Q4 2014 Canadian Tire Corporation Ltd Earnings Call
Feb 26, 2015 AM EST
CTC.A.TO - Canadian Tire Corporation Ltd
Q4 2014 Canadian Tire Corporation Ltd Earnings Call
Feb 26, 2015 / 05:00PM GMT
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Corporate Participants
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* Michael Medline
Canadian Tire Corporation Ltd. - President and CEO
* Dean McCann
Canadian Tire Corporation Ltd. - EVP & CFO
* Allan MacDonald
Canadian Tire Corporation Ltd. - COO, Canadian Tire
* Rick White
Canadian Tire Corporation Ltd. - COO, Mark's
* Mary Turner
Canadian Tire Corporation Ltd. - COO, Canadian Tire Financial Services
* Chad McKinnon
Canadian Tire Corporation Ltd. - COO, FGL Sports
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Conference Call Participants
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* Jim Durran
Barclays Capital - Analyst
* Mark Petrie
CIBC World Markets - Analyst
* Irene Nattel
RBC Capital Markets - Analyst
* Derek Dley
Canaccord Genuity - Analyst
* Brian Morrison
TD Securities - Analyst
* Peter Sklar
BMO Capital Markets - Analyst
* Keith Howlett
Desjardins Securities - Analyst
* Chris Li
BofA Merrill Lynch - Analyst
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Presentation
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Operator [1]
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Good afternoon. My name is Tracy and I will be your conference operator today. At this time, I would like to welcome everyone to the Canadian Tire Corporation Ltd. fourth-quarter and 2014 year-end results conference call. (Operator Instructions).
Earlier today, Canadian Tire Corporation Ltd. released their financial results for the fourth quarter of 2014, as well as the full year. A copy of the earnings disclosure is available on their website and includes cautionary language about forward-looking statements, risks, and uncertainties, which also apply to the discussion during today's conference call.
I will now turn the call over to Michael Medline, CEO and President. Michael?
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Michael Medline, Canadian Tire Corporation Ltd. - President and CEO [2]
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Thank you, Operator. Good afternoon and thank you for joining us today. I have most of the senior leadership team with me today and they will be available, as always, to answer your questions after Dean and I speak.
As you have already seen in our results this morning, the team is putting the numbers on the board. 2014 was a record year for annual sales, income before tax, and earnings per share, all of that up against similar records in 2013.
Our EPS for Q4 was up 5.1%, or 12.8% on a normalized basis, and this was despite selling 20% of financial services, our second largest business. So overall, I believe we are executing well against our strategy that we shared with you at investor day.
Canadian Tire retail had its best year in a very long time, posting its highest annual same-store sales growth in eight years and positive comps, again, across all of its divisions.
CTR is now a stronger division and much of the credit has to accrue to our merchant leadership. As well, the dealers are doing a better job than ever serving our customers and our marketing programs, especially in brand and digital, are hitting the mark.
We have continued to invest in our digital transformation and we rolled out a national e-commerce platform at Canadian Tire. In Q4, canadiantire.ca website traffic was up strong double digits year over year and we know it is driving sales at our bricks-and-mortar locations, but we haven't even scratched the surface on what we will do with e-commerce.
As you saw, all of our businesses were up this quarter against very seasonal prior-year weather and strong numbers in 2013, but none more than our financial services business that was up against IBT growth of 16.6% last year. While their bottom-line growth doesn't look all that impressive at first glance, it's actually right where we planned for them to be and okay given the investments they made in GAAR growth during the quarter.
What is impressive is the growth and the quality of the CTFS portfolio. In fact, CTFS ended the year by surpassing CAD5 billion in gross ending Accounts Receivable, a first for CTFS, and with a record number of active accounts in their portfolio.
I spoke last quarter about my four criteria for assessing our quarterly performance when I think about our retail businesses. First, did we properly balance our promo and regular pricing or were we buying sales? Our topline growth in Q4 was strong at the Canadian Tire and FGL Sports banners over some already impressive results in 2013. FGL Sports posted a [4.9% comp] (corrected by company after the call), while Sport Chek put up a 9.4% comp. Impressive results, given what we were up against from Q4 last year.
Our Quebec franchise sales were weaker than the rest of the country, due to much milder weather in December 2014. At Mark's, a lack of more seasonal cold weather in December, especially in western Canada, hampered sales of outdoor and industrial wear; however, the introduction of new national brands and the jeans campaign helped generate the topline growth. Overall, I am pleased that Mark's was able to pull off a positive 1.2%, given the unseasonable weather and without buying sales.
I want you to know that when it comes down to it, we will not cede market share to our competitors. We know where we have leadership positions across our core categories and all of our businesses will defend their position against our competitors.
Having said that, margins held in there for the quarter. Our retail segment margins were basically flat after stripping out the petroleum business from the numbers. CTR did a great job of balancing their sales and margins with weather that was unseasonal in December, compared to the previous year.
Honestly, at FGL we did buy some sales. Discounting to offset lower traffic levels due to the lack of colder weather in December meant margins were down, but, to be clear, it was not because of competitive pressure and they weren't down a lot.
Second, did we drive sales through creative marketing? Canadian Tire continued to innovate with marketing campaigns that resonated well with their customers. We created some of the best traditional marketing we have ever delivered through our flyer and on TV.
And we started to dip our toes into new digital marketing that's part of the generational shift we keep talking about. During the World Juniors hockey tournament in December, our Big Play initiative was the highest viewed video Twitter campaign ever recorded in Canada, and all of this under the guidance of TJ Flood, who we were proud to see named Canada's Marketer of the Year in 2014 by Strategy Magazine.
At Sport Chek, our digital marketing was second to none. This past December, the team partnered with Facebook to create 50 seven-second video ads to promote products that drove very high double-digit sellthrough, compared to products that did not get that video support. Sport Chek continues to shift resources from print flyers to digital advertising and continues to post strong comp sales in those weeks where the old print spend has been redistributed digitally.
Third, were Canadians choosing us for seasonal products and, especially, did our innovative products resonate? Canadian Tire had fantastic results, given the year-over-year weather. Our blocking and tackling have become far better. Much of the sales growth in seasonal categories came from new SKUs and our dealers really embraced our new ideas and products focused on our younger customer segment, including CANVAS, our new home decor product line, which killed it.
It is also important to note that across all of our core retail banners, we have taken positive steps to weatherproof the businesses as much as we can. We saw these efforts pay off as we had strong performance in nonseasonal categories at Canadian Tire in the quarter. We also saw continued momentum in our automotive business and significant sales growth in our auto service business.
Over at Sport Chek, which posted 2014 comps of 10.6%, I can tell you that our sports technology wearables category was a huge contributor to Sport Chek's very strong growth. There is a lot of emerging technology in sports built into clothing, equipment, and the wearables category, and you're going to see Chek be a leader in this arena.
Fourth, did we properly watch our expenses while continuing to invest in the future? Overall, expenses were well managed across the businesses, but in my view it was not good enough. I want to see more of each incremental sales dollar flowing to the bottom line and we as a team are committed to changing that.
Now Dean is going to discuss recent economic headwinds and his thoughts on how they may impact our business going forward in a moment, but before I pass things over, let me just say that every year, every year, we are buffeted by macroeconomic factors. There are always puts and takes that impact our business, whether it's an economic downturn, regulatory changes, competitors coming to or exiting the Canadian retail market, and so on. But I believe we are making the right decisions to make this corporation stronger, no matter what headwinds prevail.
Overall, I think you can tell I'm very proud of what the team has accomplished in Q4 and in all of 2014. But that's now over and we're moving on to 2015 and onwards.
With that, I will turn it over to Dean.
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Dean McCann, Canadian Tire Corporation Ltd. - EVP & CFO [3]
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Thanks, Michael. My comments today will be brief and centered on just a few noteworthy topics. I will start with a few things to keep in mind while reviewing our results.
This is the first quarter since the close of our financial services partnership deal, and as a result, our EPS numbers reflect the impact of the 20% interest in financial services earnings now owned by Scotiabank.
Second, our Q4 results reflect an extra week of operations, owing to 2014 being a 53-week retail year for us. To address this, we provided our retail sales on a reporting-period basis and our same-store sales figures on a 13-week comparable basis for each of the retail banners in our Q4 MD&A.
Third, earnings for the full year have been normalized for the early redemption premium on debt retired in Q2 and for CT REIT formation costs in 2013.
Finally, for Q4, we normalized earnings to exclude the impact of the fair value adjustment related to Scotiabank's put option. Essentially, this reflects the increase in the expected value -- expected future value of Scotiabank's 20% interest in financial services, should they choose to exercise their right to sell back their interest to CTC after 10 years. IFRS accounting requires us to perform this valuation exercise each quarter, and given the nonoperating nature of this adjustment, we will continue to normalize our EPS and EBITDA metrics for this item going forward.
As per our usual practice, we have highlighted our normalizing items for Q4 and on a year-to-date basis in our MD&A.
Now, turning to Q4 performance, this was a strong quarter, particularly for the Canadian Tire retail banner. Michael noted the strong comp sales performances from both the Canadian Tire and FGL Sports businesses, especially given they were lapping at very strong Q4 in 2013, which experienced much more seasonal weather than we had in December this year.
Our operating expenses, excluding depreciation and amortization, as a percentage of revenue were well controlled in the quarter and came in 24 basis points above last year, largely as a result of higher share-based compensation costs. Generally, I am pleased with where we ended 2014 regarding our operating expense percentage, but we are very focused on containing operating expense growth in 2015 and improving our productivity with the program we have underway. As we said at our investor day in October, the focus will initially be on overheads and non-merchandise supplier costs.
The financial services business delivered strong GAAR growth, up 7%, breaking through the CAD5 billion mark in ending receivables as of December 31. Investments in marketing and balance transfers to drive receivables growth flattened the segment's income before taxes, prior to the effects of the Scotiabank partnership.
Earlier this week, CT REIT reported its Q4 2014 earnings and first full year of results. In addition, they announced they would be filing a shelf prospectus, which would enable them to access the capital markets as they continue to grow their property portfolio and complete the projects in their development pipeline. In my view, this is a very positive development for CT REIT and a first step towards demonstrating their ability to fund their growth going forward.
Inventories are healthy across all retail businesses, although we did pull forward some purchases at year-end to offset the potential impact of disruptions at western ports, which resulted in higher ending inventory levels. But we are very comfortable with those decisions.
Our ROIC methodology was refined in the quarter to fully isolate the effects of CT REIT and financial services, thus ensuring our retail ROIC metric represents a pure measure of our retail business segment. We have restated the prior-year figures and the reported numbers are 8.07% for 2014 and 8.10% for 2013.
While there is a one-time increase in the Q4 2014 number, the new methodology does not materially affect our trend in our ROIC metric and we continue to be focused on achieving our aspiration of a 9% retail ROIC by the end of 2017.
Operating CapEx, which excludes spending on additional distribution capacity and CT REIT third-party acquisitions and developments, was CAD476 million for the full year. Certain CT REIT funded development and intensification activities totaling CAD57 million, which were originally planned to be operating CapEx and were included in our guidance of CAD500 million to CAD525 million. So in total, our operating CapEx ended up at CAD533 million, just above our guidance.
CapEx for external purchases, developments, and intensifications by CT REIT, including the CAD57 million for a CTC, totaled CAD183.4 million and was higher than expected, primarily due to the Q2 investment in the Canada Square property.
Finally, spending on our new distribution center capacity came in lower than expected at CAD62.4 million.
For 2015, as we told you at our investor day, we forecast ongoing capital expenditures 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 initiatives. 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 and developments by CT REIT.
We ended 2014 with a very strong balance sheet and maintained our balanced approach to capital allocation. We repurchased CAD283.7 million of Class A nonvoting shares under our existing NCIB in 2014 and filed a new NCIB with the intention of making further purchases through to the end of 2015. We also increased our dividend to CAD2.10 per share. We paid down CAD200 million in corporate debt.
And finally, we invested in our businesses to drive organic growth, while continuing to seek out opportunities to make a strategic acquisition that will build on our existing businesses. I would remind you that any acquisition target that we would consider would be subject to the strict criteria that Michael has spelled out in the past.
Looking ahead to 2015, I want to highlight a couple of things that you will need to keep in mind as you assess our performance. As you think about modeling 2015, a reminder that the first three quarters will be impacted by the reduction in earnings due to the Scotiabank partnership transaction. This is especially true for Q1 because the retail earnings contribution is so small relative to the rest of the year.
Second is the headwinds from the recent developments in the economy. We expect to be impacted by the effects of the decline in the Canadian dollar, but the degree is difficult to predict and I am certainly no economist. That said, we know that like all retailers buying products overseas we will have to factor the higher exchange costs into decisions about procurement, pricing, and supply chain.
A sustained decline in the dollar can be expected to have an increasing impact over 2015. Our hedging program will help smooth this effect and, as we have mentioned before, the exchange is only one factor in the determination of margin and our merchants have done a very good job managing all of the inputs into cost and margin to date.
We also have to consider the economic impact of a decline in oil prices, especially in western Canada. None of our businesses have seen a discernible impact to date, although we expect that Mark's is the most vulnerable, given its industrial wear business. That said, Mark's has grown outside the western regions over the years and its reliance on the west is less than in the past, with about 17% of its store count in Alberta.
Finally, because of the additional week in the 2014 fiscal calendar, the 2015 quarter-end dates will shift for the retail businesses, and as a result, we anticipate there will be some retail sales and revenue shifts that may make quarterly comparisons a bit more challenging throughout the rest of the year.
Before I wrap up, I want to mention that we just launched our 2014 year-in-review digital summary that showcases the great accomplishments of the businesses through video and text and gives site viewers a chance to hear directly from our senior leaders and employees. It went live this morning and can be accessed at 2014.canadiantirecorporation.ca.
With that, I will turn things back over to the operator to take your questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Jim Durran, Barclays.
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Jim Durran, Barclays Capital - Analyst [2]
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It's nice to see that Canadian Tire is no longer a weather-dependent company. (laughter). Just back to the FX question, so I know you hedge the FX, but we can see that there is now a second year of demonstrable increase, and so as we get through the year, it doesn't seem there is any real ease of abatement at all. If you look back at 2014, how successful were you in an order of magnitude on not having FX negatively impact gross profit dollars?
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Dean McCann, Canadian Tire Corporation Ltd. - EVP & CFO [3]
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Jim, it's Dean. The way I think about this is obviously we had a headwind with respect to FX in 2014, and with the significant drop that we've experienced just in the last really five, six weeks, that headwind will face the merchants in 2015 as well.
But what I would say is they did an exceptional job in 2014 by looking at, as we have talked before, all of the elements that go into margin, right, and factor into margin, everything from -- right from the sales line through to the cost line through to, ultimately, the margin. And as well, also have done a great job of managing their operating expenses.
So as we look forward to 2015, it's -- we're expecting more of the same out of them, but there is no question that this drop that we've had over the course of 2015 and, as we talked before, hedging just gives you a glide path to whatever eventuality you end up at, right, good, bad, or indifferent, so it buys us time for the merchants to work their way through things, but as I said in 2014, as an example, they did a great job of adjusting to it.
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Jim Durran, Barclays Capital - Analyst [4]
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E-commerce, so now you have got a fully deployed Canadian Tire retail product offering. How meaningful do you feel that can be to your sales growth in 2015?
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Michael Medline, Canadian Tire Corporation Ltd. - President and CEO [5]
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It's Michael. I'm going to say a few words, then I will throw it over to Allan because he's doing a good job on that.
We just started this up. The sales numbers are nowhere close to where they're going to be. I think we will see some progress in 2015. It will be good for us. It will be more meaningful and material, but I don't think you should expect a huge number in 2015.
You're going to see real material differences as we head into 2016 and 2017, and I think all of the businesses, but especially Canadian Tire and FGL, which is actually -- retail is a little further ahead in terms of their progress because they have been doing it longer, you will see that 2016, I think, you're going to see some meaning here to it, but, Allan, maybe you want to fill in that?
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Allan MacDonald, Canadian Tire Corporation Ltd. - COO, Canadian Tire [6]
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I totally agree. I think when we are looking at it right now, Jim, it's -- we are in the market and there is a lot to learn. It is a very, very complex value. It is a very complex offering for our categories, and really we're in the throes of building some capabilities that are going to be very, very important as we start to get meaningful scale.
Look for a lot of that, which won't be as apparent to the public market as it will be internally over the course of 2015. Then to Michael's point, in 2016 you're going to see a difference, based on our current course.
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Michael Medline, Canadian Tire Corporation Ltd. - President and CEO [7]
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Allan is planning for big percentage growth, but it's -- really big percentage growth. It's just not off a huge base yet.
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Jim Durran, Barclays Capital - Analyst [8]
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On a consolidated basis to Canadian Tire retail, it won't necessarily move the needle very much from a sales growth standpoint in the immediate term?
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Michael Medline, Canadian Tire Corporation Ltd. - President and CEO [9]
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No, but I think that when we talk as a team about e-commerce, a lot of the strength of e-commerce is already showing up in bricks and mortar and in -- and will continue to do so.
I think sometimes when we talk about only e-commerce alone, I think that Allan is already seeing, as I said a little earlier, some real tailwinds here because so many more people are going online and researching product and seeing whether it's in stock in the store, which we couldn't do before. So the infrastructure and even what we have in place right now is helping our business. It's just not helping it as much as we will get in pure e-commerce.
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Jim Durran, Barclays Capital - Analyst [10]
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Okay. Just last question, Q4, last year if I recall correctly, you attributed 50% of the comp-store sales growth of CT retail to favorable weather conditions and then the rest to the establishment of stronger business practices. Now the comp-store sales for this year, the Q4, given that the weather wasn't helpful, is quite impressive. Can you give us an idea of what you think the biggest dynamics are driving that comp?
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Michael Medline, Canadian Tire Corporation Ltd. - President and CEO [11]
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Allan, do you want to have a go at it first? It's your business? You're talking about CTR? You want to talk about CTR, Jim?
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Jim Durran, Barclays Capital - Analyst [12]
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Yes.
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Michael Medline, Canadian Tire Corporation Ltd. - President and CEO [13]
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Okay, good.
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Allan MacDonald, Canadian Tire Corporation Ltd. - COO, Canadian Tire [14]
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I think, you know, Jim, it's not dissimilar to what we talked about in other quarters. We have been working really hard at making sure that we are open for business and that all five divisions of CTR are performing strongly. I have talked to many of you guys in the past about the fixing business, improvements we have to do there.
If you look at getting the inventory positions right, where we have had our marketing over the quarter, you have seen Mastercraft Maximum come out with new drill bits. You saw the launch of CANVAS in living. We had a great quarter in tires.
Our activity in the market is, I think, quite balanced. We are focused on bringing to market what our customers are looking for and that's creating a bit of a groundswell in terms of our regular, more predictable, nonseasonal business.
Over and above that, of course, with weather is going to come changing buying patterns. On top of a quarter -- despite the fact that December was quite light in terms of weather, I am really, really pleased with how we performed. Had December been freezing cold and snowy the way it was in 2013, we probably would have seen some incremental performance over top of that.
But all in all, I couldn't be more pleased, but I wouldn't look to a magic bullet. It's really strong performance across the floor.
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Jim Durran, Barclays Capital - Analyst [15]
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Great, okay, thank you.
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Operator [16]
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Mark Petrie, CIBC World Markets.
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Mark Petrie, CIBC World Markets - Analyst [17]
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I did want to just ask about the margins in the retail segment in the context of a weaker Canadian dollar, which you talked about in your comments about not giving up market share. Are there other levers that you can be pulling in terms of gross margin percentage in order to drive increases there and how realistic is cost leverage on the operating expense line, given your ongoing investment in e-commerce?
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Dean McCann, Canadian Tire Corporation Ltd. - EVP & CFO [18]
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Mark, it is Dean, and I will start and if any other guys want to chip in. But certainly from a margin perspective, I think I touched on this a bit, but you have obviously got the topline and you have got the cost line, and we have talked a lot about exchanges, just one of the inputs into cost.
As I said, we have talked about our hedging program. That gives you a bit of a glide path, but there is no question that the move in the Canadian dollar that we saw through 2014, the merchants handled very well, and similarly we would expect they will be challenged to handle that same type of move in 2015. It will probably be even more of a challenge in 2015.
But that said, they are doing some very smart things around -- and you can put this in the category of the guys embracing productivity and just being smarter about how this Company buys, but everything from the cost of inputs to how we pay for things to the topline and managing, as Allan said, the mix of promotion and regular product. So there is a lot of levers that the team has to pull.
Then your question around operating expense leverage, I think all of the teams -- there is a renewed focus, which I'm very appreciative of, around managing the cost structure in general and being much more, if you will, deliberate about additions and incremental investment, and it just goes with a trend that we have been on about challenging every new dollar that goes into this place and looking for opportunities to take those dollars out, which feeds very well into the program around increasing the productivity.
The answer to your question is I think there is -- we're certainly expecting more to come and working hard to deliver more. It all goes in line with what Michael said around we want to see more fall to the bottom at the end of the day. That's really what we are all driving towards with all these various initiatives. Does that help?
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Mark Petrie, CIBC World Markets - Analyst [19]
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It does. Thanks. There was big revenue growth in the retail segment, particularly at the Canadian Tire banner in Q4. Appreciating that often there is a timing issue and a disconnect between sales and revenues or shipments, can you just put a little bit of context around that number? Obviously, there was a big restocking after the strong Q4 last year, but how are you feeling about that number and, I guess more specifically, dealer inventory levels?
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Allan MacDonald, Canadian Tire Corporation Ltd. - COO, Canadian Tire [20]
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Mark, it is Allan. Yes, we're feeling good about it.
There's a couple of things in play and I think for the most part you mentioned them. Part of the growth that we are being able to capture at CTR is really predicated upon having the inventory in stock, and when you have got a broad range, especially in Q4, of seasonal and then the other five divisional product lines, you want to be open for business in all those categories. So, of course, you're going to have that component.
Optimism certainly drives -- is contagious and we see that at the dealer level. As well, too, what you would have seen is us bringing some inventory and being careful to make sure that we are well stocked in light of any potential disruptions that we're expecting there late in Q4 or early in Q1 with regard to ports and rail companies and the like.
Overall, the inventory level is quite healthy. I think it's been a huge enabler of our growth, very, very -- we are managing it very closely, and I'm feeling quite comfortable with it.
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Mark Petrie, CIBC World Markets - Analyst [21]
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Okay, thanks. I will circle back.
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Operator [22]
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Irene Nattel, RBC Capital Markets.
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Irene Nattel, RBC Capital Markets - Analyst [23]
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Just sticking with the topic of inventory, particularly I'm thinking here about Mark's. With the weakness that -- well, with the warm weather that we saw, are you going to have to do a lot of clearance activity in Q1? How should we be thinking about the margin profile?
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Rick White, Canadian Tire Corporation Ltd. - COO, Mark's [24]
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Not -- it is Rick White here. Thanks for the question, Irene. Not very concerned about the inventory level at all. In fact, the inventory level, albeit slightly over last year's level, is in line with where we were at in 2012. We were very careful when we went in and we don't anticipate any hits to the margin whatsoever.
We did not buy sales. As we saw that it wasn't great in December, we made the decision not to buy sales and we were actually affected by less than 50 basis points in our margin. At the end of the day, we were still able to pull out a small positive comp, but from a bottom-line perspective, coupled with our expense control, we were very, very healthy and solid.
As we have moved into January, we are not experiencing anything negative in the way of down margins. We have managed it very, very carefully. In fact, I think it would be safe to say that we're probably a little light in inventory in the prior year, in 2013, when we do it on a comparative basis, so all in all we are in very good shape.
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Irene Nattel, RBC Capital Markets - Analyst [25]
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That's very helpful, thank you. Just, also, thinking about the impact of lower oil prices, obviously there is a negative in western Canada, but some retailers are noting that they are starting to see a pickup in traffic and basket as consumers have more pennies in their change in Quebec and Ontario. Wondering if you are seeing any of that?
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Michael Medline, Canadian Tire Corporation Ltd. - President and CEO [26]
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It is early days and hard to pick out in a crowded environment of different factors, but we know that in central Canada and eastern Canada that people have more money in their jeans, which we are glad to see. I think we have good expectations in terms of having some help there, and I saw -- I think we generally agree with other retailers on that, but it is hard to pick out those factors.
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Irene Nattel, RBC Capital Markets - Analyst [27]
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That's great. Thank you very much.
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Operator [28]
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Derek Dley, Canaccord Genuity.
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Derek Dley, Canaccord Genuity - Analyst [29]
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I was wondering if you could just comment on some of the trends that you are seeing in the financial services business. We saw write-off rates tick up a little bit this quarter. Can you just comment on that and if you expect that to unwind going forward?
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Mary Turner, Canadian Tire Corporation Ltd. - COO, Canadian Tire Financial Services [30]
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Thanks, Derek. It's Mary. It's a complicated question to answer simply, but let me just say this. As you know, we have grown our portfolio much more rapidly over the last two years and we have done it two ways. We have grown our balances and we have also grown the number of customers.
When you add new customers to your portfolio, you inevitably are going to see higher rate -- write-off rates as you get to know them better. There is about a two-year cycle until they become part of the mature portfolio.
I think as we continue to grow with new customers, you are going to see some pressure on the write-off line. You see how much we are -- how hard we are working to manage it, though. I think you can expect to see that continue to happen.
We aren't really seeing any impact yet on the economy, but that's the other factor that we are watching for very, very closely, so as we see the impact of the changes in commodity prices, if that affects employment rates over time, certainly that would be something that would affect our write-off rates over time.
But so far, no main signs -- no big signs of that, but that's something we are focusing on very, very, very intensely.
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Derek Dley, Canaccord Genuity - Analyst [31]
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Okay, thank you very much.
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Operator [32]
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Brian Morrison, TD Securities.
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Brian Morrison, TD Securities - Analyst [33]
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Mary, if I can just follow up on a question on CTFS. Have those promotional items, specifically the balance transfers that impacted yield, have these slowed now and should I presume that they should dissipate as we look forward to Q1? And what does your historical precedent suggest in your ability to retain balance transfers?
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Mary Turner, Canadian Tire Corporation Ltd. - COO, Canadian Tire Financial Services [34]
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Hi, Brian. It's Mary. We have used balance transfers as a tool to drive GAAR growth a lot over the years. It's a tool we understand very, very well.
I have drawn back on it, I would say, recently over the last two years because I would rather do financing inside our own stores, so we have tended to move some of that balance or some of that investment into other areas that are inside our own stores.
There were two things happening in Q4. One was certainly we had higher balance transfers and I think higher than we expected. We had a really good take-up on an offer we put out in Q4. But we pulled back in Q1. Then I don't need to do as much in Q1.
I think what you're going to see us continue to do is a lot of the in-store deferred financing, the 12-month or 18-month equal payment plans, those work really well for us. They get us new customers. They drive GAAR growth. There is some pretty good retention on the receivable balances there, the revolve rate is pretty decent, and it works for our retail business.
Balance transfers work well, too, but I think, again, it is just something I would use probably more on a tactical basis as opposed to having it as a strong underpinning of GAAR growth.
Our customers, we do have customers who expect it is part of our value proposition, so we will continue to do it. But, anyway, hopefully that was a somewhat clear answer, but I think you won't see the impact on yield perhaps as dramatic as you saw in Q4.
It's a hot quarter for us from a retail perspective. We had a lot of customers inside the stores and I think that was reflected in how strongly our customers took up on that investment.
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Brian Morrison, TD Securities - Analyst [35]
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That's excellent. Thank you.
Dean, if I can just turn to the retail balance sheet, you have had a marked improvement over the last quarter, inclusive of those heightened intercompany transfers to financial services. I am curious if funding in the financial services -- curious if the funding in the financial services intercompany, if you'd look at funding that externally as an option?
Then second, as you mentioned, one of the objectives is to demonstrate the ability at the REIT to raise equity and debt independently. Does this increase the probability of repayment of the maturing Class C units, and if so, what is the use of proceeds?
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Dean McCann, Canadian Tire Corporation Ltd. - EVP & CFO [36]
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Brian, I can always count on you for this question. The reality is this goes in the bucket of just managing the overall balance sheet of Canadian Tire Corporation and capital allocation.
For sure with the -- with financial services as an example, we are having lots of discussions around, if you will, the term -- average term, if you will, of their financing, right? We have an ALCO committee and debate this regularly.
I think there is going to be opportunity in 2015 to lock in more rate.
Similarly with the REIT, as we talked about before and we certainly, I think, talked about it at IR day, and also signaled with the filing of a shelf prospectus, is we would like to do something in the public markets to demonstrate the REIT's ability to raise capital and probably really want to look at both the opportunity to raise equity, as well as debt. But this just puts us in a position to continue to have those discussions.
Our balance sheet is in fantastic shape, as you know. My job is flexibility and I think we continue to put ourselves in that position. We have got our announced uses of capital. At IR day, we indicated the CAD400 million through to the end of 2015. We refiled the NCIB, so we are in a position to take that forward.
That's where we are at. We are continually monitoring it, as obviously you are.
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Brian Morrison, TD Securities - Analyst [37]
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Sorry, and just a follow-on, are you leaning one way or the other with respect to the repayment of the maturing Class C units in May?
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Dean McCann, Canadian Tire Corporation Ltd. - EVP & CFO [38]
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We are still evaluating that, Brian, so it will really just depend on market conditions and where we want to end up.
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Brian Morrison, TD Securities - Analyst [39]
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Okay, and if I can just have one housekeeping item, if I can. The amount of real estate that remains at CTC that remains appropriate for the REIT at year-end -- I realize there are some transactions post quarter, but can you provide us that balance and potentially the timing of vending them in in total?
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Dean McCann, Canadian Tire Corporation Ltd. - EVP & CFO [40]
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I haven't -- actually off the top, I haven't looked at that number very recently, Brian. It's still substantial, as you might imagine, but from a timing perspective, the REIT continues to have a pipeline from CTREL, from Canadian Tire real estate, and we want to keep that pipeline filled over the next number of years. And as you know, we continually add, if you will, to the real estate portfolio with the acquisition of new properties and expansion of properties.
Basically, because I don't know the answer off the top of my head, but I would say we are probably still in a CAD1 billion kind of range that's available, if you will, to move over to the REIT, but because we -- as we move some over, we seem to add more to it, so I would say that's probably a pretty safe number.
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Brian Morrison, TD Securities - Analyst [41]
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Thank you kindly.
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Operator [42]
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Peter Sklar, BMO Capital Markets.
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Peter Sklar, BMO Capital Markets - Analyst [43]
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On your Canadian Tire banner, I'm just wondering if you can run through the various product category groupings, you call it auto, fixing, seasonal, and others? Just which ones do you think you have fixed and are performing well -- I think you are reasonably satisfied with autos, and which categories do you think require further attention? I know you touched -- I think Allan touched a little bit about it earlier, answering one of the questions, so I'm just wondering if you can systematically go through it.
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Allan MacDonald, Canadian Tire Corporation Ltd. - COO, Canadian Tire [44]
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Yes, hi, Peter. To post a comp like we did in the quarter at CTR, especially with the weather patterns we had, really is the result of strong performance across all five categories, and we think of them in terms of fixing, living, playing, driving, and then the seasonal business. Seasonal would be both, in some cases, weather related and also seasons like Christmas, for example.
As a broad-based statement, we were very pleased with the performance across the divisions. Some, of course, outperformed others, but by and large I think you're going to continue seeing the fruits of our labor that I spoke about in the past.
The tools business or the fixing business, most particularly we called attention to in previous quarters, and I am pleased to say we saw improved performance and that was one of the contributors to Q4. But we are by no means perfect, but I would say that we have less outliers in terms of performance projects at a divisional level than we have had in the past, and now we tend to turn our attention a little bit more to the next issues in front of us, like Michael noted when he talked about e-commerce and digital. By and large, I'm pretty pleased with where we are at.
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Peter Sklar, BMO Capital Markets - Analyst [45]
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Right, and what would you attribute the strength in auto service to? Someone called that out as a particular area of strength.
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Allan MacDonald, Canadian Tire Corporation Ltd. - COO, Canadian Tire [46]
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Yes, I think it's an amalgam of a number of things. We have been working a lot more closely with our associate dealers over the last couple of years on improving our service offering, and we have invested in infrastructure that made it possible for us to have better advice and to be able to train our advisors better at the counter.
The rising tide of our brand and the success of other divisions, of course, helps with traffic, and we have done a lot of work to shore up supply of parts and tires so that we have readily available parts and tires when you bring your car in.
All of those things tend to result in just a higher satisfaction level overall, but also a higher success rate in terms of converting potential customers when we are able to satisfy them.
Not one magic bullet and not something that happened quickly, but it would go back to something -- I'd probably say too much -- and that's we're open for business, and as customers come through the doors, we are getting better and better and better at being able to service them.
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Peter Sklar, BMO Capital Markets - Analyst [47]
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Okay, and Dean, just one last question. The fourth quarter, there is always accruals and reversing of accruals to true up. Was there anything that particularly happened in the fourth quarter, either positive or negative, or were the results pretty representative?
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Dean McCann, Canadian Tire Corporation Ltd. - EVP & CFO [48]
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I would say they're pretty representative. If you want to get into a big accounting discussion someday, I won't be there. But no, there was nothing unusual, if you will, from a perspective of the quarter, at least in my estimation, anyways.
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Peter Sklar, BMO Capital Markets - Analyst [49]
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Okay, thank you.
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Operator [50]
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Keith Howlett, Desjardins Securities.
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Keith Howlett, Desjardins Securities - Analyst [51]
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I had a question about the deferral financing in the CTFS. Can you give some indication, of the CAD5 billion portfolio, what part that is and how long the impact of growing that business will persist?
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Mary Turner, Canadian Tire Corporation Ltd. - COO, Canadian Tire Financial Services [52]
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Hi, Keith. This is Mary. It's not a very large part of our business -- or of the CAD5 billion and some of it's quite short term. It will reverse in Q1, a bunch more in Q2, and the rest is over the balance of the year.
We did -- the BTs were three or six months in Q4 and the financing inside of CTR was either 12- or 18-month equal payment plans, so nothing that's going to linger for a long time or cause us grief.
Again, we had more take-up, but this is not new for us. These are tactics that we've used before. We are just -- particularly inside of Canadian Tire retail, we are doing more of it than we were, say, three years ago, but we've been ramping up this volume over the last two years. We just had a bit more success in December than we had expected because there were more customers inside the store.
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Keith Howlett, Desjardins Securities - Analyst [53]
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Is the deferral -- was that the big success in December or both were big successes? Both balance transfer and deferrals?
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Mary Turner, Canadian Tire Corporation Ltd. - COO, Canadian Tire Financial Services [54]
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Both, I think. We have spent a lot of time, as you know, over the last couple of years trying to improve how we connect with our customers. We have done a lot of improvements inside the store. We have just relaunched our new value proposition in the end of October, which I think would have really got more customers paying attention to what we are trying to tell them and the offers that we are bringing to them.
So I think it's a whole lot of different things that we've been working on for some time to just really make sure we are connecting with our customers more effectively. That's why you see GAAR growth and higher number of active customers, et cetera. I think it's a bit of a blip and particularly in December because it was a busy retail month, but nothing out of the ordinary.
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Keith Howlett, Desjardins Securities - Analyst [55]
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Then I was just wondering on the digital initiatives that I know you have been busy at for the last couple of years or longer, is there a number that you would give as to what that is dragging your earnings, and whether that would subside or whether that is just going to be an ongoing expense for the foreseeable future?
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Dean McCann, Canadian Tire Corporation Ltd. - EVP & CFO [56]
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Keith, it's Dean. I would look at this as there is capital obviously being invested and that comes with depreciation and amortization, that kind of thing. But from the perspective of ongoing investment, I don't think you can think of these things as one and done. I think it's -- you update the websites. It's more of a continuous investment. I think we have done a lot of what we needed to do in terms of the backbone, right, as we talked about at our IR day, and I think Michael alluded to that, and Eugene Roman and team have done a superb job of building, if you will, the backbone.
But the ongoing -- we are going to be spending money on digital, I think, forevermore, so from that perspective I think it's somewhat embedded in the cost structure, right, quite frankly, on an ongoing basis. That's the way I think about it, anyway.
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Michael Medline, Canadian Tire Corporation Ltd. - President and CEO [57]
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It's Michael. We have reallocated capital and operating expenses and we will continue to do so in the right mix to ensure that our old business, which is a great, healthy business, is great and that we have transferred into the New World.
I think we have done it subtly, almost, in terms if you look at our results, but Dean is absolutely right. The future here is to get ahead of your competition. I think everyone is spending a bigger proportion of capital and OpEx on technology and that isn't going to stop and that's a good thing. That's going to help us grow our business.
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Keith Howlett, Desjardins Securities - Analyst [58]
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Just finally, if I could, on the Mark's industrial wear business, do you see directly in that -- in, say, Alberta and Saskatchewan the last two months in the oil patch, or does this take a while to catch up?
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Michael Medline, Canadian Tire Corporation Ltd. - President and CEO [59]
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As we said, Keith -- it's Michael, we have not seen meaningful -- any meaningful movement in terms of what we have seen in western Canada, especially Alberta. Having said that, you know you're going to see some.
The other thing is it's hard in a short period of time to pull things out, but -- and you know there's weather factors. There is other factors that are going on, but we have not seen anything yet. We expect to see a little bit. Mark's will be the first to see a little bit.
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Keith Howlett, Desjardins Securities - Analyst [60]
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Great, thanks. Maybe could you just update us on your flagship Sport Cheks? I think you have some opening up soon.
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Chad McKinnon, Canadian Tire Corporation Ltd. - COO, FGL Sports [61]
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Yes, Keith, it is Chad. I will give you a quick update. Our West Ed store just finished its first full year and we are ecstatic by the results. It drove the whole market up. We had a 30% increase in the whole Edmonton market.
We learn every day, the number of transactions going through there, something new about retail, so very excited about West Ed. Metropolis opened in Burnaby, BC, in November, right around Black Friday. It's exceeding its results, so we'll have our second CAD20 million-plus store coming up right away, so very encouraged with that.
Then we have got two opening in the GTA, which is a big, big move for FGL. We still underindex in the Toronto area, so in November of 2015 we will launch simultaneously Yorkdale and Square One. Shortly there followed in spring -- March right now, for Sherway, so we will have three full flagships set up, and then we'll go after Vancouver after that.
So I see 2015 being about the GTA and 2016 looking at shoring up our Vancouver market, but very happy with the results so far.
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Michael Medline, Canadian Tire Corporation Ltd. - President and CEO [62]
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These aren't just flagships for the brand, which they are; these are moneymakers.
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Keith Howlett, Desjardins Securities - Analyst [63]
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Great, thank you very much.
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Operator [64]
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Chris Li, Bank of America.
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Chris Li, BofA Merrill Lynch - Analyst [65]
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My first question is in recent years, the Company has invested to drive efficiency in the distribution centers through new technologies, and I am just curious to see are most of the benefits now behind us or are there more initiatives planned to drive efficiency at the Company-operated DCs?
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Michael Medline, Canadian Tire Corporation Ltd. - President and CEO [66]
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It's Michael. I think we have done a good job in our DCs. But there is plenty left in terms of driving efficiencies and taking costs down, and I think we have great teams running our supply chain and every year they are finding costs. I think as part of the -- what we used to call the productivity initiative, that is going to be a place where we can take costs out of this business and see more of our topline flowing down to the bottom line. I think it's great question.
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Chris Li, BofA Merrill Lynch - Analyst [67]
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Okay, and my second question is a two-part question on Target. First is do you expect their liquidation sales to have a material impact on your sales in Q1? And secondly, would you be interested in scooping up any other leases that might come up for sale?
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Michael Medline, Canadian Tire Corporation Ltd. - President and CEO [68]
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I was waiting for this one. Yes, we don't expect a material impact on us. They didn't have a material impact before; they are not going to have a material impact coming out.
And for sure, we will look to scoop up a limited number of real estate opportunities if they're available and if we like them. There might be deals available. There might be properties that we would not otherwise be able to take into our portfolio, so we are diligently looking, but I think it's a very limited aspect to that.
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Chris Li, BofA Merrill Lynch - Analyst [69]
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Okay, great. Last question, I guess, is housekeeping question for Dean. Just in terms of your NCIB, can you just remind us of the CAD400 million that you are targeting to this year, how much of that is now behind us? Just trying to guess how much you can do this year so far.
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Dean McCann, Canadian Tire Corporation Ltd. - EVP & CFO [70]
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I think that's in the documents. I think we have done -- I think we've got CAD318 million or something like that left to go.
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Chris Li, BofA Merrill Lynch - Analyst [71]
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Okay.
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Dean McCann, Canadian Tire Corporation Ltd. - EVP & CFO [72]
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There's a lot of people waving at me right at the moment, but I think it's around -- yes, about CAD320 million is what I have in my head left to go.
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Chris Li, BofA Merrill Lynch - Analyst [73]
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Okay, thank you.
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Operator [74]
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That's all the time we have for questions today. I will now turn the call back over to Michael Medline, CEO and President, for closing remarks.
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Michael Medline, Canadian Tire Corporation Ltd. - President and CEO [75]
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I just want to thank everybody. I know it's a busy day, especially for the sell-side analysts today. You've got a lot of reports, so thanks for calling in, and if you have any further questions, you know where to reach us and I appreciate it. Bye-bye.
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Operator [76]
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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 Ltd. 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 call or the materials provided.
This concludes today's conference call. You may now disconnect.
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