Canadian Tire Corporation Ltd at CIBC Retail & Consumer Conference

CTC.A.TO - Canadian Tire Corporation Ltd
Canadian Tire Corporation Ltd at CIBC Retail & Consumer Conference
Mar 26, 2015 / 12:15PM GMT 

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Corporate Participants
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   *  Mark Petrie
      CIBC - Analyst
   *  Michael Medline
      Canadian Tire Corporation, Ltd. - President & CEO

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Presentation
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 Mark Petrie,  CIBC - Analyst   [1]
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 All right. Perry talked about -- or in the write-up in the conference book we talk about this being a golden age for retailers and 2015 having a pretty strong outlook. I think for Canadian Tire the challenge is going to be to top 2013 and 2014 because they've had a pretty incredible run.

 So here with us today, Dean McCann, CFO, is here to answer any detailed financial questions we get into. But we're going to bring Michael Medline, President and CEO, up and we're going to do some Q&A.

 So, Michael?

 Okay. So we'll start with a nice --

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 Michael Medline,  Canadian Tire Corporation, Ltd. - President & CEO   [2]
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 The goal is to beat 2013 and 2014.

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 Mark Petrie,  CIBC - Analyst   [3]
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 Okay. All right, all right. Just to be clear about that.

 Okay, we'll start off with a nice softball for you. So Q4 was another strong quarter, obviously 2014 was a fantastic year. Talk about what you're doing differently and what you think has really driven that performance over the last year.

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 Michael Medline,  Canadian Tire Corporation, Ltd. - President & CEO   [4]
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 Yes. I think, I mean, I was very gratified by 2014, especially Q4. Q4 in retail, especially in our business, is you got to nail it. Because if you don't, you hear it from you guys for a year, all right, because you can't get it back in Q1. In fact, Q1 which we're in right now is a tiny retail quarter. It's mostly a CTS best financial services quarter, and you're always trying to do well. But it's so tiny compared to Q2 for us or Q4 especially. So it was very good.

 When you look back, we sat here a year ago and I was quite confident in our ability to perform. But our confidence level now is much higher. And we had seen great performance at Sport Chek especially and at Mark's. And we had started to see the momentum coming in at the big dock, Canadian Tire, which is approximately half of our revenue.

 And we are seeing now performance which is not the up and down as much and much more momentum. And although we're always going to be a weather-driven retailer like many are, you can see that we're taking some of that weather out of the business. And I think that that's for many reasons.

 So we got the momentum, we got -- for those of you who don't know, we were, in Q4, trying to go over a 4 comp, because of the weather in 2013 was perfect actually for Canadian Tire. And so there was some trepidation going into 2014. 4 comp for a big retailer is big, and 2% of that was driven by weather. And we did a 2.8 comp on top of the 4 and we did not have weather, especially in December.

 And there was strength across all of our businesses in the big division, from automotives, to living, to fixing, to seasonal, everything was going well, and across the board, every region as well which was really good. And this was the same throughout 2014. It was a very good year.

 And what is different now is I think a few things. One is the first thing we think about every day, our brand. How consumers and Canadians relate to Canadian Tire today, you can't even compare it to even five years ago. And how they feel we're part of the fabric of the country in a different way, how we support sports, our marketing which I -- well, has been recognized as, I think, now, the best in the country, and that connection with our customers is second to none now. And we do probably more brand studies and customer studies than anybody in the country.

 And what we've seen over the last two years especially about accelerating is unbelievable progress in terms of how Canadians see us, in terms of our customer service, in terms of products we carry, the quality of our products, and the brand overall. And that is putting a really good halo effect on our business. In fact, if you just saw in the last couple of days, we started running ads bragging about auto service which we've never done before. But it was high time we did because our autos business and our auto service has improved so much.

 So the brand is the key, related to that is way better, way better marketing which relates to Canadians and is focused on particular group. We want to appeal to all Canadians. But where we saw that we had the ability to grow our share was younger families with kids which is a big demographic for us but where we were slightly under-indexing. So I think we have real runway to grow that going forward and you're seeing that.

 Execution is far better in all respects. When I came in as president of the Company about 18 months ago, we had a pretty green team. And in some points in Canadian Tire history, I think Canadian Tire just sort of let the world walk over it. It snowed this day or the economy did this.

 And we got a team now where 18 months ago I felt they were green a little bit. We got a team now which is the best I've seen. And they are driving the business proactively and not letting the world come to them. But whenever it snows in the winter, we're not going to sell a lot of shovels. But, boy, we're driving every aspect of that business.

 Our dealer engagement -- and I mentioned earlier to you, Mark, I think you could put probably some sort of correlation, some sort of R-squared between if I could measure our dealer relationship, it would correlate somewhat with our customer sales and our ability to deliver results. Our dealers are executing in that store. And when our dealers are executing and they're so good and we're at the corp, giving the support they need, you can't even compare our dealers to corporate store managers because they're so much better.

 And now, I'm seeing too that the new world that I talked about a year ago that we were shifting into is really helping us. And so some of the success we're seeing in bricks and mortar is because we're better on online, nowhere near where we need to be. We're nowhere near where we need to be, but all those things together.

 So it's always fun to have one magic bullet to turn things. I think we got a lot going in our favor. As long as we play our own game and we understand who we are, no matter what the economy is, no matter what the weather is, we will push forward and we'll put up the results. But much more results-driven than I've seen before.

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 Mark Petrie,  CIBC - Analyst   [5]
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 Obviously the same sort of sales trends have been very strong. We've heard you talk about being less like a general store, more like a specialty store or a collection of specialty stores. Can you first just explain really what you mean by that and then maybe just give us some examples in terms of how that's actually playing it?

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 Michael Medline,  Canadian Tire Corporation, Ltd. - President & CEO   [6]
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 Sure. So I think in 1994, Walmart came in, then Depot comes in. And we were described at some point as the Canadian Tire is a deer in the the headlights. I wasn't around but I'm sure we didn't like that description very much.

 And we had to scramble. And we had some CEOs and had a CTO at that time who did an unbelievable job adapting and making us relevant for the new world. I mean, we didn't have stores or products selection that was anywhere near what we have today.

 But in doing so, and to compete with especially Walmart, which is such a good retailer, we became a bit more of a general merchant. And I believe over the years that we took our eye off the ball in certain key heritage categories like automotive, believe it or not, like sports. And we recognized that about six or seven years ago. And every day, we're not just competing with Walmart, in automotive, we're competing against the best automotive retailers in this country, in sports, the same, in living, the same.

 And if you have a mindset as just general merchants and you compete against Walmart, you compete against everyone, generally, you will get beaten by the specialties while you're doing that. And so now when we look at it, yes, we're going to compete against Walmart and Costco and Amazon and everybody. But we got to beat everybody at their own game with their own way, by playing our own game. We're not going to do it the same way as they do, and we have to think differently.

 And so in auto, we had to really invest in that business, about five or six years ago. We've put a lot of time, effort, and resources, and capital into it. Now, we have the systems to be able to run a business. We brought in a very [neat team] in automotive. We've done the same in playing.

 In fact, in playing, we took one of our best merchants out of FGL sports, so Sport Chek, and brought them over to run playing. And the same is true everywhere.

 I'll give you one great example of it. So when I ran FGL Sports, the bike buyer loves bikes. Okay? And the hockey buyer, captain of the Notre Dame Hockey team, and knows everything about hockey. And if you try to get the bike buyer and the hockey buyer to switch jobs, their minds would blow up, they would hate it.

 And at Canadian Tire for a while, we were saying -- okay, one day you're buying hockey, the next, you can be buying oil, next, you can be buying hoses. That's just not the case. When we hire somebody on bikes to Canadian Tire, they know more about bikes than anyone else.

 I've had a meeting yesterday with an individual. And she's become a very prominent buyer in sports. And her background in the sports that she's buying for and selling and supporting our customers and our great dealers is unbelievable. When the gardening buyer goes home, he or she -- in this case, it's a she -- should have dirt under her fingernails and be working in the garden, and wake up every day, well, trying to kick the you-know-what out of the competition. And we have gotten away from that kind of prowess in each of the businesses.

 We still got to fight like a general merchant when we have to, but we got to be a bunch of specialty retailers under one roof. We have made significant progress over the last two years in that, significant. And that's just one example, but really deep pallet that knows the business and thinks about beating the competition and exciting our customers every day.

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 Mark Petrie,  CIBC - Analyst   [7]
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 You touched on the dealers earlier, you sort of made a comment. I'm actually a little bit disappointed. This is my 10th retail conference. You've broken the nine-year streak of the presenter for Canadian Tire saying that the relationship with the dealers has never been better. So I'm actually really disappointed that you didn't use that line.

 But I'm assuming the relationship has never been better than it is today. Can you just talk about sort of how they are viewing this strategy of general merchant into sort of specialty stores and what kind of role they play in that evolution?

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 Michael Medline,  Canadian Tire Corporation, Ltd. - President & CEO   [8]
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 Yes. Well, I think it goes about as saying that it's the best relationship we've ever had.

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 Mark Petrie,  CIBC - Analyst   [9]
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 Okay. We're good. Take that off, [Bart].

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 Michael Medline,  Canadian Tire Corporation, Ltd. - President & CEO   [10]
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 And I don't know who's telling in all 10 years we have the best relationship because I think it's over the last six or seven years that we've made significant progress in our relationship with the dealers. And that's not the dealers' issue. That was the corp's issue in my opinion.

 As maybe not everybody knows, Canadian Tire stores are run by associate dealers, almost invariably one dealer per store. And they're close to the customer, they're close to the communities, and they really run their store and buy and understand the community and the needs of the community. And when they are engaged as they are today, we can't lose. And I really do believe, as I said, that a lot of our success is because now that respect between the parties.

 So whenever there's a contract -- and we don't have a contract up for a like a decade now which is good. But whenever there's a contract up there's some unsteadiness because both parties don' t know where it's going to end up. We've gone over that. We have a great contract now that rewards both parties fairly and the dealers I think believe that this is a great contract.

 But what they really like is when they believe that the corp, as they call us, are doing all the things right and care about the Company as much as they do. And that they have experts. So when I talk about the specialized -- when they see people in automotive who really know automotive, the dealers get very excited. And they send me notes and letters and they talk to me and they say -- we really like what's going on. They are very excited about the team at Canadian Tire and they are working really well.

 I'll give you an example. My favorite meetings at Canadian Tire, we call them mini-Mac. And what they are is every quarter we have meetings on much of our businesses. So we would have a meeting on paint, we would have a meeting on auto service, we'd have a meeting on our flyers. And dealers paid to do this.

 Dealers come in from all over the country, who are experts, who are the best in those categories, and work with our management. And they'll sit down for a day or two -- how are we going to beat the competition and excite the customers in paint. And I was in one of those last year and now our paint business is taking off.

 You do not get that expertise with a corporate store setup. You just can't. You can't have people talking like that because they're at the laptops and tell you how much they're going to buy, what their customers need. They're my favorites meetings, my favorite meetings, because it shows you the power of our system.

 As Dean likes to say, we've been in business for 93 years, there's a reason. And it went through great management and management maybe that wasn't as strong as it needed to be. And the dealers have been strong throughout that. And when we get the same quirk we have right now we're very hard to beat.

 They got very excited about beating that American company that left the country. And when they get behind something, like they got behind that, to put in a much better housewares department to really improve our living, you could see what happened. And we and a bunch of other national champions made it very hard on the new entrant, very, very difficult. And those aren't just us.

 But you give Canadian Tire or some of these great Canadian companies, like the grocers or the pharmacies and some others, a little bit of time and we'll do well. So now they're getting excited about things like digital and eCommerce and how to connect better with the customer in the new world.

 But they're really on the right trajectory and it is -- I don't think we need to say every time it's the best relationship ever because I think it'd just be a great relationship and we shouldn't have to talk about it honestly.

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 Mark Petrie,  CIBC - Analyst   [11]
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 One of the issues that comes up with Canadian Tire, particularly the Canadian Tire banner, pretty consistently is historic experience. One of the strategies that you guys have been using in order to drive same-store sales has been an evolution to higher price point products, right? I mean, we see $1,000 barbeques or seeing $600 vacuums, products that we wouldn't have seen in Canadian Tire maybe five or six years ago.

 How do you sort of match that up, the higher price point product with the store experience? And what role -- obviously a crucial role, but how do you engage the dealers in terms of being able to match the store experience to a more premium product discernment?

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 Michael Medline,  Canadian Tire Corporation, Ltd. - President & CEO   [12]
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 So, I mean we're always going to have a good, better, and best strategy in our stores. We cater to -- if you want some sort of barbeque and you don't want to spend a lot of money, we're a good place to go. If you want to go high-end now you can do that. So we got a lot of choice and we don't want to get away from that kind of choice because that's what Canadians want.

 I believe that that's what we have to do to be able to make that jump that we're now making and we're seeing in our results from a retailer that just tries to appeal to everyone to be really focused on different groups of customers to drive our sales. Like we successfully did at FGL Sports, we're now doing at CTR.

 I think the in-store experience is so much improved. We're never happy, the dealers aren't happy, we're not happy, but it's so much better than it was a number of years ago. Well, I'm not just going to -- I mean what I say shouldn't matter, you can look at almost any customer survey in terms of what our customers say when they're visiting our stores now and the improvement is there.

 We have to offer a level of service which is better than many of our competitors, that's expected from us, that's what our customers tell us we can do. We need the people in the store to be able to do that and we need to do it better digitally. And that's where I think we've really ratcheted it up. So, the technology in the store is better, its way better in automotive, it's better throughout the store, it's better online.

 When people say -- Mike, we're always critical about your eCommerce business because we want you to do much better. But the infrastructure is being put in, so if you go online right now you can see in the layered store how many of the wiper blades that you're interested in are in-stock. So the amount of technology we put in to assist the stores and assist the customers is incredible. And I don't think we brag about it enough. We have a great technology department, our marketers working at the technology department.

 We had put in a system which was developed by dealers and then working with the Company to be able to find any product in a minute, basically, in the store whether it's on the shelf or back in the warehouse which we couldn't do a year and a half ago. So behind the scenes has been a lot of investment within our capital budget to bring us to that park. But it's not there yet; we've got to still keep going.

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 Mark Petrie,  CIBC - Analyst   [13]
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 And in terms of that digital transformation, you're talking more on the technology side in the store, but maybe from an eCommerce perspective, maybe just talk about sort of where you're at in terms of that trajectory and how much progress you've been able to make, what we can expect to see in 2015 and then what the end sort of goal is to the extent that there is ever an end to that type of initiative?

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 Michael Medline,  Canadian Tire Corporation, Ltd. - President & CEO   [14]
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 Right. I mean I look at digital in three sections and that's probably over simplistic. The first is in-store digital, how you excite the customers, I think relating the world. I have traveled the world. I was just over in Asia a couple of months ago, visiting our buying office in Shanghai. So I toured through China, I toured through Japan, looking to see whether we have much to learn in digital. In Europe, United States, talked to people. I think we're doing great in-store digital.

 I think that we are fantastic at digital marketing and digital advertising and that people are going to school in terms of what we're doing and especially in terms of what we do in work and working with Google and Facebook and YouTube and how we're exciting our customers across all of our divisions. And really, as I'm looking at my guys here, I'm not happy where we are in eComm but it is where we are today.

 We had put in 80% to 90% of the infrastructure needed to do eComm but it doesn't resonate yet. We have all the assets to be great and we're making massive progress, but we're not where we need to be. And when I talk about assets, nobody has the assets we have as long as we play our own game. We started to compete with Amazon and Walmart and Costco, we're not playing our own game.

 But why would you compete differently online than you do in the store? We don't try to compete with Amazon and Walmart in the store, we try to play our own game. Again, in Canadian we have the best brand. We have 1,700 sites and 500 Canadian Tire stores that we're going to use for eCommerce.

 We have the deepest and strongest tech team in the business, and I put that up against anybody. We have the best marketers. We got content which is going to be absolutely key. We're developing content and the ability to show that content anywhere, especially online. And we have the partnerships, especially in sports, that should be able to differentiate us.

 So we got all those assets. But we haven't put them together yet, Mark. And so we're making the progress, we got the infrastructure, we got all the ability to use content and data in our Winnipeg data center that we put in a couple years ago. We've got -- in Communitech in Waterloo, we've got the best in terms of apps development, and we're already reaping some of the benefits.

 So we have a wiper blade app. You should go in the stores and see the wiper blade app which makes it a lot easier to buy wipers, fantastic digital progress. Instant credit at CTFS that we developed which is growing our CT financial services business, and the [Fastfind], which is how to find things earlier that I mentioned before. So there's progress. But I kind of tend to gloss over that, so I want to mention some of the progress because eComm is really the next step.

 And eComm is not a business unto itself. It's not how the shopper looks at it. It's just going to be shopping. And at the end of the day if you're not good -- and I don't like the word but it says the story -- if you're not good on the channel you're not going to win. And why would it be different in the store than what it is online? And we have so many strengths.

 So we've been working around this and putting it in place, but in December we burned the boats. And we said that by the end of 2017, which we've said in Investor Day, too, we will be best in the world in what we define as best in the world, Canadian Tire best in the world. Why end of 2017? In my opinion, we have some time. Canada is a little bit behind the rest of the world but we have a lot of time to get great.

 But I think a lot of what we're going to see in terms of the great performance from the online helps the stores. It's just -- and that's when you talk to people in the states, around the world, they see upticks in everything when you get really good online. So we're going to be great because we said we're going to be and that is what we're going to tackle next.

 So there's always these periods where we have obstacles or, in this case, opportunities. So, one first, you got to grab that business, make sure nobody takes it from you. So, no one is going to take our business. Then you got to think -- how good can we be so we can take everybody else's business?

 And that's I think the place where we are now, trying to figure out how we're going to build the business. And in some of our divisions, the corporate stores, how we're going to do that. And how we're going to work with the dealers to win that as well.

 But right now it's too much of a transaction site. It's only pick-up at the store. It's gotten better, the site. But it is nowhere close to what you're going to see in later stages of 2015 and especially when we get to 2016 and 2017.

 And maybe I got to give an example, though, because I think it helps which is -- I'll pick on Sport Chek I guess. So, if you go online, if you went online with Sport Chek -- and this what really got me going on this -- and you want a hockey stick -- and hockey sticks are not cheap anymore, they're not the same as when I was a kid -- you want to pick up your hockey stick for yourself or your kids, your son or your daughter, and all you see are bent sticks. You see 12 bent sticks, and under it'll say Bauer -- you're going to hear from later, which is a great brand -- or one of the other brands. And -- oh, my lord, I mean, could it be more boring? And then you start thinking -- okay, what can you do?

 So I asked Chad who is doing a great job running Sport Chek and FGL. Can I talk about this? So very soon you're going to see -- how do you weigh? How tall are you? How old are you? What's your skill level? What do you do? You like taking slap shots? You like taking these shots? And just bring some excitement to it and some knowledge to picking a stick. Because I can tell you most eight-year-olds can't bend a stick and so they probably don't need that model, they don't need the most expensive model.

 And then I started thinking -- okay, we got Steven Stamkos. He works for us, right? Why would Steven Stamkos come on the screen and tell you -- look, if you're at this level this is the kind of stick you should be buying. This is the kind I got, but maybe that's not the right one for you. Now, suddenly no one's beating that and we can do that across our businesses. And so I think you'll see Sport Chek hit first with Canadian Tire not far behind.

 Mark's is a little different and I think it'll be a fast follower. But that's the kind of excitement I want to bring to it. We got to break new ground and leapfrog.

 People always ask me who is good and I can pick out some people. I mean, I think [Saxx] is really good. I think Saxx's content is good. But I don't see anyone doing it the way it's going to be and how it's going to win. And we got a lot of competitors who are very good at this, so we got to leapfrog ahead of them, but we got the assets to do it.

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 Mark Petrie,  CIBC - Analyst   [15]
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 You sort of answered this question, but I do want to just sort of raise it. One of the challenges I think that's there for Canadian Tire as it relates to the online world is taking your sort of high-low flyer driven business, which is the Canadian Tire stores, and bringing that into sort of the everyday low price world of eCommerce. How do you think about that, like right now, I mean as an example, the goods that are in the flyer aren't available online at the promotional price? So, how do you look at blending those two worlds? You sort of answered the question but I do just want to sort of get your thoughts specifically on that topic.

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 Michael Medline,  Canadian Tire Corporation, Ltd. - President & CEO   [16]
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 Yeah, you got -- I mean I got a lot of respect -- I might not like white-collar competitors but I got a lot of respect for a lot of them. And Amazon just aims right at what the customer wants and needs. And if you go 1% off of that you're not going to win.

 So we got to make sure that we're doing what the customer wants, not what we want. And so you pick on something there which is what we try to like and we're going to change, which is it shouldn't be that a promo point -- if something is on promo it can't be bought online. And we're working right now with the dealers to figure that out. And I don't think that that will be a major problem, honestly. And I think we don't have to have -- I think online should represent Canadian Tire.

 We're not going to be [EDOP] just because we're online. We've [gotten] that excitement of the digital flyer, the excitement of Canadian Tire, but these are the kind of things that we've got to do.

 You've asked me before, Mark -- what's the biggest hurdle getting into this new world, is it technological? Is it cultural? Is it something else? It's 100% cultural. We can do anything technologically. We can do anything marketing. We work with our dealers.

 It's scary for people. So merchants who spent their lives doing such a great job how to adapt and think differently, so that happened at FGL where we went to digital flyers and now they can't get enough digital flyers. And so our dealers, this is a different way of doing things. They know we have to be great at eComm, how are we going to do it? Well, they have the same feelings that we do, like how are you going to conquer this?

 The first thing I guess to get over any problem is acknowledge you have a problem. And I acknowledged we have a problem, we're not where we need to be in eComm. What we are -- the tone from the top should be clear and it's clear across Canadian Tire. We know we can compete and be -- and [drive] in bricks and mortar.

 I know we can do the same in the digital world, we're proving it in different instances. But we have a long way to go in eComm and we got to do it in a short period of time.

 So, people are going to have to get over some of this cultural uneasiness. But it's funny at Canadian Tire once you have a threat and once you've earned the boats, Canadian Tire reacts really well, especially our dealers. So, I'm not that worried about it but I want to bring a sense of urgency to it.

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 Mark Petrie,  CIBC - Analyst   [17]
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 Okay. So, just changing gears a little bit, I think we're going to hear a lot about sort of macro factors on retail over the next year and sort of a longer term. What's your perspective on it, sort of specifically thinking about FX, weakness in Alberta, impact of the oil prices, that type of stuff?

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 Michael Medline,  Canadian Tire Corporation, Ltd. - President & CEO   [18]
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 Yes. It's endemic to retailers to be always complaining and whining, so I guess I've become a real retailer because we whine all the time. So we always want snow in the winter but then it snows too much [a number] of times, and then we don't want some of the snow because it closes the stores or it snows in April rather than what we wanted, so there's always something.

 So I'm on Retail Council of Canada, I was with a group of great retailers and we were whining and complaining about everything under the sun, economic, weather and everything. And I don't think -- I pointed out there was probably a day in 2003, probably in the fall of 2003 where everything was perfect. It's never perfect, Mark. It's just never perfect.

 And you just play your own game, you fight your own game and come what may. And honestly, we can't control the weather that well. We can do our best to deal with it and we can do our best to deal with economic factors. We can improve ho we do business.

 There're some headwinds possible here. Let me deal with Alberta first and the oil sands which -- I mean, if truth be known we'd like a higher oil price. We have a couple of divisions, but especially Mark's that is big in Alberta.

 So just to give you a sense of how Alberta plays in our whole business -- about 12% of all our stores are in Alberta. It's slightly more of our POS is in Alberta because we have bigger stores. Only 6% of our financial services receivables are in Alberta, very, very small. So 12% of our stores, so a little bit more on that on POS, so it's not mammoth. But for Mark's it's bigger. And we haven't seen yet. We don't hit. It's been hard because it's been a pretty mild winter, so it's hard to pull it out.

 We haven't seen a big hit in Alberta yet to any of our divisions, but we expect something. With jobs and less capital spending, we'll see something in Alberta and Mark's would be the one that bears a bit of the brunt of it. Mark's is about one-twelfth of our revenue, just giving you a sense, because they do a lot in work wear. But we have an unbelievable leader who used to be the chief merchant at FGL and he's growing jeans and he's growing casual and he's putting casual footwear and growing the business as much as he can. But to think there won't be any hit in work wear in Northern Alberta is silly, right? We don't expect that.

 Having said that, some of that money which is put back in consumers' pockets, we're already seen some real strength in Central Canada. And so when I said that sort of joke about things never being perfect, there's always a quid pro quo. And we perform very well historically, notwithstanding the economy.

 In terms of the Canadian dollar, we like a high Canadian dollar. That's just the facts. Fortunately, we had a very good hedging program which is still helping us today, which has allowed our businesses as in especially our merchants to adjust to changes as they come up. And so this has given us enough time to really get ready for a rig change.

 But this was a very violent drop in the Canadian dollar, maybe most violent ever in terms of the speed of it. And so, yes, we were hedged and the merchants have reacted very, very well.

 The key there in the -- well, there's a few good things, right? Which should really help us as a country over time. There is not a lot of cross-border shopping going on. I can tell you that is drying up.

 The key to us is we'll deal with this. And if you saw the kind of results we put up notwithstanding that, the key that we're keeping our eyes on and all the business leaders are, when that dollar appreciates, we got to keep that money because that should really be good instead of easing up on some of the things we're doing to make up for this dollar. So that's one thing we got to keep our eye on.

 So, yes, Alberta, certainly. Canadian dollar, yes. But there's always something we're dealing with, whether it be a new regulation or something going on and we just have to adjust and we have to be better with what we do. And then when it turns, we got to reap that.

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 Mark Petrie,  CIBC - Analyst   [19]
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 One of the things you guys have talked about for a while, although I do think you talked about sort of a new program back in the fall with a productivity initiative. Can you just talk about how that's coming along, what the opportunity is there and what you sort of expect in 2015?

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 Michael Medline,  Canadian Tire Corporation, Ltd. - President & CEO   [20]
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 Yes. It actually makes me sick to have to talk about productivity. Like I think if we were great at productivity, we wouldn't have to talk about it. And, look, we're not lousy. We have so much progress made, otherwise we wouldn't be putting up the kind of the results over the years we've put up.

 We're so good a supply chain in financial services in aspects of our business. But when I look at our company, I see that an extra dollar of sales, not enough of it is falling to the bottom line. And so we are concentrating on productivity. And there are some things going on right now.

 So I said I don't like talking about it. I'm telling you that it is a priority. I'd say the two biggest priorities other than [writing] the day to day for me are digital and the move to eComm and productivity. And that's the case with our senior management team.

 But we're doing things right now. I keep talking about them but I want you all to look at some quarters as we go through the next couple of years and go -- wow, they're making huge progress. We didn't see that coming. Because I don't want people to -- I think when you see it, you should believe it.

 But we have sort of short term priorities. We have ones where we need to change the processes we're doing and we're doing that. We have some that are a little further out where we're working with our dealers who also want to take costs out. But the commitment is there and I think we talked about it too much.

 The number that we're after, one of the big numbers as we said on Investor Day is a 9% [ROIC] heading toward a 10% ROIC and more. And we can't get there if we're not as productive and efficient a company as we can be. And being productive and efficient will make us better and will allow us to do a lot of the projects we like to do and move into the new world of retail.

 So you got to do it. I think we're okay at it, but there's a lot of money we can take to this company and we got to do it in a really smart way. Does that answer your question? I want to make sure.

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 Mark Petrie,  CIBC - Analyst   [21]
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 Yes, yes. So I do want to just sort of touch on sort of related to that your balance sheet, what you sort of see in terms of capital allocation. And I also want to just sort of get your comments on the capital budget because obviously, it's quite substantial, this year, next year. And maybe just talk about that as it relates to your ROIC targets and the general sort of view on the capital allocation.

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 Michael Medline,  Canadian Tire Corporation, Ltd. - President & CEO   [22]
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 I mean, we're quite aware. And our investors point out to us all the time that we have been sitting on a lot of financial flexibility more than we have ever had before. And as I've been saying to the people who own this company, I think that's one of our biggest responsibilities is to be able to make the best decisions on behalf of our shareholders who have owned Canadian Tire and to allocate capital properly and keep strengthening our balance sheet but utilize it properly.

 And so we've always talked about a balanced approach to our capital. Let me just go through it real quickly. We're happy with our dividend policy of 25% to 30% trailing earnings realized. We're happy with that. And I haven't heard a shareholder saying much about that. So I think that's basically okay.

 We are buying back shares really almost for the first time in the last couple of years and at a much better pace. I have great belief that when you believe you're undervalued and it's the best use of your cash and you don't have a better use for cash that share buybacks are a very fine way to invest in your company.

 And you can't really say you're undervalued and then buyback in shares. That's what we've done. And we have, thankfully now, the financial flexibility that we never had before to pay dividends like this and buyback shares.

 Now, I said we're undervalued. So I'm going to say it, Mark. A year ago, I said that you just do the simple math on some of the parts, I'm a simple guy. And we have a $10 billion market cap now which is great. We're up from last year substantially.

 As Perry pointed out, our PE, our multiple, our EBITDA are better than they were a year ago. We're better. And we crystalized the value. So when you look at it simply, you got $10 billion market cap, you got $3.5 billion which is our ownership stake and our reap. We got about $1 billion in excess real estate that's not in the reap that can do into the reap.

 We know what financial services is worth because we sold 20% of it. So it's worth about $2.5 billion. And you're sitting on about $0.5 billion worth of cash, give or take. So I'm no accountant as I always say, but that gets up to about $7 billion to 8 billion, $7.5 billion.

 So you got $2.5 billion for three of the best banners and brands in the world and certainly North America in Canadian Tire, FGL Sports, and Mark's. And last year, when I was sitting here, we did not have the momentum or strength especially in the core business, Canadian Tire, we have today.

 So I agree with Perry. Our job is to show you results, get the comp store sales, grow our earnings, and the rest we'll leave to our investors whether they're confident and like what we're doing with our cash, whether they like what we're doing at eComm and all that, that's all we can do.

 But I will point out that as long as we think that's undervalued and we don't have better use for the cash, we'll buy back our shares which just seems like a pretty good buy, because retail businesses are undervalued in our opinion. So you got dividends, you got share buybacks.

 And then you ask -- what are you investing in? We are investing heavily in our business. We are putting up a distribution center because we have to. Now, there will be some synergies. We're putting it up but you would never do it from that.

 One of the curses of growing and being successful in retail is you have to put up a supply chain infrastructure. We'll be through that soon. But that is hyping up our numbers a little bit. We're going through this kind of old school new world CapEx spending right now where we have so many still opportunities especially in the core business to put up stores. But we've been putting in technology and you've heard that we still want to invest in eCommerce.

 These will be high return projects. 2015, we think and we've said it will be a high wire mark for a while in terms of capital as we try to do some things. And we are committed to that 9% going to 10% ROIC and we got to control our capital spending. And I do think it's under control. And the projects we're doing are high return.

 You asked me before when we talked before -- is there anything that's changed since Investor Day which was, I guess, October. In my thinking about capital, I'd say two things have changed. I'd say that I'm more confident today in our current businesses and our ability to grow than I was a year ago in our Investor Day. Because I could see it on the -- but I now can see a company that -- it's coming for real.

 And I think there's more room to grow that. And I also think that the digital business can grow faster and I thought it could be more successful.

 But I was also asked a question, I think it was by Keith Howlett at an Investor Day -- when you look at small acquisitions in eCommerce to get that engine going faster or get higher returns or to own some of that space. And I think that I said then I wasn't sure and that that wasn't really on the plan. I think there is an opportunity, but very, very limited opportunity to do that and to get eComm going and to be really good at it. Because we're very good in all aspects of digital. Well, the things I just mentioned won't take away the financial flexibility I'm talking about.

 And then last, would we do a larger acquisition? And we're always looking. From the day I joined the company 14 years ago, we've been looking for great acquisitions. We've done two. One was 13 years ago and one is now, believe it or not, four years ago. And we were not in any hurry. We have got a great business.

 If we believe there is a compelling acquisition for our investors, we show them that we'll do it and that we're pretty choosy and picky. And we know how to integrate and we know how to make a thing better. But that's two examples, Mark's and Forzani group. But we all know what it means to make a bad acquisition. And we don't have any intention of doing so and we're not in a hurry to do that.

 We can run our business, we've got plenty of places to put our money. And we know that we have a balance sheet and that we have to make our investors pleased with how we handle that.

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 Mark Petrie,  CIBC - Analyst   [23]
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 You talked about FGL. Obviously, that's been a pretty fantastic acquisition for you. On the last conference call, you used a line that I very much enjoyed because these aren't just flagships, these are money makers.

 How is your thinking about FGL and the Sport Chek banner in particular changed since you've acquired that business? Obviously, the growth has been pretty remarkable.

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 Michael Medline,  Canadian Tire Corporation, Ltd. - President & CEO   [24]
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 Yes. Four years ago when I walked in there and we walked in there, we had two main problems with two big stakeholders. We weren't progressive enough at Sport Chek in terms of brand and the excitement in store and moving to a more digital world.

 And the biggest and most important brands in the world, the Nikes, Adidas, Under Armours, Bauers, we're losing a bit of confidence. And the biggest landlords in this country who are so important to us, Cadillac, Oxford, we're losing confidence giving us [crummy] spaces, wanting us not in the mall.

 And so I got a little concerned as you can imagine. I knew this was a good deal and I knew that we were getting the bones of Forzani group or unbelievable people and the way they do business and their strengths and their merchants and the operators were so strong. And so now we have really in the last -- it happened in about a year, returned it. And now I'd say we have this good relationship with the best brands in the world and the best landmarks in this country than anyone.

 And to the standard where the Nikes, Under Armours, Adidas and Bauers, et cetera, wanted to do business with us, wanted to be in all our stores, and especially wanted to be in our flagships. And that the best landlords in the country are making space to allow us to put our stores in and especially put the flagships in.

 So what we did -- and I'll tell you that story -- is we had to put up a lab store in [Young]. We had to change our marketing. We had to appeal to the consumers who spend all the money in sports in this country. And then we had to dream about flagship stores to be able to excite our customers. We've been putting an umbrella over the brand and make sure the biggest brands and biggest landlords were happy.

 So we thought that'd be pretty good. The early results from the lab and the flagship that we put up are that they are best performing stores. These flagships are money makers, high return. And they're not just flagships, they're battleships. And they changed the perception not only of the brands and the landlords but of the consumers, of you, I hope.

 West Edmonton Mall, which I showed you a video of because it had just opened I think when we were here last year, is an unbelievable store. And the dream was that retailers and brands would fly in from all over the world at Edmonton to check it out, and that definitely occurred. Everybody went, flew up from everywhere in the world.

 Now we've opened in Burnaby. And Burnaby's, if I could say so, even better. And this year, hopefully in time for the big November sales, we're going to put up 75,000 square feet in Square One and we're going to put up a beautiful 45,000 feet in (inaudible). And then we're doing Vancouver, then we're coming back to Toronto. We're doing Calgary.

 And look, we're not going to put 30 of these up. But it's a bigger number than I first thought. I thought it was 8 to 10, then I said 10 to 12 probably last year. I think it's 12 to 15. These are very high return.

 Now at the same time, many people are saying -- why are you putting up bigger stores? Aren't people going smaller. I think we're right-sized in all our banners. But you want to put that flagship above it to the brand and people will flock to that store.

 So the sales are good and it fits well digitally in what we're doing at eComm to such an extent that this summer we'll be opening our first, what we call a showcase Canadian Tire store, 130,000 square feet of retail in South Edmonton Commons, which is not only going to be big, but is going to be beautiful. And we're going to see how that goes.

 And instead of talking about how many there could be -- let's just open that up. Let's see how customers react, let's see what it does to the competitors. But we are very proud of that. And that pushes the team to think about the business differently. And that it pushes them differently and all that in terms of thinking about eComm.

 So at first flagships were more of a brand statement and we hoped they'd have a good return. They're a brand statement and they are very high return.

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 Mark Petrie,  CIBC - Analyst   [25]
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 Looking forward to check them out, Michael. Thanks very much for your time. Thanks a lot.




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