Q3 2014 Canadian Tire Corporation Ltd Earnings Call
Nov 06, 2014 AM EST
CTC.A.TO - Canadian Tire Corporation Ltd
Q3 2014 Canadian Tire Corporation Ltd Earnings Call
Nov 06, 2014 / 05:00PM 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 - EVP & CFO
* Chad McKinnon
Canadian Tire Corporation, Limited - COO, FGL Sports, Ltd.
* Mary Turner
Canadian Tire Corporation, Limited - COO-Canadian Tire Financial Svcs., President-Canadian Tire Bank
* Allan MacDonald
Canadian Tire Corporation, Limited - COO
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Conference Call Participants
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* Chris Li
BofA Merrill Lynch - Analyst
* Irene Nattel
RBC Capital Markets - Analyst
* Peter Sklar
BMO Capital Markets - Analyst
* Mark Petrie
CIBC World Markets - Analyst
* Jim Durran
Barclays Capital - Analyst
* Brian Morrison
TD Securities - Analyst
* Vishal Shreedhar
National Bank Financial - Analyst
* Keith Howlett
Desjardins Securities - Analyst
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Presentation
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Operator [1]
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Good afternoon, my name is Stephanie and I will be your conference operator today. At this time I would like to welcome everyone to the Canadian Tire Corporation, Limited 2014 third-quarter results conference call. All lines have been placed on mute to prevent any background noise. (Operator Instructions).
Earlier today Canadian Tire Corporation Limited released their financial results for the third quarter of 2014. A copy of the earnings disclosure is available on their website and includes cautionary language as well as forward-looking statements, risks and uncertainties which will also apply to the discussion during today's conference call. I will now turn the call over to Stephen Wetmore, CEO. Stephen.
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Stephen Wetmore, Canadian Tire Corporation, Limited - CEO [2]
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Thank you, operator, and good afternoon, everyone, thank you for joining us. As you will hear in our remarks today, we are very encouraged by the performance of the Company this past quarter. We have a lot of initiatives in progress to build for the future, yet our business leaders are staying focused on the short-term and delivering some impressive results. All our major projects are on time and on budget, which also positions us well for the coming year.
So before I hand the call over to Michael I just want to say, as I said last month at our Investor Day, that I have total confidence in Michael and the team to continue to drive great performance. And I would like to thank Michael for turning in such great results in my last quarter. Thank you very much for that.
And I'd also like to thank all of you for your support of Canadian Tire over the last six years. And your questions and insights have actually made us a better Company. So thank you all very much. And with that I will hand off to Michael and Dean to take you through the details of the quarter.
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Michael Medline, Canadian Tire Corporation, Limited - President [3]
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Thanks, Stephen, and good afternoon, everyone. Today marks Stephen's 25th quarterly earnings call and, as you all know, Stephen has made a tremendous impact on the organization since his first earnings call way back in February 2009. He has strengthened Canadian Tire by building our brand, our assets, our team to move the Company to the next stage of growth. So thank you, Stephen, for that. And I wanted to recognize that before we moved into our results.
I'm going to keep my remarks brief since you all just heard from us a few weeks ago at our Investor Day, and I am not going to repeat numbers that are already available to you. But I will provide some color on our results that were released this morning.
Q3 was a strong quarter with good comps across all of our banners, especially given that we were up against strong comps in Q3 last year. Once again our revenue margins and operating expenses all met our expectations and our Financial Services business had another strong quarter of both top- and bottom-line growth.
You know, like most retail businesses we are sensitive to changing weather conditions, but this quarter, it was not a weather driven story for any of our retail banners. At Canadian Tire Retail we were up in all of our businesses.
We had another strong quarter for automotive where sales were up across all categories including automotive service and we executed well in growing non-seasonal sales, applying a renewed focus around back-to-school promotions and to our fixing and playing categories which also posted good results.
Revenues were up 2.8% due to strong shipments of both seasonal and non-seasonal products. And just last week we launched My Canadian Tire Money, the digital evolution of Canadian Tire's iconic paper money loyalty program. It is a national loyalty program that will take Canadian Tire to the next level, helping us to deliver more personal product offerings, rewards and in-store experiences.
Clearly it is still early days, but we have been blown away with the results from our first week. We are issuing about 100,000 new cards per day, well above our expectations, and we are already hitting our 2015 targets for sales penetration.
The positive early results are largely due to the strong dealer support and staff engagement in the store in the program, which we're seeing across our entire network. But as I said before, the real benefits to us are a linkage to the data which will ultimately allow us to serve our customers better.
FGL Sports had its fourth consecutive quarter of double-digit comps at Sport Chek. Very strong sales especially reflected in our athletic and casual clothing including outerwear. Later this month we will launch a program that we announced at Investor Day which we are calling Burn and Earn where Sport Chek customers can earn and spend SCENE points on purchases at Chek.
We are also excited about the new FGL Sports flagship store that is set to open in Burnaby later this month. It will build off the great work the team has done at our West Edmonton store and represents our next iteration and latest thinking on the flagship concept.
Moving on to Mark's, last quarter I stated that 3.2% comps were not what we were aiming for at Mark's. This quarter we saw impressive sales results of 6.8% comps due in part to new assortments, better merchandising and recent changes to in-store signage and fixtures across certain stores in the network.
As I mentioned at our Investor Day, Mark's launched new national brand denim assortments along with the "Everything in Jeans" campaign which resulted in a double-digit sales lift in denim this quarter. Our enhanced denim assortments are also an example of our efforts to weatherproof our Mark's business and a key part of our strategy to target a younger customer demographic and increase sales in the shoulder seasons.
Moving on to our Financial Services business, we continue to put numbers on the board in this business with another quarter of impressive receivables growth led by both new accounts and increased average account balances. Improved in-store customer acquisition processes and better marketing programs across Canadian Tire also help to drive results. And strong return on receivables performance benefited from favorable aging and lower write-offs.
I'd also like to say a few words about interchange. Earlier this week MasterCard and Visa announced they would be reducing their Canadian credit card transaction fees to an average of 1.5% for the next five years.
Speaking strictly as one of Canada's largest retailers, we welcome the news of lower interchange rates. However, as you all know, we are both a retailer and a bank, so we are in a unique position that is different from most of our retail peers in Canada.
While we are still trying to determine the exact financial and operational impacts on our consolidated business, I'd remind you that the banking industry and our businesses have faced a number of regulatory changes in the past and we've been successful in adapting to those changes over time. We do not see this week's announcement on interchange as being any different. There are many inputs to our results in any given year, some of them positive, some negative and interchange is one of those inputs.
Now let me just stand back for a moment. When I say that we are pleased with our performance at CTC in the quarter as we were in Q3, what do I mean by that? What makes a good quarter?
When I think about our retail performance in the quarter the top four things I watch for are: first, did we properly balance our promo and regular pricing or were we out just buying sales? In Q3 we balanced quite well, as we have throughout 2014, with solid POS growth while managing our margins across all of our core retail businesses.
Secondly, did we drive sales through creative marketing? Customers in this quarter, Q3, responded to our offerings in all of our retail businesses. Our jeans campaign at Mark's was a big success. Our new Canadian Tire Guy TV spots drove traffic and sales. And we continued to use digital advertising at both Sport Chek and at Mark's which led to incremental sales.
Third, were Canadians choosing us for seasonal products? Especially did our innovative products resonate? Seasonal product sales in outerwear at FGL Sports and backyard living at Canadian Tire were very strong in Q3.
And four, did we properly watch our expenses while continuing to invest in the future? Well, in Q3 we have continued to invest in our businesses to position them to grow and compete in this market and into the future. We planned for higher spending in a number of areas to support the retail business, such as our store network investment and our digital and technology initiatives, and continue to be on plan for that.
So those are the four key retail indicators I watch for. And the test is, did we drive regular sales but also have the products Canadians needed and wanted when they turned their minds to the season because the weather arrived?
Now obviously we can't control the weather although I think that we're doing a somewhat better job at weatherproofing our business. And when the weather doesn't cooperate it is like we're all dressed up with nowhere to go. And this happened back in Q4 2012.
Now we're up against big sales numbers in our upcoming fourth quarter. In Q4 2013 Canadian Tire posted 4% comps, Mark's had comps of 5.2%, and FGL Sports delivered 12.5% comps and 15.6% at Sport Chek. Last year, as you know, we got a big boost in sales in December when we had near-perfect weather conditions and our stores were well-stocked and prepared for it.
Again this year we believe that we have a better set up for the key November/December season. Clearly we have a great deal of momentum and the Tire is on a roll right now -- pun intended. We are pleased with where we are in terms of setting up with this crucial season and we will see if the weather cooperates.
Before I turn the call over to Dean I would like to make one additional remark. Last week John Forzani passed away. I know that many of you on the phone today knew John. 40 years ago John opened Forzani's Locker Room with his brothers and friend. That store eventually became the Forzani Group, Canada's largest sporting goods retailer.
So much has been said and written about John's legacy -- athlete, entrepreneur, leader, businessman, philanthropist, mentor to so many. We at Canadian Tire are all saddened by the loss of John, particularly at our FGL Sports division where John's huge legacy lives on in the people, the culture and the competitive spirit.
When Canadian Tire purchased Forzani Group we had to come up with a name going forward for our new division. We were proud to name it FGL to honor the history of Forzani Group and the leadership of John Forzani. He will be missed. I will now turn the call over to Dean.
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [4]
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Thank you, Michael, and good afternoon, everyone. As you have just heard, we are very pleased to see strong results from all our core retail businesses this quarter and the impressive results from our Financial Services business.
On a consolidated basis our gross margin dollars were up 6% year over year, largely reflecting the strong revenue performance across the Retail and Financial Services businesses and an indicator that we are able to generate the sales without heavy discounting.
Retail gross margin rate was up overall by 17 basis points which included a strong margin performance by petroleum. Excluding petroleum's results Retail gross margin was down 22 basis points, but still very strong in light of the top-line growth from our Retail businesses and the dampening impact of increased foreign-exchange pressure which, despite our hedging program, began to rise.
The merchants have continued to do a great job offsetting the impacts of changing costs due to FX, re-examining their promotion, pricing and buying strategies to hold margins in the face of this additional cost. This will be a focus area for the merchants for the remainder of 2014 and 2015.
Q3 for Retail is our second smallest quarter and as a result our margin growth for Retail was largely offset by the planned higher run rate for OpEx coming out of Q2 owing to new corporate stores opened this year, PartSource franchise stores converted to corporate stores at the beginning of the year, higher run rate expenses for IT due to new investments and a rise in compensation expense associated with the rise in our stock price.
Our consolidated OpEx on a year-to-date basis, ex-depreciation and amortization, as a percent of revenue is 21.7% versus 21.1% a year ago. On the quarter we ran closer to last year's level at 20.7% versus 20.6% a year ago. We continue to work on keeping the growth in OpEx in line with our revenue growth.
With Q4 being our largest quarter our consolidated OpEx as a percentage of revenue is expected to be lower in Q4 and should bring our year-to-date rate down from the current rate. That said we will likely end a bit higher on the full-year basis.
Moving to inventory, corporate inventory levels are very clean, but were up this quarter versus prior year for two main reasons. First, at Canadian Tire we brought some purchases forward to ensure we were well-stocked for Q4 and to offset risks of port disruptions. And then secondly, at FGL Sports we were building inventory for 13 store openings in Q4.
Our ROIC metric was up roughly 30 basis points over the prior year at 7.8%, largely reflecting our improved retail earnings performance over the past four quarters.
We have updated our expected 2014 effective tax rate to around 26.5% which is slightly lower than the 27% we previously indicated. This is largely due to a higher stock-based compensation expense than we estimated at this time last year and due to the non-controlling interest earnings that are not taxable for CTC.
Our 2015 effective tax rate estimate for planning purposes is 27.5%, which includes the full-year impact of the Scotiabank transaction and assumes a lower anticipated stock-based compensation expense compared to 2014.
Earlier this morning we declared our second quarterly dividend increase during 2014. At CAD0.525 per share our dividend is up 20% since the beginning of the year. In addition, earlier in the quarter we completed our previously announced commitment to repurchase CAD200 million of our Class A nonvoting shares. Both these actions reinforce our commitment to increasing shareholder value and our balanced approach to capital allocation.
As announced at our Investor Day, we intend to continue to acquire Class A Non-Voting shares under our 2014 normal course issuer bid to a maximum amount permitted under that bid. It is our intention to repurchase CAD400 million of Class A nonvoting shares from now until the end of fiscal 2015 subject to regulatory approval.
Our base CapEx increased to CAD152 million -- CAD152.8 million in the quarter and includes costs related to the expansion of the FGL Sports store network and investment in digital and technology initiatives. We remain on track to be at the higher end of our previously stated range for 2014 CapEx of CAD500 million to CAD525 million.
On a year-to-date basis our capital expenditures for additional distribution capacity are below our previously announced range of CAD75 million to CAD100 million. However, we expect to see a fairly significant ramp up in these costs in the fourth quarter and expect to be at the lower end of the range for all of 2014.
Looking ahead to 2015, we forecast CapEx of CAD600 million to CAD625 million primarily due to increased spending on the retail network expansion including the FGL Sports growth strategy and significant investments in digital and technology initiative.
This range does not reflect spending for additional distribution capacity, which we expect will land in the range of CAD175 million to CAD200 million, or for the Company's support of third-party acquisitions by CT REIT.
Finally, I'll remind you of a couple of items that will impact our Q4 numbers. Because 2014 is a 53-week year our Q4 numbers will include an extra week of results which we will call out as part of our disclosures when we report on our Q4 performance in February.
And secondly, Q4 will be the first quarter where our EPS results reflect the impact of Scotiabank's non-controlling interest in the Financial Services business, the nature of which we provided -- the effect and nature of which we provided on our website last month.
As well, beginning in Q4 our prior year comparative numbers will begin to reflect the REIT activity, making the numbers for our Retail segment more easily comparable in 2015. With that I will turn it back over to the operator for the Q&A portion of the call.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Chris Li, Bank of America.
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Chris Li, BofA Merrill Lynch - Analyst [2]
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Just a few questions on the strong FGL same-store sales performance. First, I just want to confirm that the positive impact from the banner rationalization program was no longer impacting this quarter results.
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Michael Medline, Canadian Tire Corporation, Limited - President [3]
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It was not.
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Chris Li, BofA Merrill Lynch - Analyst [4]
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It was not, okay. And then if you exclude the West Edmonton flagship performance, are you able to share with us what Sport Chek same-store sales comp would have been?
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Michael Medline, Canadian Tire Corporation, Limited - President [5]
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No, but one store doesn't make hardly any difference in our numbers. This was across the board strength.
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Chris Li, BofA Merrill Lynch - Analyst [6]
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Okay, and maybe just along the same line, can you share with us any metrics you have in terms of same-store traffic and average transaction size for FGL Sports?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [7]
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No, we don't -- Chris, we don't typically do that in terms of average basket size.
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Michael Medline, Canadian Tire Corporation, Limited - President [8]
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When you start putting up double-digits all you're seeing -- you're seeing real good traffic and really good basket, both of them, and Chad will say a couple words.
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Chad McKinnon, Canadian Tire Corporation, Limited - COO, FGL Sports, Ltd. [9]
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I just want to add one thing, Chris. We take a look at its success rate, which is the number of stores out of our chain that are comping and it is very encouraging. It is nationwide, 177 to 183 stores are comp year-to-date, it is almost a 97% comp ratio. So it is coming from everywhere right now.
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Chris Li, BofA Merrill Lynch - Analyst [10]
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Okay. And I imagine given your strong performance you are taking share away from -- taking some market share. Where are you really taking market share from or who are you taking share from?
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Michael Medline, Canadian Tire Corporation, Limited - President [11]
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I've got to watch what I say here. Look, when you are putting up the numbers that FGL is putting up, you are taking it from everywhere. I also think though that when -- with the branding and stores and what we are doing that we are also growing the market. That more people are buying athletic wear or shoes or hard goods in Canada, and that it is not all taking market share.
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Chris Li, BofA Merrill Lynch - Analyst [12]
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Do you have a sense of what the market grew during the quarter?
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Michael Medline, Canadian Tire Corporation, Limited - President [13]
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No.
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Chris Li, BofA Merrill Lynch - Analyst [14]
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No, okay. Okay, I will get back in the queue. Thank you.
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Operator [15]
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Irene Nattel, RBC Capital Markets.
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Irene Nattel, RBC Capital Markets - Analyst [16]
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I was very interested in your remarks, Michael, because this is the first time in many quarters that we really didn't hear anything about either cautious consumer spending or a highly competitive promotional environment and just sort of a lot of pressure. So wondering kind of what you are seeing on both of those factors?
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Michael Medline, Canadian Tire Corporation, Limited - President [17]
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Yeah, I mean we just take it for granted that this is going to be more and more competitive as we move forward. And as for the economy we don't see huge differences from what we saw even a year ago. At the same time I am not sure that we reflect best in terms of what other retailers are seeing. I think we have a little better success than some are seeing right now.
But we have planned and executed on the basis that we've got to make our own good fortune here. And so that is why we don't talk about it a lot, we don't even like talking about whether, but we end up talking about that a little bit. But we are not seeing anything more. I think we are prepared for Q4 for some competitors, especially if they believe that they are struggling to make it quite competitive, and we are ready for that.
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Irene Nattel, RBC Capital Markets - Analyst [18]
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That is great, thank you. And just on a related topic, so clearly your comps are outpacing what I would say likely, any of your underlying categories are growing. So how much of this is catch up and should normalize versus we really still have some more arrows in the quiver on things like remerchandising, repositioning that can sustain these kinds of comps?
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Michael Medline, Canadian Tire Corporation, Limited - President [19]
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That is a great question, Irene, and obviously from our standpoint we see all the things that we are not doing right and all the opportunities that we still have out there. We see a heck of a lot more opportunities than what we've already taken advantage of.
I mean if you look at just what we are doing just in our big dog Canadian Tire retail and the changes we've made in merchandising execution, our relationship with the dealers, now having this loyalty card, and we haven't even started to exploit data and e-com yet. We are at sort of the -- Stephen I think put us on the right path, as I always like to say, on the journey. But we are way closer to the beginning of the path than the end of the path.
So I could have picked any of the divisions and gave those examples. Well, we are bullish. We also know that we've got a -- every quarter is a new adventure. So now we are working on Q4, Q1 and all of 2015. So we don't like to get too swaggery about our successes. We celebrate them for about 3 minutes and then we worry about the next year. But I think we are in a good spot and we haven't -- we have many arrows left in our quiver and it is up to us to execute.
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Irene Nattel, RBC Capital Markets - Analyst [20]
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That is great, thanks, Michael.
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Operator [21]
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Peter Sklar, BMO Capital Markets.
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Peter Sklar, BMO Capital Markets - Analyst [22]
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Dean, I think you said in your commentary that the retail segment margin when you exclude Petroleum was down 22 basis points year over year, which is a bit of a change from the previous few quarters where you had very strong pick up in margin and basis points. So I am wondering what has changed? Is it the FX, you are just comping now against strong quarters or can you provide any further comment there?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [23]
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Peter, I think it is a combination of things. But let's just be clear that at 22 bps we are not fussed about that at all. I think the merchants have done an exceptional job, right, comping over a very strong quarter last year, first and foremost. And secondly, I would say there is some headwind with respect to FX but they've done a great job.
We have had that throughout the year and the merchants have done an exceptional job kind of -- if you will, kind of fending that off with everything from their pricing promotional and their purchasing strategy. And I would expect them to -- certainly expect them to be able to continue to do that going forward. So I don't see it as a big change, right, in terms of the 22 bps.
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Peter Sklar, BMO Capital Markets - Analyst [24]
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And then I have a question on the Financial Services business. Like your impairment losses continue to remain low. And I'm just wondering, does that reflect any change in your credit standards or is it just the consumer is hanging in there? I am just wondering -- you are really showing that is a very strong stat.
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Mary Turner, Canadian Tire Corporation, Limited - COO-Canadian Tire Financial Svcs., President-Canadian Tire Bank [25]
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Hi, Peter, it's Mary. So we haven't changed our credit standards we are still using the same strategies and same guidelines as we have for a long time. I think a number of things are happening. One is we continue to improve our models and our execution of our models and how we manage collections and customer service. So all that helps us with better aging and better write-offs. So that is kind of our internal perspective.
But externally I think we are seeing maybe I will call it a very modest improvement in the economy, we saw some small improvements in unemployment rates. So I think that is helping us too. It does sort of seem like the consumer is hanging in there, as you said. So I think we are fairly optimistic about the position we are in with the economy and with our ability to cope with it.
I think the other thing maybe I would just point out is over the last year or so we have really ramped up our growth in new accounts. So you are going to see some numbers that might -- they might look a little puzzling where you get allowance rates going down and write-offs going up.
Those are the -- that is the delay between when you take on new accounts and as they ramp up you build up allowances, but write offs don't really start to kick in for some time. So you are probably seeing a little bit different patterns then you would have seen if you went back a couple years when our new account growth was more flat.
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Peter Sklar, BMO Capital Markets - Analyst [26]
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Right. And then lastly, I'm just wondering if someone from the management team could comment on the relatively new e-commerce effort at the Canadian Tire banner and what kind of traction you are getting?
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Allan MacDonald, Canadian Tire Corporation, Limited - COO [27]
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Hey, Peter, it is Allan. We are really pleased with it. I mean it is early days for us. Introducing e-commerce in a model as complex as ours with a product level -- product assortment that is as broad and seasonally related is definitely a journey, we are just beginning that.
But we are seeing customers respond well to it. When we make changes we see the impacts on a daily basis. Our tires e-commerce business remains strong. So I think we have positioned ourselves very, very well for where we want to grow from here and, if anything, it has been very encouraging.
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Michael Medline, Canadian Tire Corporation, Limited - President [28]
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I think we were just looking at how many more visits to our website we had this year than last year. We are up 18% Q3 over Q3. And it's the infrastructure that I really like in there that our customers have more surety of trips to our stores.
So we can tell you how many of the windshield wipers that fit on your car are available and the store closest to you. And that is a part of the infrastructure that I am very excited about. And I think that that capability and our online presence getting better is helping sales in the store. So I think it's early days and we can get a lot better. But we're seeing some real progress.
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Peter Sklar, BMO Capital Markets - Analyst [29]
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Okay, thank you.
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Operator [30]
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Mark Petrie, CIBC World Markets.
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Mark Petrie, CIBC World Markets - Analyst [31]
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I just wanted to ask about the retail business and the pace of sales growth versus revenue growth. And given the strong Q4 I would have guessed that revenues might have been a little bit closer to sales or even outpaced sales in Q3. So can you just talk about the timing of dealer orders as it relates to restocking for winter and how we should think about that?
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Allan MacDonald, Canadian Tire Corporation, Limited - COO [32]
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Well -- hey, Mark, it is Allan. Yes, I mean we are, in a nutshell, feeling really good about our inventory positioning going into Q4. Like anything you always try to set ambitious targets for yourself and you have to have the inventory to make that possible. And we feel like we are in a good position.
Of course, as you know, the timing of shipments doesn't always match up with the quarter. But we have no reason to believe that we won't be, as Michael described, open for business when the seasons arrive.
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Mark Petrie, CIBC World Markets - Analyst [33]
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So I guess that sort of noise of sales not necessarily matching up with revenue, that is going to continue, but strong revenues for Q4 shipment essentially?
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Allan MacDonald, Canadian Tire Corporation, Limited - COO [34]
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Well I'm not sure -- when you say sales aren't matching up with shipments, I mean over a long enough time frame they match up identically. But, yes, in Q3 it is always hard to time these on a quarter-by-quarter basis, especially when you may start the quarter with a small week and end it with a big week one year and the reverse the next. So I wouldn't look to match them up too closely on a quarter-by-quarter basis. But we feel we are going to be ready for business (inaudible).
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [35]
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Yes, Mark, it is Dean. You are right, there is a bit of a lag here, right, but it's nothing that any of us is concerned about, that's for sure. We are greatly -- very well positioned from an inventory point of view going into the fourth quarter.
As I mentioned to you earlier today, we have -- we brought in some extra inventory so the guys are set in terms of the stores. And as you know, Q4 last year was an exceptionally strong quarter for all the businesses, but particularly for Canadian Tire Retail. So I expect we are in good shape.
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Mark Petrie, CIBC World Markets - Analyst [36]
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Okay, so Q3 through, that inventory is sitting at corporate level, but over the first part of Q4 that is moving to dealers essentially?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [37]
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Yes, we didn't buy it not to sell it.
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Mark Petrie, CIBC World Markets - Analyst [38]
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And then just on Financial Services, you recently moved up the return on receivables target, but obviously you are dramatically outperforming that recently and clearly in Q3. What dynamics do you expect to change or turn against you to come closer to that 6%, and do you feel like those would be more market-driven or engineered by changes in your strategy or tactics?
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Mary Turner, Canadian Tire Corporation, Limited - COO-Canadian Tire Financial Svcs., President-Canadian Tire Bank [39]
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Mark, it is Mary. I think over time I mean right now I guess what I would say is we are reaping the benefits of a lot of very good tailwinds. So interest rates are really low. The economy is pretty good and, well, we always have good expense control so that Dean is happy. And we've got growth in our portfolio which is driving our top-line.
So all those things are working for us now. Over an economic cycle if those don't all go your way, you will start to see higher write-offs in tougher times and presumably higher interest rates. So I think that is why we don't have seven or higher as a permanent target because it is really -- at this moment in time there is a lot that is very favorable about the card business, but it just never lasts.
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Mark Petrie, CIBC World Markets - Analyst [40]
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And of those criteria that you outlined what do you feel like is the most at risk at this point in terms of turning from being so favorable to even just more normal?
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Mary Turner, Canadian Tire Corporation, Limited - COO-Canadian Tire Financial Svcs., President-Canadian Tire Bank [41]
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Well, I think it's what happens with the economy. I think it is external, not internal. I am not concerned about our ability to manage expenses or drive revenue or control credit risk. But in a tougher economic environment that can put pressure on the ROI.
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Mark Petrie, CIBC World Markets - Analyst [42]
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Okay, thanks very much.
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Operator [43]
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Jim Durran, Barclays Capital.
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Jim Durran, Barclays Capital - Analyst [44]
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I just wanted to go back to the interchange fee change that is coming up. Can you provide us with an indication as to what percent of your retail sales are done on credit card?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [45]
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I think, Jim, we have sort of resisted doing that. And like what I would say is the change that came down is -- we don't have all the details of how it is going to be implemented yet, right. That said, we are -- we think it is a very manageable impact like Mary and team have dug through it and we have over foot in both sides of the pond here, right, in terms of being a retailer and being a financial services business.
So it is just a manageable impact for us going forward, right. And certainly for 2015 we don't see it as being a terribly big deal for us, right? It will affect Mary's business a little more than the retail businesses. But at the end of the day it is very manageable and these guys have lots of experience kind of working through regulatory change and the impact of it. So that was a non-answer to your question, I realize that.
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Jim Durran, Barclays Capital - Analyst [46]
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I appreciate that (multiple speakers). So I'm going to ask another question then. On e-commerce across the board like at what point in time, and I know it is going to vary by business, do you feel it will become a meaningful driver to sales growth? And I assume you include that in the comp store sales depending upon which business we are talking about.
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Michael Medline, Canadian Tire Corporation, Limited - President [47]
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We do include it in the comp store sales growth, although it is not very meaningful at this point. And I have said -- it's Michael, how are you doing Jim? I have said that within three years each of the banners will be world-class. I expect in three to four years it will be a meaningful part of our business and hopefully a fast-growing one for us.
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Jim Durran, Barclays Capital - Analyst [48]
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So if I get more tactical about that though and think about 2015, is there sort of a time through 2015 where you think you are really going to have ramped up enough that it does become a meaningful driver?
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Michael Medline, Canadian Tire Corporation, Limited - President [49]
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No. I think it will be -- obviously we are already seeing big percentage growth and we are going to make some changes in some of the banners in 2015 which will improve it, but I don't think it will be what you and I would call meaningful in 2015.
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Jim Durran, Barclays Capital - Analyst [50]
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Okay. And then last question just on depreciation, it was a much bigger number this quarter, Dean. I'm just trying to figure out how to look at it for into 2015 in terms of the things that are driving it and should we continue to see it up substantially or was this an aberration quarter?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [51]
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I think you should see it trend up, Jim, just simply because we have highlighted the approaches around investment in digital and IT projects. Our project agenda, -- led by Eugene and then scored by the business folks that are at all-time highs over the last two or three years. So I think it will trend up. It is not going to be the end of the world, but obviously when you put IT projects in they are amortized at a much faster rate appropriately than traditional bricks. We have given you kind of a number, but I would be -- I would have it rising over the next two or three years.
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Jim Durran, Barclays Capital - Analyst [52]
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I will take that as a more tangible answer than the first question I asked.
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [53]
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A little closer, yes.
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Jim Durran, Barclays Capital - Analyst [54]
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Thanks a lot.
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Operator [55]
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Brian Morrison, TD.
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Brian Morrison, TD Securities - Analyst [56]
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If I can just go back to Financial Services for a moment. Clearly the operating leverage in Financial Service was impressive. But what really caught my attention was that SG&A was essentially flat to last year, which was a little bit different than it was in the second quarter. So can you just address the performance this quarter versus last and I guess how we would see this trend moving forward?
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Mary Turner, Canadian Tire Corporation, Limited - COO-Canadian Tire Financial Svcs., President-Canadian Tire Bank [57]
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Hi, Brian, it's Mary. We had a bit of a blip in last quarter. You may remember we had a settlement of a contract that was really a one-time blip. I think we -- I made a joke about it earlier and Dean didn't smile. But we really, we focus a lot on our OpEx -- now he is making a face -- and because our volume of business is growing that is helping us from a scale perspective.
And there is just a lot of things going on in our business where we are trying to improve our processes, trying to acquire customers more efficiently at a lower cost, look for ways to eliminate unnecessary costs. So it is just a big focus at our place as I am pretty sure you know. So I think all you are really seeing is that the impact of that blip last quarter and hopefully that answers your question.
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Brian Morrison, TD Securities - Analyst [58]
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Yes, that is fair. And then the second question, I guess probably for Dean, but on the cash flows in Retail with the Glacier financing it looks like we flowed CAD600 million back to Retail from Financial Services. Presumably there is a little bit more from the REIT through interest and dividends, yet the net debt at retail remained flattish.
So I guess I have two questions. I understand the timing of inventory, there is some elevated CapEx and of course the buyback. But are there any other movements that may have been out of the ordinary on the retail side of cash flows?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [59]
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Not really. And we completed the share buyback, right, so that would be the only other factor in there. But I think you have hit all of them on. And I am not sure that CAD600 million is dead right, but we can walk you through that, Brian, but you are in the ballpark anyway.
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Brian Morrison, TD Securities - Analyst [60]
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Okay, and then I guess (multiple speakers).
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [61]
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As we raised the Glacier money we did reduce intercompany debt between the corporation and CTFS.
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Brian Morrison, TD Securities - Analyst [62]
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Right and then just on the negative inventory adjustment of CAD236 million, I think you pointed out in the MD&A, how much of that was to avoid disruption risk and how much was carry over due to the weather that you mentioned there as well?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [63]
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It was a decision, right, on the part of particularly Allan's team to bring inventory in earlier. And I think as we mentioned right at -- I think the guys were worried about port disruptions and that kind of thing. And quite frankly we were -- we had a very strong quarter, as you know, last year and the team wanted to be ready going into Q4, right, to be able to support the stores.
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Brian Morrison, TD Securities - Analyst [64]
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I understand that. I'm just wondering the carry over due to weather, how much of that was due to that?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [65]
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Not an issue in any of the meetings I was in, let me put it that way.
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Brian Morrison, TD Securities - Analyst [66]
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Thank you very much.
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Operator [67]
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Vishal Shreedhar, National Bank.
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Vishal Shreedhar, National Bank Financial - Analyst [68]
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Thanks for taking my questions. The first one is just on the impact of lower oil. I'm just wondering if you're seeing anything in your own costs or if you are seeing anything at the store level, maybe improved traffic or improved customer reception or even at the gas pump. Any comments related to lower oil?
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Michael Medline, Canadian Tire Corporation, Limited - President [69]
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You know any movement in sort of more macro things like the movement of oil has pluses and minuses. A lower price at the pumps will put more cash in the jeans of Canadians, which is good news. Lower oil will at a certain point lower our cost of delivering our products to our customers.
At the same time the Canadian economy and jobs and the strength of the Canadian economy is incredibly important to us as a retailer. And so, a big portion of our business, especially in some of the -- some of our banners, our Western banners are in Alberta and Saskatchewan and have been good growth provinces for us.
But at this point I don't see anything -- I haven't seen anything change and that doesn't mean it won't. But there is always pluses and minuses in how it works out. But those are the three things I think about when I think about big changes in oil.
Now at the same time the Canadian dollar has fallen, as you know, at the same time as oil. So in terms of competitiveness of our business in Canada it has probably not moved in the global picture as much as it appears to have. But it is one input and, as I said in my script to you earlier, in many inputs. But we watch it, we watch it very carefully.
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Vishal Shreedhar, National Bank Financial - Analyst [70]
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Okay, so no benefit to traffic yet or at least perceived benefit to traffic as a result of lower oil.
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Michael Medline, Canadian Tire Corporation, Limited - President [71]
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It would be hard to pick up immediately. But you've got to believe in the long-term that people aren't spending so much money at the pump and that gives people more disposable income.
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Vishal Shreedhar, National Bank Financial - Analyst [72]
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Okay. In terms of the gross margin, in the MD&A you noted benefits from cost-saving initiatives and the timing of payments. I was hoping you could elaborate on that further.
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [73]
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I mean, Vishal, it is Dean. Cost-saving initiatives, I mean are -- and we talked about productivity at IR Day kind of on a go-forward basis, but I think I did mention that Allan and team particularly, but all of the businesses have been focused on cost for the last couple of years.
And I think an example that I gave there, the returns process and that whole world has been a focus area that Allan and his team have done a great job with as an example. So I think that is what we are referencing there and it is probably the primary factor.
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Vishal Shreedhar, National Bank Financial - Analyst [74]
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Okay, and in terms of the SG&A rate target, the flattish versus last year now. I think you said it may not be exactly flattish this year on the SG&A rate. And if that is correct is the delta the stock-based comp?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [75]
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I expected this question from you, Vishal, so you are right on cue. Stock-based comp will be a factor. I think potentially marketing may be a factor because the teams are up against big quarters a year ago. So I think as we look at it and going into the fourth quarter I think the teams may want some more marketing money with and with the levels of performance they have been putting up they probably deserve it.
And then thirdly is the IT costs, i.e. infrastructure costs, project costs, right. So some of that continues to filter through. Most all of this is planned, right, except probably the first two. We'll probably look a little higher. So that is all I'm signaling there is we've been talking about trying to get back to roughly flat, grow at the rate of revenue growth and we are still committed to those. But we'll probably end up a little higher on the full year than where we originally anticipated. But not dramatically.
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Vishal Shreedhar, National Bank Financial - Analyst [76]
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Great, that is it for me. It's nice to know I can deliver on cue. Thanks.
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Operator [77]
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Keith Howlett, Desjardins Securities.
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Keith Howlett, Desjardins Securities - Analyst [78]
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I just wanted to go back to the CAD240 million roughly of inventory year over year. Can you sort of break that down as to how much of that is just a shift of delivering earlier to avoid port issues and how much of that is anticipation of sales growth in the holiday season?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [79]
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I think a majority -- no, there will be a component of it, Keith, that will just be bigger business, right, i.e. we have opened more stores through the year, year over year. I think as we have mentioned, we have also -- we took back 24 -- or bought back I think it was 23 or 24 PartSource stores that were franchised a year ago and now are corporate.
But the biggest majority of it was, as I mentioned before, Allan and team's decision to get ready for the fourth quarter having had such a strong fourth quarter a year ago. But I'm not giving you the numbers, right, just to be clear. But the majority of it is the third point.
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Keith Howlett, Desjardins Securities - Analyst [80]
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And then just on the FX, I wonder if you could speak to that? Presumably most of the competitors are looking at the same FX, so what is -- sort of what is the impact I guess in the short run of the change in the dollar?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [81]
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Well, I mean as we've said before, right, we've got a hedging program that kind of gives you a flight path to it, a smoother flight path to it, you sort of glide into it. But at the end of the day you will feel whatever the change is, right, it just takes time to get there.
As you rightly point out, our competitors are going to feel that same thing. We are not the only people buying stuff in US dollars from China and so on. So I would expect the marketplace to reflect that over time. And that is one of the things that will factor into the guy's strategy as they deal with this on a go-forward basis. But we haven't isolated out an ex-number of basis points. But it was a factor in that 22 basis points with respect to Retail ex-petroleum that I referenced earlier.
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Keith Howlett, Desjardins Securities - Analyst [82]
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And then just on the new loyalty program, has it already sparked any change in sign-ups for the credit cards or is it mostly people just getting the loyalty card?
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Mary Turner, Canadian Tire Corporation, Limited - COO-Canadian Tire Financial Svcs., President-Canadian Tire Bank [83]
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Hi, Keith, it is Mary. So that is a great question and I think we very much anticipate the ability to attract more customers as a result of our stronger value proposition. We are only a couple weeks into it, so it is hard for me to give you any kind of certainty on it. But that is very much part of what we think is going to happen.
We have got a number of things going on in the stores. We are looking again at making it easier for people to sign up for our card when they come into the store and they see how strong that value proposition is. I think we really expect a lot of people are going to want to immediately become cardholders. So we will have more color on that next quarter for sure.
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Keith Howlett, Desjardins Securities - Analyst [84]
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Thank you.
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Operator [85]
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Chris Li, Bank of America.
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Chris Li, BofA Merrill Lynch - Analyst [86]
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Dean, I want to make sure I understand for the CapEx for next year, so just want to confirm CAD600 million to CAD625 million for 2015. But that excludes another CAD100 million to CAD125 million of additional investments and distribution capacity. Is that -- did I hear that right?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [87]
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I think it is CAD175 million to CAD200 million as we continue to work on the -- particularly the Bolton DC. And then that doesn't include any third-party external purchases that might -- the REIT might entertain from a CapEx point of view.
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Chris Li, BofA Merrill Lynch - Analyst [88]
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Okay, that is great. And a second question is on a scale of 1 to 10, 1 being no impact and 10 being a lot of impact, how would you rate Target's impact on your business relative to your initial expectations?
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Michael Medline, Canadian Tire Corporation, Limited - President [89]
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I'm not going to rate them. I was excited by the question, but I'm not going to rate them. It has been -- as you know, it has been less than we anticipated and less than we planned for. But you give us 2.5 years to get ready and I think the team at Canadian Tire Retail did a good job getting ready. And we respect all our competitors, but it has been less of an impact than we imagined.
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Chris Li, BofA Merrill Lynch - Analyst [90]
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Okay. And my last question is -- I'm not sure if you mentioned this before, but are there any plans to do a potential share split given where your share price is at the moment?
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Michael Medline, Canadian Tire Corporation, Limited - President [91]
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No, there is no plans to do that at the moment.
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Chris Li, BofA Merrill Lynch - Analyst [92]
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Okay. Okay, thank you.
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Operator [93]
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As there are no further questions at this time I will turn the call over to Stephen Wetmore, CEO, for any closing remarks.
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Stephen Wetmore, Canadian Tire Corporation, Limited - CEO [94]
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That is great, operator. Thank you very much. Thanks, everybody, for joining us and Happy Holidays and we will talk to you soon. Thanks.
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Operator [95]
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Thank you. Ladies and gentlemen, a telephone replay of today's conference call will be available for one month and the webcast will be archived on Canadian Tire Corporation, Limited Investor Relations website for 12 months. Please contact Lisa Greatix or any member of the IR team if there are any follow-up questions regarding today's conference call or the materials provided. This concludes today's conference call and you may now disconnect.
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