of you out there will probably take an "I'll believe it when I see it" attitude and I'm just fine with that. Because, quite frankly, we'd rather let the results speak from themselves and talk less about it.
Now finally, the third area I want to cover is make a few comments about CT REIT and the financial services partnership with Scotiabank. We get asked a number of questions about them and I think it's worthwhile covering them with the broader group here.
As we think about CT REIT, there is a current view and then a longer-term perspective of where it goes in the context of CTC. But first, I'll touch on some of the benefits of the REIT.
Today, we've surfaced real estate value of some $4 billion and we've identified the opportunity for a further $1 billion in real estate owned by CTC to move into the REIT over time. In fact, to date, we've moved in almost $100 million of that real estate into the REIT since the IPO level. We have also continued to grow our real estate holdings with a number of third-party acquisitions such as the 1/3 interest that has been acquired at the corner of Yonge and Eglinton where our home office is located. And we've added to the value of the company as CT REIT has outperformed the REIT market since its inception.
Now we own 83% of CT REIT and we also hold a $1.8 billion receivable from the REIT, all of which we received as payment for the property that was transferred into the REIT at the time of the IPO. Now over time, likely beginning as early as 2015, we expect that CT REIT will demonstrate its ability to raise its own equity and debt, which represents an opportunity for CT REIT to continue to fund its growth going forward, particularly the third-party properties or those not acquired directly from CTC.
Similarly, the Scotiabank Financial Services partnership also represents a source of future financial flexibility for us. To level set, that transaction is unique in the way we structured it as a sale of a 20% interest in the business to Scotia. We chose not to go the route of the typical balance sheet-type deal many of you might be familiar with and we really did that for three reasons. First, we were concerned about the risk associated with an agreement that included a term, at the end of which you're subject to renegotiation risk. We preferred a structure where we had a partner that was invested in the business with us over the long term.
And second, with a balance sheet type of arrangement, we felt there was significant risk that we would, over time, dilute our capabilities in running the business. As a bank partner, it was likely to become more significantly involved in the day-to-day business operations.
And finally, and frankly, we were somewhat surprised to learn that the funding synergy that we thought would be provided in the balance sheet deal really wasn't there and that was because our funding structure for CTFS was frankly very competitive with that of the big banks. So we moved to the partnership structure and are very pleased with our arrangement with Scotia. Already, we are seeing the benefits and opportunities to work jointly in a marketing relationship to grow their respective businesses, some of which Michael alluded to today.
As Stephen touched on earlier and similar to the REIT formation, we surface the value of financial services as well as creating another source of financial flexibility. That flexibility can be triggered through the put mechanism included in the deal, which can be exercised by CTC with six months' notice, providing us with the right to sell a further 29% of the CTFS business to Scotiabank.
Now obviously, we're in the early days of this relationship and we have a lot of work to do to realize all the benefits and growth opportunities of working together, so I don't anticipate the exercise of that option in the very short term.
For 2015, there will be an initial reduction in EPS related to the Scotia's participation in Financial Services earnings. And the nature of that effect, we provided in a presentation posted on our website last week.
So to finish up. Overall, this is a very strong company, as Michael said it's a high-class problem, with tremendous financial flexibility to pursue our strategy and to win in a competitive and dynamic retail environment. We remain committed to increasing long-term shareholder value and we'll do so, first, through the delivery of our financial aspirations; second, through the prudent investment of our capital along with a balanced approach to returning capital to shareholders in the form of dividends and buybacks; and finally, through identifying long-term sources of growth for CTC, ensuring we are successful over the next 92 years as we've been over the past 92.
And with that, I'll turn it back over to Michael for your questions.
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Questions and Answers
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Michael Medline, Canadian Tire Corporation, Limited - President [1]
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Good job. Now the fun part. So what we're going to do here is we're going to have runners in the room. When you're going to ask question, if you could do it into the mic, not because I can't hear you but because we're webcasting this and we want everyone to be able to hear your question.
And if you could identify yourself and the firm you're with, that would also be helpful so people know where you're coming from. So with that, let's go ahead and take some questions.
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Peter Sklar, BMO Capital Markets - Analyst [2]
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Michael, thanks. Peter Sklar from BMO.
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Michael Medline, Canadian Tire Corporation, Limited - President [3]
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Hey, Peter.
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Peter Sklar, BMO Capital Markets - Analyst [4]
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Steve outlined the -- made a good outline of -- and summary of the new Dealer agreement. But you haven't given a lot of disclosure in the past, so it's not clear to me what's new. So can you highlight what's new in the Dealer agreement versus the old agreement and how that will facilitate your strategies?
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Michael Medline, Canadian Tire Corporation, Limited - President [5]
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Yes, I'm going to answer this in a few different ways, I think, Peter, so thank you for your question. And Stephen -- first, I'm going to say, as Stephen said, we can only go so far as you can probably appreciate it in that we have confidential agreements with our Dealers, but let me give you a little bit of flavor for it.
First, I'm going to say that I think that people spend a lot of time talking about the Dealer contract and not as much time as we would like talking about the Dealer relationship. So the contract is one thing and we have a better contract now and I can give you a little bit of flavor of that, but I think Stephen did a good job. The difference is the relationship you have with the Dealers because the contract, which is not a thin contract, it's a thick contract with the dealers, we don't end up talking about everyday.
Today, by the way, we have, I should introduce him, Doug Waldie, who's the President of the Dealers Association with us today. So we just spent the last month traveling the country, meeting with our Dealers in different regions of the country.
And it's -- we don't talk about the minutia of the contract very much, okay? In fact, I haven't. What we do talk about, and this is new and this is real, seven years ago, we would not have had the conversations we're having today. Dealers were cautious and nervous about the relationship. The contract still hadn't been settled. And so it's a different conversation today with our Dealers.
The conversations today are not fingers pointing at each other, they're how we can work together to take this organization, to take the Canadian Tire Retail to the next level. And that is very important.
So what sort of questions and conversations did I get in when I was talking with the Dealers across all the regions across the country? Are we moving fast enough in technology? Are we good enough on e-commerce? Are we concerned about online competitors? Are we doing enough in analytics? Are we growing fast enough? Are we local enough?
Those were the kind of questions we can only dream of a number of years ago. Now part of that is because we settled an 11-year contract that puts that kind of thing at ease and part of it is because we had a leader who came in six years ago and told us we, as a corporation, had to pull up our socks and that we couldn't look in the mirror and talk to the Dealers because we weren't doing our job good enough, or as my English teacher would say, well enough.
So we weren't doing a good enough job. Now that doesn't mean we're there yet, but the Dealers get it now, and Doug, you can shake your head no, if you don't agree, but they know that the team running the company, especially running CTR, Allan, the team below him get it and want to work with the Dealers.
And so conversations -- do we have conversations where we don't agree? You're darn right, we do, but we settle them and we worked them through in the best interest of the customers.
Now Peter, right about now you're going, "Wow, he's really avoiding my question. You haven't even come close to it." But okay, that's okay.
What's different about the contract, I'm going to tell you, one, it's a longer -- longest contract we ever had. So it goes for a long period of time. But two, it allows us to have conversations and work with the Dealers in a more aligned fashion toward the future.
Stephen alluded to the fact that basically now, and by the way, when we say basically, we mean basically, because there's about 500 inputs into this that we will not bore you all with, we share most of the costs 50-50 where there's a sharing of the right costs. So inbound, outbound freight are shared 50-50, okay? Not one party is goring the other in any way in terms of the contract.
But the thing we're seeing right now is the flexibility of the new contract gives us in terms of dealing with issues in the future. So we were dealing with the contract -- we were dealing, basically, with the contract, there was a wholesale contract from 19 -- if Martha Billes is announcing -- listening, she'd know, but it's way back, okay, its way back when A.J. Billes was running the company. There was a wholesale contract. It didn't work for the future.
Funnily enough, in 1952, they hadn't thought of the Internet that much before, they didn't think that much about data analytics. Those were different issues. Hadn't thought about localization, digital flyers. These are the kind of questions now that the contract, in it's own way, allows us to address.
But I think that -- I don't want to go too much further than Stephen did because we're very careful in terms of what we can disclose in a confidential agreement. But I think when we get stuck and sometimes we do ourselves, talking about the contract, we get away from the relationship and the fact that it wasn't the Dealers ever really slowing us down.
The Dealers give us a strategic advantage because they're in that community and they speak up and Stephen alluded to that. If we make a mistake, they tell us. But I've been involved in a lot of different retail businesses at CTC and the feedback we get from our Dealers or our franchisees at Sports Experts and Intersport are a lot different than we get in other places.
So we have what's called Mac and mini-Mac meetings and we bring Dealers in and we talk about the issues that are facing us. So a little while ago, we had a meeting on why our paint business wasn't where it needed to be and they started talking about, could we do this on stain? What is our advertising going like? Why do our competitors have these products? And we're getting the feedback from people who are on the ground and interact with customers and dealing with competitors on the ground everyday and they give us frank feedback and we have a conversation and we made it better. And we've seen the impact from these conversations in our paint business and we altered our strategy. And we see it in Automotive, we see it in Living, we see it in Playing, we see it throughout Canadian Tire.
So yes, when we went into this, we knew that we were -- some people actually don't care what's in the Dealer contract. They want to see us put up the results and they want to talk about it. Some people want to know a lot about the Dealer contract in great detail. So we're trying to find the middle ground here. When you find the middle ground, you usually make no one happy. But that's how I wanted to talk about the contract today because, literally, 500 inputs to get to the simplicity that Stephen and I talk about.
Here then there, okay. Just getting the mic for you.
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James Durran, Barclays Capital - Analyst [6]
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Jim Durran at Barclays.
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Michael Medline, Canadian Tire Corporation, Limited - President [7]
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Hey, Jim.
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James Durran, Barclays Capital - Analyst [8]
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I just wanted to get some clarity on the buyback intent, the $200 million that's in place right now. Is it your intention to run through the $200 million and then increase the buyback to $400 million in 2015? Or how will that segue?
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Michael Medline, Canadian Tire Corporation, Limited - President [9]
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Yes. In fact, we've run through the $200 million. And so from today till the end of 2015, we'll do an initial $400 million. So that is in our intent right now.
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James Durran, Barclays Capital - Analyst [10]
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And how did you come up with that sort of range? Like what's your sort of perspective on how you're doing in that area versus your competitors? And -- I know Dean likes to maintain flexibility and conservativism.
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Michael Medline, Canadian Tire Corporation, Limited - President [11]
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He surely does.
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James Durran, Barclays Capital - Analyst [12]
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But it certainly feels like there's still quite a bit of cash on the balance sheet.
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Michael Medline, Canadian Tire Corporation, Limited - President [13]
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Yes, and so -- and there is an -- and we talked about a balanced approach and we realized -- well, let me say it a different way. We talked about a balanced approach and we've been out meeting with our investors in the last year, Stephen and Dean and I and others, probably more than we have ever in Canadian Tire's past and listening to our investors and having conversations. And we're not just there, telling our story; we're listening to questions and trying to get the nuance of what people are asking us.
I can tell you that probably nobody agrees exactly on how we should do our -- use our balance sheet or how much buyback or what -- or what our balance sheet should look like, but there's a theme to it, which is that we have -- and we recognize it and that's why I said it clearly, we recognize we have a lot of cash and we've got a lot of financial flexibility, which has been augmented by the deals we did at the REIT and what we did with Scotiabank at CTFS.
So we continue to look at the balance that we have, so at this point, we looked and we said, "What do we need for the current businesses or what do we need in terms of our debt rating? What happens if an interesting acquisition should come up?"
But where we found that the logic wasn't quite there in terms of what we were talking about was we're not going to sit on cash forever on our balance sheet. That's not productive. And we don't have an imminent transaction to complete.
So when we looked at that and we saw the progress that we made, and by the way, prior to 2013, we hadn't done a lot of buybacks. So we started with what was, I guess, looking back, is small manner with $100 million, went to the $200 million, which we've done this year. And we like to do what we said we're going to do, we said we'd do $100 million, we did it. We said actually this year we're going to do $100 million and we increased that to $200 million. And now we're doing the $400 million.
So it would take a while to take you through all of the conversations and the numbers we look at, but we're looking at the same numbers that you are. And I realize that some people would rather have us do a little less and some people would rather have us do a little more. We think this is the prudent and right decision at this point how to spend our shareholders' cash. Sorry, it was -- I think, Irene was next actually. Sorry.
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Irene Nattel, RBC Capital Markets - Analyst [14]
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Thank you. Irene Nattel, RBC Capital Markets. You've identified, I guess, two sort of tangible earnings-related objectives, the 9% ROIC target and the 8% to 10% average annual EPS growth target.
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Michael Medline, Canadian Tire Corporation, Limited - President [15]
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Yes.
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Irene Nattel, RBC Capital Markets - Analyst [16]
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You've also talked about top line growth targets for the various banners, you've talked about productivity initiatives, you've talked about buyback. How should we think about the relative ranking in terms of importance of sort of, let's call it, the operating initiatives in terms of same-store sales, in terms of productivity as well as the buyback as factors that will contribute to you achieving that 8% to 10% growth rate and the 9% ROIC target.
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Michael Medline, Canadian Tire Corporation, Limited - President [17]
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Yes, I think, I mean, I like the ROIC number because everything builds to that over time. And so when we become more productive -- for a word we don't like, Dean, we use it a lot, productivity. When we become more productive or how much we use in CapEx, all these things will build over time to a company, which has an appropriate ROIC that it's proud of. And we're not yet proud of our ROIC, we're getting there.
So I like the ROIC in the long term, but all of these things build toward it and so you can't have a -- a ROIC moves slowly over a number of years. So we need some targets to keep us interested, which are all pointing toward that ROIC target.
So today, you heard pretty darn aggressive POS targets for a retail company, well, not just in North America but anywhere, 3% plus, 5% plus, 9% plus POS targets are big targets. Those grow toward the ROIC.
8 to 10 earnings per -- 8% to 10% EPS growth, some of you are going to say, well, you're blowing through that a lot in the last little while and we'd love to do that and continue to blow through that one, but grows toward the ROIC.
A CapEx program that is appropriately sized helps toward the ROIC. And so all the things we're doing, I think, are growing toward that appropriate use of capital to grow a business and obtain results.
But we need to be able to put, as I always say, the numbers on the board to be able to show we're moving toward that ROIC target. So all of them are important to us. But when you say, where is this all rolling up? It will roll up into a 9% plus ROIC, we expect, by 2017. By the way, 9% is not good enough as I said. That's on our way to a much more appropriate ROIC that we're proud of.
Does that answer your question, Irene? Go ahead, no, you can ask some more if you want.
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Irene Nattel, RBC Capital Markets - Analyst [18]
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Okay. So if we put the ROIC target aside, if we look at the EPS target, what are the key factors that are going to get you there? Is it -- if you fall short on the top line, can you make it up -- can you make it up with the productivity? That sort of thing. How do you get to that number?
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Michael Medline, Canadian Tire Corporation, Limited - President [19]
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Yes, so productivity, you should be doing productivity all the time and we have. But we're going to take that up a notch. Our productivity also gives you some buffer in the event that macroeconomic factors don't go in your favor. We can control a lot of things in our business but we cannot control all of the macroeconomic factors. We're in better shape on that than we were three years ago, five years ago, six years ago, but we can't control all of that.
So I think that's how I look at productivity. You should be doing it, that's what great companies do. But it gives us that buffer. And we have to be able to get to that ROIC target, we have to be able to grow the top line and see it showing up in the bottom line.
So I mean this is not that complex a business when you take it all apart, right? We're growing the top line. We've got to keep our margins strong, take out the costs, get that earnings number good, at least 8% to 10% per year. That's going to translate into financial success for us. So that's the way I look at it.
Sorry, let's go there and then Patricia. Thanks.
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Vishal Shreedhar, National Bank Financial - Analyst [20]
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Thanks. Vishal Shreedhar, National Bank. Just regarding the digital -- the shift to digital at the various banners -- Mark's, FGL, Tire. Given the different demographic at core Canadian Tire Retail and the Dealer arrangement, how should we expect the cadence of shifting to digital at Sport Chek and Mark's versus Tire? And it's three years, I mean, are we going to be able to make substantial headway at Tire or even noticeable headway at Tire, the core Retail business, within the three-year time frame?
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Michael Medline, Canadian Tire Corporation, Limited - President [21]
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Okay. On the digital side, yes, so I mean, I kept saying today that we're going to run fast with Sport Chek and we're going to try things at Sport Chek that we can translate to the other banners.
But let me take a step back because this weekend I wanted to see -- I just wanted to compare our online capabilities today against our competitors, which we do every once in a while so this weekend I went on, and I've got to tell you, today, I would say that our Canadian Tire online presence is better today than our Sport Chek or Mark's presence. And I would put our Canadian Tire one as pretty good against the competitors.
Now they're all pretty bad. They're all really deficient in terms of what it should be. And so I tried to explain to people what it's going to look like when we get digital right. And I don't know if some of you remember the old Sport Mart stores that FGL had, well, Sport Mart stores are where we are today online in our banners.
And West Edmonton Mall or whatever comes after West Edmonton Mall is where we need to be. So that's a big gap, but we can close it quickly and that's why I wanted to emphasize today that behind the scenes in our -- with our capital spend resources we had, we've almost quietly put in place all sorts of infrastructure and technology that will now let us go really fast.
If you do not have that infrastructure, you cannot hit the time frames I'm talking about. I think you'll now see Sport Chek, starting this spring, but it won't be all the way there, it'll be pretty good. It will get ahead of the other banners and then it's going -- it has a plan the year after the spring to continue add on to become the best in the world. The best in the world. Mark's is going to be coming behind that.
And I have no doubt, no doubt, that Canadian Tire can achieve that in less than three years. In fact, that's the goal they've set for themselves in CTR -- to be an online power and to connect with the customers in a way -- better way than others are doing today within this period.
And so I've got all sorts of confidence in that and I think a lot of that confidence comes from the team, which is a young, passionate, digitally-savvy team from the infrastructure that Eugene is putting it forward from the interest and excitement of our Dealers at Canadian Tire, but it's also because we are committing to it and that's the next level to raise Canadian Tire's game to. That we have to get there and fortunately it's grown a little slower in Canada than U.S. and fortunately no one's knocking our lights out.
But one thing we should emphasize on online, the big returns on online, the bottom line on online at least in the first number of years will probably be bigger in-store with the capabilities in-store than from people ordering online, which will be a good business for us.
But when Chad always talks -- when Chad McKinnon here who runs FGL Sports always talks about it, it drives me insane that people are walking out of his store because we didn't have the green medium Adidas running shorts that they came in to get. But with our talented staff and with the online capabilities we'll have in the spring, customers can wait a little bit for some products now.
And maybe they'll wait for a day, maybe they'll wait for two days or maybe they'll wait an hour, but we can fulfill more and grow our bottom line, take that away from our competitors, be more competitive, make our customers happier and I think you're going to see that people underestimate if you have a great online business what that's going to do in-store.
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Vishal Shreedhar, National Bank Financial - Analyst [22]
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Just to follow up again. As you move to -- as you increase and become digital at Canadian Tire Retail, should we think of the same sort of cost basis or cost split between the Dealer in Canadian Tire Corporation just given that there's a lot of back end infrastructure that has to be put up for this to work.
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Michael Medline, Canadian Tire Corporation, Limited - President [23]
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Yes.
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Vishal Shreedhar, National Bank Financial - Analyst [24]
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So how do you think about that?
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Michael Medline, Canadian Tire Corporation, Limited - President [25]
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Yes, I don't think there's going to be a significant -- any material change whatsoever to our share or what anything you'd see in terms of our financials. I wouldn't be too concerned about that. I think Patricia's next.
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Patricia Baker, Scotiabank - Analyst [26]
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Thank you for taking my question, Michael. Michael, in deference to Dean, I'm going to refer to his big effort around productivity as the cost discipline initiative.
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Michael Medline, Canadian Tire Corporation, Limited - President [27]
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Okay.
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Patricia Baker, Scotiabank - Analyst [28]
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And it's not unusual for companies and a lot of retailers to actually share the goals and targets that they have with respect to how much costs they can take out of the business. The fact that it wasn't given in your press release, I'm assuming that you're not going to share with us now. If that is the case -- if you want to share it, that'd be awesome. But if it's a case that you're not going to, can you talk about the three buckets and what the proportional contribution from the three different phases might be in terms of relative size? And then walk us through sort of the cadence when we're going to see it show up actually in the numbers?
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Michael Medline, Canadian Tire Corporation, Limited - President [29]
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Okay. I'll make a general comment and then I'm going to throw it over to Dean because I've done a lot of talking and I keep talking about what a great team we have, what talent, and you've heard from Dean, but there are others here who can talk plus my voice probably needs a rest.
But the first thing I'd like to say is that 9% ROIC, it's so important for us to get the productivity, and what did you say, cost discipline in the business. And that's what's going to grow us because that 9% plus ROIC target is going to be key and we've got to get some efficiencies and costs out of the business to do that. And so that's a number where, if you're going to watch a number like I said before, watch that ROIC. But I think Dean has a lot more specificity he can give and he's running the project for us. So he can talk.
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Patricia Baker, Scotiabank - Analyst [30]
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That was my follow-up question, who's in charge and I was hoping it was Dean.
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Michael Medline, Canadian Tire Corporation, Limited - President [31]
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Well.
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Dean McCann, Canadian Tire Corporation, Limited - CFO [32]
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Yes, I wasn't but -- and we're not giving you numbers, Patricia, right?
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Patricia Baker, Scotiabank - Analyst [33]
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I know.
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Dean McCann, Canadian Tire Corporation, Limited - CFO [34]
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So the reality is we're working through this and I said in terms of the three phases, the easiest phase, for a lack of a better word, is that first phase, right, where we go after the vendors. To me, that's money, right, and I see that producing benefit for us, right, early on, right? '15 and as early as potentially even this year.
That said, then you move to the second phase, right, which is the overheads kind of thing. We're underway with respect to that and we'll do that very carefully, right, through the organization.
What you don't want to do, right, is a slash-and-burn exercise because that always comes back. That's our view, right, so you have to approach this very methodically. So we're likely to get at some of that as we move into '15.
The third one is -- the third phase is the really hard work, the end-to-end business process piece. That's a lot of work. And we're just talking through that as to how to go at that. That's going to involve Dealers, that's going to involve everybody in the organization, right, and it goes right from the top line right through to the bottom line. So that's a much bigger effort.
The way we're, if you will, looking at the result of this, it's obviously the business has got to deliver the top line margins, all that. That's a component of getting to that 9%. I believe this is an additional component that's going to allow us to get to this 9% plus going forward. And that's almost how we're designing the targets as a component of achieving the ROIC target, right? That's how we're kind of filtering it in. We obviously have numbers in mind, but we're not sharing them at this stage.
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Patricia Baker, Scotiabank - Analyst [35]
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Fair enough.
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Dean McCann, Canadian Tire Corporation, Limited - CFO [36]
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Yes.
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Patricia Baker, Scotiabank - Analyst [37]
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Now maybe at the beginning of your remarks, you talked about Phase 1 being completed. Maybe you did say when you started it, I just can't remember. When did you start the process?
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Dean McCann, Canadian Tire Corporation, Limited - CFO [38]
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Yes, really, it started in earnest about six months ago.
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Patricia Baker, Scotiabank - Analyst [39]
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Okay, perfect. And by the way, we don't have to worry about slash and burn because, by definition, it wouldn't be disciplined.
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Dean McCann, Canadian Tire Corporation, Limited - CFO [40]
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Right, I agree.
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Michael Medline, Canadian Tire Corporation, Limited - President [41]
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Other questions?
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Brian Morrison, TD Securities - Analyst [42]
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Hi. Good morning. Brian Morrison, TD Securities.
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Michael Medline, Canadian Tire Corporation, Limited - President [43]
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Hi.
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Brian Morrison, TD Securities - Analyst [44]
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I have a question with respect to the REIT. I'm wondering if you can maybe update the timing of how you see the flow of the initial $900 million real estate from CTC to the REIT. And I want to maybe confirm that -- your message that you conveyed this morning is that you do expect it'll likely be cash rather than equity units in Class C Units as the REIT has the ability to tap external markets now. And then just lastly, if you could update how low you might be willing to take the ownership percentage of your equity in that case?
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Michael Medline, Canadian Tire Corporation, Limited - President [45]
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So I'll take the last one and then, Dean, you want to take some?
On the ownership, I mean, we have only had the REIT for about a year and so we have the 83% ownership. There was no magic to that number, as I'd like to say. I mean, it didn't have to be 83%, but we're happy with that right now. It's a good business to own and it's appreciating. But I don't think we've ever said publicly and I don't think we've -- even though where we will end up with an ownership of a company, which is rather independent at certain stage. So we like owning it like that now, but there's no magic to 83%. We could go lower, I doubt we'd go higher, but we're not saying we're at 83% forever.
Do you want to take that, Dean?
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Dean McCann, Canadian Tire Corporation, Limited - CFO [46]
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Thanks, Brian. On the $1 billion that Canadian Tire continues to hold and we have moved some of it over, I mean, in the IPO we said over a 10-year period. The reality is we'll probably do that over the next three to five years is quite the way we're thinking about it.
And if you remember, the part of the strategy with the REIT was that's a steady source, if you will, of inflow of property and therefore increased AFFO for the REIT. So that's an important aspect, if you will, of the strategy of the REIT in addition to other sources of investment as it moves forward. Does that answer your question?
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Brian Morrison, TD Securities - Analyst [47]
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Yes, it does. I was wondering, in terms of conversation (inaudible - microphone inaccessible).
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Dean McCann, Canadian Tire Corporation, Limited - CFO [48]
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Yes, in terms of the properties moving over from Canadian Tire, I mean, that's obviously an option, right, but I think we're more focused on testing in 2015 as I referenced right around testing equity markets directly with the REIT and testing debt markets with the REIT, more focused on any external purchases that they either might do or have already done.
We certainly want to see the REIT as being self-funding, right? That's a very clear message I want to deliver here, is that you can build a box around the REIT and absolutely believe it can fund itself on an ongoing basis in terms of its growth, right? And then as Michael says, that's a question of how much of something bigger does Canadian Tire need to own over the long term, right? And that gives us yet another source of financial flexibility, which, as you know, I like.
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Brian Morrison, TD Securities - Analyst [49]
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That's great.
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Michael Medline, Canadian Tire Corporation, Limited - President [50]
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Here and then we'll go to -- there are two in front here.
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David Hartley, Credit Suisse - Analyst [51]
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Great. Thanks. Good morning. David Hartley from Credit Suisse.
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Michael Medline, Canadian Tire Corporation, Limited - President [52]
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Hey, David.
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David Hartley, Credit Suisse - Analyst [53]
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Good morning. Two questions. First on the marketing spend, I know in previous quarters, you talked about marketing spend and there's opportunity for leverage there over time. Could you talk about that in context to investments you're making on the digital side and how much of that gets expensed versus capitalized, et cetera, and what the trade-off is there?
And then secondly, if I may just throw at it, the USD you talked about as potentially a headwind, do you see an opportunity here to, actually, for it to be a tailwind to your business as more domestic buying of your product rather than cross-border shopping happens in areas particularly in Automotive?
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Michael Medline, Canadian Tire Corporation, Limited - President [54]
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Okay. I'm going to talk about the first one and I'll let Dean take the FX and the other question.
But I think that when you look at our marketing spend, I just think it's become more efficient. In fact, when you look at marketing over the last five years, the area we would have taken the spend up the most would be in sponsorships and that's not by a big deal -- that's not a big number. But the payback and the way it feels, it seems like we're spending so much more on sponsorship and marketing because of its effectiveness and because we're becoming more of a brand-driven, brand-centric company. So not a lot of difference there.
The big difference going forward is pretty obvious, which is more and more old school marketing techniques are going to become new world marketing techniques. And you've seen us use, to talk about and get really excited about the digital flyer. We're very excited about almost anything we touched digitally, including social media, including going digital in terms of our marketing. That spend is going to transfer over.
And I've always said that we're actually in expensive -- a bit of an expensive time in retail, but I think we're starting to get out of that, which is I always said we're in the old world and we're still spending and trying out things in the new world.
Now we're starting to get, especially in Sport Chek, which I said is a little further ahead, next year at 20% to 30%. I said 20% in my speech, but I think it might even get higher as it works. We'll take out the print and we'll have a more flexible, more efficient tool, which, by the way, I think digital is actually way cheaper in terms of its efficiency and flexibility than a paper flyer that you have to plan literally months ahead. So that would be the shift.
Now there was a question in terms of expensing and capitalizing, which I know you'd love to answer and then talk a little bit about FX.
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Dean McCann, Canadian Tire Corporation, Limited - CFO [55]
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Right.
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Michael Medline, Canadian Tire Corporation, Limited - President [56]
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Yes.
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Dean McCann, Canadian Tire Corporation, Limited - CFO [57]
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Thanks, David. In terms of pure marketing expense like things like Olympic partnerships, all that stuff is expensed, right, so we don't capitalize any of that stuff. What we capitalize is hard assets, the build, if you will, back end for e-commerce is an example of those kinds of things, right? If that's what you're referring to as marketing, but we wouldn't see that as marketing. We see that as pure capital. But the day-to-day marketing expense on digital work and stuff you see on screens expense, number one.
FX, your comment around it being a positive, I haven't heard any of the merchants say that to me, so I'll use that going forward. But obviously, we're watching exchange very carefully, right, and as an element, if you will, of overall costs. But as we've said before, it's just an element of overall costs, right?
Now that said, a sustained weakening of the Canadian dollar, it will have our attention as we move forward and the teams have lots of strategies to deal with that. But it is a factor, right, in the overall costs of the product that we sell to consumers.
Your point around border shopping and all that, that's a factor that the teams watch as well and certainly Dealers watch and there are Dealers that are obviously very interested in that, those along the ribbon of the border.
I was just at a Dealer meeting with Michael and a couple of Dealers were talking about that. So some see that as potentially positive of a little bit weaker Canadian dollar. But I think we're more focused on, if you will, managing through, if you will, the cost implication, right, over the next couple of years depending on where it goes.
The one thing I know about the Canadian dollar, nobody knows where it's going to be a year from now. I'm telling you that right now.
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David Hartley, Credit Suisse - Analyst [58]
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Just as a follow-up very quickly then. So if we're thinking about the top line growth that you've outlined as goals for the next three years on the retail side and your GAAR targets, I guess, for CTFS, I guess we're somewhere around the 5% type of growth rate on the top line with 8% to 10% on EPS, just my guestimate, how is that? So if that's a number, I mean, is there any leverage at all in EBITDA margins as we work our way down to the bottom line? Or is the difference between the top line growth, and say, the growth you'd get in EPS more related to buybacks?
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Michael Medline, Canadian Tire Corporation, Limited - President [59]
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Well, I mean, there's always opportunities on margin and cost in the business. So in some cases, I mean, if you're modeling margin, I don't think it'll be too far off what it is today. That's the way I would model it.
One thing on the margins of margin, our higher-margin businesses are growing under this outlook higher at a faster rate than the big dog Canadian Tire, right? It's growing -- they're growing faster. So in the very margins of margins, that will increase our margin. But with FX and with crude prices and with competitive onslaught, hard to predict margin. But we haven't seen too much erosion of margin even with all that occurring. Pretty strong in terms of that.
At Mark's, I've talked about, with the INA wholesale division being able to strengthen our margins in that business, but in that business, as well, we want to make the stores more exciting. We'll bring a little bit of national brands, which are tiny bit lower than our private label brands in terms of margin.
So I think that, that's a way to look at it. But no, I'm not -- it's not just top line down to the bottom line now. I want to see that top line get down to the bottom line first. That's what you'll always have to be looking for, but we're starting -- we're seeing that. I mean, I think you've seen that over the last number of years. So no worry about that, but watching the margins. But that one has a lot of inputs into it and the costs and making sure we're watching our costs, key to what we're doing. So I think there's lots of room.
And share buybacks will help, but share buy -- that's not the way to manage the business and manage from the top to bottom just by doing share buybacks.
Okay, I think there's a question. You're next and then over here.
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Keith Howlett, Desjardins Securities - Analyst [60]
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Keith Howlett, Desjardins. I just wanted to indicate we're willing to sit here all day and listen to the Dealer contract discussion. Just a three-part question on acquisitions. The first part, I just wanted to confirm that the heritage categories are Driving, Fixing & Playing, maybe you could confirm that.
And then, secondly, I wanted to know how your acquisition parameters relate to Mark's and FGL Sports, which I think our Apparel and footwear-based so don't appear to be directly in the heritage category. And then, thirdly, if you could speak about whether you need to make or would look at making anything in the online or digital space in acquisition that help accelerate your progress on that front?
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Michael Medline, Canadian Tire Corporation, Limited - President [61]
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Okay. Can we take it one at a time? Can you repeat the first one again, I just want to get them all right for you, Keith.
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Keith Howlett, Desjardins Securities - Analyst [62]
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Just trying to get the heritage categories.
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Michael Medline, Canadian Tire Corporation, Limited - President [63]
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The heritage categories for us are, I said when we talked about it, we mostly talk about Playing and under Playing that, that's Sports and Outdoor and Driving.
Now of course, we have other, what we would call heritage categories like Seasonal and Fixing. But when we talk about acquisitions and -- look, I'm not a betting man, but if we're going to do -- think about acquisitions and I'm not trying to close the doors on this, but I'm just trying to give you some transparency on this.
I'd say Playing's 1A and Driving is 1B, but not just in that order just because of the way that this place is evolving. But those would be the areas we would probably look at most. They are the areas that a lot of your banks bring in for us to take a look at over the last 15 years. But as we said, if there's something real smart and it fits all our criteria and it's good for our shareholders, we'll look at it. Only two of those are qualified but I just wanted to give you a bit of flavor, if that may be helpful.
The second one was? What was that, the soft goods.
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Keith Howlett, Desjardins Securities - Analyst [64]
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Yes, apparel and footwear or whether --
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Michael Medline, Canadian Tire Corporation, Limited - President [65]
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Oh, no, I think -- okay, well, obviously, Mark's and FGL, especially, are not in Driving, so they're only into Playing. So we believe that Playing, sports is more than hard goods. And I think, before we had FGL Sports, we thought of sports as really a hard goods business, it's actually the smaller part of the business than the others.
We have great competencies now, in apparel and footwear to go with the hard goods. And in fact, when you talk sports, those are -- you got to put those three together, they'd be really powerful in our opinion. So I -- when we talk about playing, we are including apparel and footwear in there.
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Keith Howlett, Desjardins Securities - Analyst [66]
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And the third one was would you look at buying a company that's -- would advance or accelerate your online digital effort?
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Michael Medline, Canadian Tire Corporation, Limited - President [67]
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Sure. I guess we -- what I guess -- we would consider that as part of the allure of a company if we were to look at one. What I'd rather see is that we get so good at digital that when we buy a company, we are bringing our enormous digital and data analytics skills to bear on that company. And honestly, yes, we've thought about is there something out there that could accelerate our growth in digital or make our online presence better. We have not seen anyone that could do that, that we're interested in, honestly. Not so far.
So I'd rather bring it than get it, but if we get it, fantastic. And as we've shown in Mark's and FGL, we'll take as well as give when we do an acquisition.
Mark?
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Mark Petrie, CIBC World Markets - Analyst [68]
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Hi, good morning. Thanks. Mark Petrie at CIBC. I just wanted to ask about the assortment at Canadian Tire Retail. And I think that over the course of the last few years, it's been clear that while maintaining a clear value image through the flyer and that sort of thing, there has been an evolution to include more higher-priced product.
And clearly, the showroom, and I guess, the new store in Edmonton is going to be able to feature that product but can you talk about that in the context of the 3% sales growth target? And how you think about the product assortment as well as traffic and basket and that sort of thing? And maybe if you could just sort of extend that, then, to Mark's and FGL?
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Michael Medline, Canadian Tire Corporation, Limited - President [69]
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Okay, thanks. Well, we haven't heard from the people who are running these divisions, so I'd like to ask Allan, maybe you could say a couple of words on Mark's question? And then Rick and Chad, if you had anything to add that would be great.
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Allan MacDonald, Canadian Tire Corporation, Limited - COO - Canadian Tire [70]
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Yes. Good morning, everybody. Good morning, Mark. When it comes to the assortment at CT area, we've been evolving it but as you would normally. I mean, it's partially to do what Michael was talking about how we're looking at our target audience and the way that life in Canada is changing and working to continue to remain relevant and actually lead some of that, so that's a part of it.
The other part is expanding the assortment. As you know, you have the ability to communicate more with the addition of digital, the addition of assets like a showroom store are small, at this point and our endless aisle offering, now we have an avenue to communicate that better.
So there is some higher price points but equally, you'll see we've made huge strides in breadth of assortment in some things like tires, for example. Huge strides in quality, we're going to unveil a couple of things in the next month or two on some quality we've done around our fixing business, which is fantastic.
So you're absolutely right, and I think, our biggest sort of guiding light, if you will on that, is how relevant we are to our target market. And in addition to that, how it's playing out in terms of the halo effect for the rest of Canadians. And we're really pleased with the way the assortments been evolving, and you can watch for that to continue to happen.
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Michael Medline, Canadian Tire Corporation, Limited - President [71]
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Rick, do you want to add anything? Or Chad?
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Rick White, Canadian Tire Corporation, Limited - COO - Mark's [72]
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With Mark's, the assortment is going to be transitioning as we start to target a younger consumer, that 35- to 50-year-old consumer. Right now, our key consumers' somewhere between 50 and 65, so as we move down, we're going to be introducing some national brands, and we're not just randomly doing that.
We did a lot of consumer research and we said, what was the younger consumer looking for, and they were looking for national brands, particularly in the footwear and in the apparel areas, in the outerwear areas. So we will be doing that. Our work wear area, which we're pretty solid in, I think we've got that covered for right now. Thank you.
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Michael Medline, Canadian Tire Corporation, Limited - President [73]
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Chad?
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Chad McKinnon, Canadian Tire Corporation, Limited - COO - FGL Sports, Ltd. [74]
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Yes. On the Sport Chek side, we've been on that journey for quite some time right now, but I'll use the West Ed flagship example, where we went in and we cleaned up some of our brands, tightened up, took it upscale. Right now, it's 30% higher average transaction or a basket than the chain right now, so we had a massive uplift in that environment.
So we'll take that into our Hero stores and our flagships. So very encouraging results by taking it up. So overall, in Sport Chek, our transactions are up, our UBTs are up and our average basket up, but not near to the degree that we've seen in West Ed.
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Michael Medline, Canadian Tire Corporation, Limited - President [75]
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Thanks, guys.
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Mark Petrie, CIBC World Markets - Analyst [76]
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And then if I could just follow up on that. In terms of the composition of the sales growth targets, the 3, 5 and 9, I think you said 1% roughly square footage growth for CTR, but what should we expect for Mark's and FGL?
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Michael Medline, Canadian Tire Corporation, Limited - President [77]
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Yes, I'd say 1% or a little bit more than 1% a year for Mark's. And in terms of square footage, we are putting at FGL, oh Lord, I always give in Sport Chek terms, so I have to get it right. But we're putting up an average of 400,000 square feet a year, which is about between 8% and 9% of Sport Chek. And Sport Chek is the lion share, so I'll get you the exact number when we put in -- when we put into FGL terms, how much of that is Sport Chek and FGL. But Sport Chek is where -- in percentage terms, where the lion share of the number of incremental new square feet is going in percentage terms.
Sorry, this person was -- right here he was -- we were waiting for a while here, so --
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Christopher Li, Bank of America Merrill Lynch - Analyst [78]
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Chris Li from BofA Merrill Lynch. I have three hopefully pretty quick questions but I'll ask them one at a time.
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Michael Medline, Canadian Tire Corporation, Limited - President [79]
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You've learned, I can only handle one at a time.
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Christopher Li, Bank of America Merrill Lynch - Analyst [80]
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I know how you feel. My first question is, I think 4 1/2 years ago at the Investor Day, there were a few slides that show the performance gap between your first quarter and your fourth quarter Dealers in terms of customer complaints and out-of-stock and et cetera. Are you able to give us sort of an update on how that gap has improved in the last four years?
And I was also intrigued by Stephen's comments earlier about how, as the mobility pool increases, as the Dealers kind of take over some of the existing stores that you typically see an improvement in the performance, is that going to be a material driver do you think going forward for the improvement in the stores?
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Michael Medline, Canadian Tire Corporation, Limited - President [81]
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Yes, great question. So the question is on our -- is first of all, have we seen a shrinking of the difference between the top-performing stores at Canadian Tire Retail and the bottom performing. And in fact, we have seen a shrinking of the difference. Now it's not quite to where we'd like it, nor is it quite to where the Dealers would like it, to be honest with you. We need a more consistent performance in our store network.
Now that's all to say as well, there are different stores out there. There are big urban stores, there are smaller rural stores, big and small suburban stores. There are changes in the store. But yes, we've seen a shrinking. I think part of the work we have done over the last few years working with the Dealers in the contract, relationship, whatever you want to call it, is to get more consistency into our chain. That is key to us, it's key to the Dealers.
We had a dearth of mobility for a number of years, which is completely opened up now as we're seeing more Dealers retiring from the system, which is giving more opportunities for Dealers to move through the system, like Stephen talked about. And as you understand our mobility system, a change at a really great store can change seven or eight different stores. And what we have historically seen is a new Dealer in a new store, the store performs better.
And so yes, I take great confidence in many things, including mobility. The fact that we're getting more consistent in our stores, and the fact that the Dealers are on the same page as we are. So that's exactly right. That makes me feel much better about the growth of Canadian Tire but also about the flexibility and being able to implement the changes that are coming in the retail industry.
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Christopher Li, Bank of America Merrill Lynch - Analyst [82]
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Great. And my second question is can you give us an update on your store renewal program in terms of your Smart stores Express, and also Small Market stores? How much of your CapEx over next three years are allocated to revamping more stores? Or are you pretty much done in terms of the big heavy lifting?
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Michael Medline, Canadian Tire Corporation, Limited - President [83]
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Allan, do you want to take that one?
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Allan MacDonald, Canadian Tire Corporation, Limited - COO - Canadian Tire [84]
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Sure. In terms of specifics, we'll save that for another day but when it comes to how we're looking at our store network over the next couple of years, we've got -- we've been very, very pleased with the success the programs we have to date. We still have some work we'd like to do, in terms of revamping our existing stores. And as we look to things like our living strategy, our pro-shop strategy, our showcase store and our showroom store, you're going to start to see those components as we begin to evolve them and perfect them, get rolled up more aggressively in various markets across the country.
So I'd say over the next three years, from a CTR standpoint, it's bringing that relevant assortment to life in the store in the best way we can. So that's where we're going to be focused.
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Christopher Li, Bank of America Merrill Lynch - Analyst [85]
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Okay. I guess my last question. Just I'd love to get a more detailed update on the automotive business, you mentioned is a $2 billion business. It's the highest margin within the CTR family. You've invested a lot of money in the AI project. Are we kind of halfway through in terms of seeing the benefits manifest in the margins? Or are there more to come?
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Michael Medline, Canadian Tire Corporation, Limited - President [86]
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Okay. So I would talk about that, Mike Broderick has joined us. This is a chance, Mike, for you to get up and say a few words, so people can -- who haven't met you can meet you.
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Michael Broderick, Canadian Tire Corporation, Limited - SVP - Automotive Business Canadian Tire [87]
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Good morning, excuse me. Good morning. I think we're just on the journey. First of all, we have invested a lot of infrastructure on the desktop at the service centers. Our opportunity right now is to monetize that investment.
Going forward, the tools that are on the market place, when we talk about North American enterprise, that needs to come to Canada in a much bigger way. And our greatest opportunity, truly, is really communicating, not only at the store level but really to the customer right now, of how convenient and how good we actually are. We're growing that business and I think we haven't talked enough about it.
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Michael Medline, Canadian Tire Corporation, Limited - President [88]
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And one of the things is we're very proud of our Automotive business, and we don't talk about it enough. We don't market that enough. We don't show the great service people in our bays, and so I think coming up, you're going to see a lot more emphasis on our marketing in terms of automotive but especially automotive service, because that's something we can brag about. Thank you for your questions.
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Christopher Li, Bank of America Merrill Lynch - Analyst [89]
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Thank you.
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Kathleen Wong, Veritas Investment Research - Analyst [90]
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Kathleen Wong from Veritas Investment Research. Can you talk about your current capacity at your distribution centers? And if there are any rationalization opportunities among your distribution centers at Canadian Tire, FGL Sports and Mark's?
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Michael Medline, Canadian Tire Corporation, Limited - President [91]
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Well, as you probably know, we're putting up the Bolton DC, which will take over from one of our Mississauga DCs. So we have to do that. It's coming to end-of-life, and it's going to make us more efficient once it's up but we're still a few years away from that.
One DC, we don't talk a lot about is in Calgary, where we are getting set to open a joint, and this is a great synergy. A joint FGL, Mark's distribution center in the West. FGL was not covered in the West and Mark's was not as efficient in its distribution in Calgary as we should have been. Put them together, it's opening soon, and you'll see cost savings and you will see better products in the store in a timelier fashion. Too long a supply chain at these two banners, especially FGL, which wasn't covered at all. And so that would be a DC that's opening. So the big one's coming up, Bolton and Calgary, which is, well, months away in Calgary. It's opening up.
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Kathleen Wong, Veritas Investment Research - Analyst [92]
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So I guess you -- currently, you do have excess capacity at your existing distribution centers, is that correct?
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Michael Medline, Canadian Tire Corporation, Limited - President [93]
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We have -- I don't like the word excess, but we have capacity, obviously, to take us -- why we're doing this in Bolton and Calgary is that we believe that will take us into the future and grow with our sales.
So right now, while we don't -- we can run with what we have. With the growth that we're seeing over the last little while, and the growth that we foresee that we need some more capacity. But it's, also, it's not just square footage or capacity, it's the efficiency of that capacity and the systems we put in place. So it's not always square footage.
So yes, I am confident that we are going in the right place and supply chain but that's something every number of years, you got to update and get better as you're growing company. There's one up here, Patricia?
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Patricia Baker, Scotiabank - Analyst [94]
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Michael, one of the things you talked about in your introductory remarks is the fact that brand matters. And behind you is that Canadian Tire symbol that stands for a lot more than it did, I'd say five or six years ago, because the marketing progress has been pretty amazing.
And there is -- when you think about the marketing that's gone on at Mark's, at Sport Chek, Forzani and at Canadian Tires, there's common elements and they seem to speak to each other and solidify the overall brand. And I guess, I have a curious question. I'd really like to know how you've structured your marketing department. And how does it -- how does it work at corporate? And how does it report into? How the decisions get made from the three divisions up into corporate, so that you have this consistency of messaging across three very different vehicles?
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Michael Medline, Canadian Tire Corporation, Limited - President [95]
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Yes, it's really interesting because not every retailer has a number of different banners with different customers. So we're cognizant of two things. One is that the customer at Mark's is not the same customer at CTR, it's not the same customer at Sports Chek or Sports Experts. And so always got to keep that in mind.
So if you're try to market to a Sport Chek marketing person, marketing to that Canadian Tire customer, isn't going to get it right. However, on the other side of it is a sudden insurge of great talent into marketing. And it was led first by the two guys here, which is Allan MacDonald and Duncan Fulton.
Allan -- and so Allan is running the place and TJ Flood's taken over, which has been a seamless transition in marketing. Duncan is now doing the marketing for all of Calgary and -- but we have different teams under him to make sure that those two banners are distinct.
But having said all that, I don't think there is a better place in Canadian Tire for working together. And so these marketing teams, when they go out, they're meeting Google together, they meeting Facebook together. They're working together to think about the next wave of how to succeed and they're sharing their successes.
And so sometimes, I go on about how Sport Chek is the Pioneer and the Marines, whatever I go on about. But there are learnings, incredible learnings from CTR in many cases. And they're passing those on to Sport Chek and Mark's. And Mark's now is having all sorts of learnings as Duncan and Rick have put in place a very, very strong marketing team there.
So the learnings are mostly, I would say, on the digital side and reminding each other not -- we got to sell product but at the end of the day, the brand is the most important thing we do. And so I think that's where we're seeing a lot of payoff.
So thanks for that question because it's a place -- there's a lot of places, I think, in the company that -- and I've talked about in the script, where we need to get better. We're not good enough but I like the way that these teams work.
The other part that people don't talk about it but there was a good article I just read, I think it was in Fortune Magazine, Geoff Colvin wrote an article in September in Fortune Magazine. A lot of the ideas in marketing are coming from our technology group. These are not two separate groups anymore. The way Eugene is doing it is not just to put in infrastructure and stand back and say, over to you, marketers. This is a very collaborative approach. And in fact, some of the best people, the people who make things beautiful and empathetic and simple because simple is beautiful, are coming from Eugene's team and working together with the marketers.
I used to say that I never thought I'd see a day where technology and marketers could work so closely together. In fact, I don't even think they knew each other years ago. Now I don't know how we could operate without them working together. And in fact, they're working together as well as any teams in the whole company.
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Patricia Baker, Scotiabank - Analyst [96]
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Is it fair to sort of think about the business on a go-forward basis, that I don't expect you to identify right now what they might be, but there might be other facets of the businesses where if the three legs of the stool are not operating like silos, there's more opportunity for collaborative?
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Michael Medline, Canadian Tire Corporation, Limited - President [97]
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Yes. I think that when Stephen centralized a lot of the back office support functions, has made an enormous difference. If you talk to Rick or Chad, who now run these businesses in Calgary, they're getting talent that we could not get before when we had teams under -- I think silos is a good word, under the silos of these banners.
Now when we go and recruit and -- Doug Nathanson, our head of HR is here. Our ability to attract, in some cases, worldwide, global talent to this company has gone up because of three things -- one, is because they have a greater purview across a lot of different banners, which is cool; two, our brand is so strong, and I talked about a little bit earlier when I was talking to you about how that's helping us attract talent; and the third is, where do people want to go now?
And a forward-looking company, okay? A forward-looking company who gets digital, gets technology, who is moving with the times, that's where you want to work. So I think that's fair to say, yes.
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Patricia Baker, Scotiabank - Analyst [98]
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Thank you very much, Michael.
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Michael Medline, Canadian Tire Corporation, Limited - President [99]
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Keith?
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Keith Howlett, Desjardins Securities - Analyst [100]
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Keith Howlett, Desjardins. I just had some questions on the Dealer relationship, I'll do it in a few parts. Maybe starting out with Auto Service, where I understand the labor component goes entirely to the Dealer and the parts are split in the normal way. So maybe you could talk about how you invest in that area? Who gets the payoff to pushing Auto Service and advertising and et cetera?
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Michael Medline, Canadian Tire Corporation, Limited - President [101]
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Do you want me to take it, Mike? Or do you want to -- okay, I'll do it, then. So yes, in terms of when I say there's 500 inputs, a very simplistic way of looking at it is that our Auto Service, labor, accrues to the Dealer and almost all -- and a lot of jobs, take parts, which we share in the parts. However, that is too simplistic a way of looking at it.
How service does, does kick in to how we share our profits at Canadian -- our margins at Canadian Tire. So it's a lot more complex and just Dealers and us, and that's where I get into some complexity that can take you a long way through.
So I look at -- some of it, yes, sell side guys are like keep going, keep going. And sorry, did that answer that part of the question? Or are we emphasizing different things because of the split? Is that what you wanted to know?
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Keith Howlett, Desjardins Securities - Analyst [102]
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Well, I was just wondering how the return on invested capital when, I guess, there was the desktop technology and there was the tire selector, and so how has been the payoff to Canadian Tire in terms of the investment of capital versus the return to the Dealer on that initiative?
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Michael Medline, Canadian Tire Corporation, Limited - President [103]
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Oh no, we're happy. In terms of the investment capital and what we invest. It's a fair share in terms of Auto Service and how it works out. Now if we could break down basketball nets and we can go to trampolines and then we can head over to hoses, right? And see where everything's like that.
The way I see the Dealer contract working now when it's all put together is a very, very fair share. And Stephen went into it a little bit it but that, that was one of the things we want to make sure, that both sides had a fair share, and we were aligned going forward.
Now the Dealers are responsible for a lot of things that we don't have to do. The staff in the store, the team in the stores report to them. They're responsible for most of the inventory in the place. They're responsible for the fixtures. And so that's a fair share.
Now at the end of the day, as Stephen pointed out, when a Dealer leaves a system there is no goodwill with it, they can't sell it. They can't leave the business to somebody, the business goes back into the pool.
Now as it turns out, the corporation, all these years, was putting in a lot of capital into buying land, which was one of our best investments we ever made. And as it turns out, if you now see it in the REIT. So what looked like maybe it was hurting our ROIC for a while has turned out to be a very good investment when we look at the rest of the business. The corporation also profits from our Financial Services business, our Petroleum business.
So yes, you can break it down in different sections. And I believe it's basically fair and even where it is but you got to take it to the higher level and say, is this a fair share? Is everyone working now in the right direction because it's a fair share? And the answer is, yes. The answer is yes.
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Keith Howlett, Desjardins Securities - Analyst [104]
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Maybe if I can take it at that high level. If I was a Dealer computing my return on invested capital, what sort of number would I be coming up with?
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Michael Medline, Canadian Tire Corporation, Limited - President [105]
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Yes. So that's funny because we always talk about that. And as Doug will tell you, Dealers do not workout return on invested capital, much as many of us do not workout on our own return on invested capital when we get -- when we get our pay check, it's just not the way they look at it.
However, I'm going to answer your question to say, when we do a detailed look at the returns now in the business between the Corp and the Dealers, like won't speak for the past, past, these returns on invested capital are incredibly close together. And that's before you could calculate in land and financial services and all the other things.
Now that's -- but I got to tell you, when you talk to us, we talk ROIC. And when we talk ROIC to the Dealers, sometimes they want us to do well but their eyes glaze over. It's not the way they run the business. They run it for cash. They run it for cash, and to make the customers happy and to beat the competition. So it's two different things. But when we look it at it, and we do look at it, it's very close. Closer than it ever was.
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Keith Howlett, Desjardins Securities - Analyst [106]
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And just finally on Dealers and acquisitions, at PartSource, initially, there was a lot of Dealer resistance to that Greenfield's initiative. But what influence do the Dealers play other than that they control the votes along with Mrs. Billes? But other than that, what role do they play in acquisition strategy? Like could they veto something because they just say, I don't want you to buy this auto parts, competitive company to me? Or what's the role there?
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Michael Medline, Canadian Tire Corporation, Limited - President [107]
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No, they cannot veto. And now because I've talked about a relationship, what we do is we bring -- usually when -- now, we don't do that many acquisitions. So okay, let me give you two examples.
We bring the Dealers in, a core group of Dealers in, very early in an acquisition on a confidential basis, the leaders. So if we were ever going to do an acquisition and Doug was the president, we bring him and some others in to discuss the acquisition to get their feedback on it. To tell them how it would affect if any thing on our business. So when we bought Pro Hockey Life, when we bought Forzani Group, and when we bought Mark's, we did so. I think we're getting better at that in terms of bringing the Dealers along. I got to be honest, sometimes the Dealers are concerned. So when we bought Forzani Group, they said, "We sell some of those hockey sticks."
Now it's usually a different price point, and it's a different customer at a different time and a different level, but they said, "Well, how is that going to influence us?" And we did some studies and we showed them and they go, "Okay, that's good." They can't veto. They can not like it. And when we first came out with PartSource, a direct competitor to the automotive parts business at Canadian Tire in some of the accessories, I'm not sure we brought the Dealers along like should have and it hurt the relationship. Now that's -- for some of you who don't know, that predates me. That's 15, 20 years ago. And we learned, we learned how to do.
But no, we're not restricted. There's nothing I can think of that we'd like to do that the Dealers are going to have a problem with. Now it's all theoretical at this point, right?
And I got a few more minutes I'm being told, so maybe time for one more question. There's someone back there who's -- thanks.
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Rosa van den Beemt, NEI investments - Analyst [108]
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Rosa van den Beemt from NEI Investments. So CTC's sustainability strategy is closely aligned with this business strategy which is great, especially since it's growing for mainstream investors in importance, and also for the younger client base we were talking about. Is CTC planning on making it a little easier for investors to know what it is already doing? For example, through reporting to the GRI or any other means?
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Michael Medline, Canadian Tire Corporation, Limited - President [109]
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Yes. So the question is on sustainability and how important that is to investors but also to companies because it's important to us too. And whether we're doing -- I mean, you're never doing as well as you'd like to do, and we're doing way better than we ever did before.
When I talked about the brand committee of the Board, so the committee of a Board's a big thing. And I don't know how many committees -- how many Boards have a brand committee. Much of, if not most of the discussion at the brand committee are on sustainability initiatives, and where we're trying to go with that. We were also talking as a management group, two weeks ago, about how we can be better at informing people what we are doing, and perhaps, some gaps we have that we can improve on.
The issue that we're debating internally, just so you know is, is sustainability is starting to stretch a lot. So when people first start to -- talking about sustainability, at least we were like that, maybe you weren't but we thought a lot about just environment. And so we've made a lot of improvements there.
And in terms of now, you're thinking about where your sourcing products, how you're treating your employees, how you're -- and it's becoming not just -- I'm not even sure sustainability is the right word anymore. Maybe to us, it's brand, because we think about brand all the time. And we think about our reputation all the time, and we think about doing the right thing. And so we got to be able to report on it, but I've got to -- we got to get better at defining what sustainability is in our world and what it needs to be, but not get it to spread out where it loses all of the impact and we're reporting on everything as part of sustainability.
We see sustainability as a very positive way to help run our business. And I think we got to be better at telling our story, and we've made great progress over the last five or six years on that, but not there yet. We're on the journey.
I want to thank you all -- sorry, Mark, I'll talk to you after. I want to thank everybody for taking the time; I know it's a lot of time to devote to us. We appreciate it very much. We especially appreciate your questions, and great questions today. Thank you so much.
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