Q1 2015 Canadian Tire Corporation Ltd Earnings Call
May 14, 2015 AM EDT
CTC.A.TO - Canadian Tire Corporation Ltd
Q1 2015 Canadian Tire Corporation Ltd Earnings Call
May 14, 2015 / 05:30PM GMT
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Corporate Participants
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* Michael Medline
Canadian Tire Corporation, Limited - President & CEO
* Dean McCann
Canadian Tire Corporation, Limited - EVP & CFO
* Allan MacDonald
Canadian Tire Corporation, Limited - COO, Canadian Tire
* Chad McKinnon
Canadian Tire Corporation, Limited - COO, FGL Sports
* Mary Turner
Canadian Tire Corporation, Limited - COO, Canadian Tire Financial Services
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Conference Call Participants
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* Emily Foo
BMO Capital Markets - Analyst
* Derek Dley
Canaccord Genuity - Analyst
* Irene Nattel
RBC Capital Markets - Analyst
* Jim Durran
Barclays Capital - Analyst
* Kenric Tyghe
Raymond James & Associates, Inc. - Analyst
* Mark Petrie
CIBC World Markets - Analyst
* Keith Howlett
Desjardins Securities - Analyst
* Patricia Baker
Scotiabank - Analyst
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Presentation
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Operator [1]
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Good afternoon. My name is Shannon and I will be your conference operator today. At this time I would like to welcome everyone to the Canadian Tire Corporation, Limited, first-quarter results conference call. (Operator Instructions)
Earlier today, Canadian Tire Corporation, Limited, released their financial results for the first quarter of 2015. 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, President and CEO. Michael?
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [2]
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Thanks, operator. Good afternoon, everyone, 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 following our remarks.
As you know we held our AGM earlier this morning, and I reiterated the importance of the work we are doing on our digital strategy and the strength of our brands; so I'm not going to repeat myself on the call today and will keep my remarks focused on the quarter. Earlier today, we kicked off our first quarter of 2015 with strong growth across all of our businesses.
I am pleased with our EPS result, which was flat to last year. And we achieved this despite owning 20% less of our Financial Services business compared to the prior year.
As you know, Q1 is always the smallest quarter for Retail and typically dominated by our Financial Services business, which was the case again this year. But it is especially gratifying to say that I don't ever remember seeing our core Retail banners as a whole put up sales numbers like this before.
As I talked about on the last call, we again had headwinds this quarter with the recent decline in the Canadian dollar and declining oil prices. But we still saw that top-line growth fall into the bottom line, we managed our margins, and our expense control was solid.
I also said last quarter that I expected to see some impact from the downturn in oil prices on our business in Alberta. We are now seeing limited impact; but I do not want to overstate it.
At our Canadian Tire banner, year-over-year sales in Alberta were still up, but we saw the rate of growth moderating somewhat, lagging slightly behind the pace of growth across the rest of the country. As anticipated, the Mark's business is the most affected and this won't shock you: we saw a sales decline in Mark's stores that service oilpatch workers in Northern Alberta.
We saw no discernible impact at FGL and a slight, a slight increase in write-offs in Financial Services. However, as we've mentioned before, a very small percentage of our receivables are in Alberta.
While we continue to believe that there will be some headwinds in Alberta, particularly Northern Alberta, we are encouraged, very encouraged by results across the rest of the country, especially Ontario and Quebec, which showed solid growth more than offsetting this impact in Q1.
Our Financial Services business had a stellar quarter, with income before taxes coming in at just over CAD100 million, a first for them, and IBT was also up 22.6% over last year. Obviously very strong results, but I would remind you that earnings in this business can be lumpy from quarter to quarter, so I am not expecting to see this magnitude of growth repeated in the coming quarters.
I continue to see momentum from all our businesses, which is what we are looking for, especially from Canadian Tire. In fact, CTR put up its best comps for a quarter in a decade. That tells me that we are doing the right things, executing on our strategy, and resonating with customers across all of our businesses, especially in the stores where Dealers are really executing.
With that, I will move on to my usual four criteria for assessing the performance of the Retail business. First, did we properly balance our promo and regular pricing or were we buying sales? We didn't buy sales in any of our divisions this quarter.
We saw solid Retail margins across the businesses during the quarter, which were up 52 basis points after stripping out the Petroleum business. At Canadian Tire, our products continued to resonate with customers and our merchants did another great job managing top-line sales and margins. FGL Sports posted 8.6% comp growth while Sport Chek came in at 8.7%.
Last year on our Q1 conference call, David Hartley of Credit Suisse asked a good question: Were we setting ourselves up for disappointment at FGL in Q1 2015 because of the great results we had last year, aided by the Olympics? I think I said there was no way we were headed toward disappointment at FGL due to our strong Chek brands, the continuous improvement we've been seeing, and the fact that the halo effect for the Olympics would not be ephemeral. So boy, was I ever glad when we saw the FGL results in Q1.
At Mark's, the solid top-line performance clearly highlights their resilience and ability to execute even when conditions are not completely optimal.
Second, did we drive sales through creative marketing? We continued to innovate with new advertising and marketing campaigns during the quarter. For the first time in recent memory, Canadian Tire featured a Dealer and our automotive service business on television, and they were in the same commercial.
We were really proud of both and, in my view, it was about time. And by the way, we posted very strong automotive and automotive service results during Q1.
Third, were Canadians choosing us for seasonal products? And especially, did our innovative products resonate? So, seasonal and innovative? And answer to that one is simply yes.
Fourth, did we properly watch our expenses while continuing to invest in the future? Now, we still have a lot of work to do when it comes to removing costs from our business, but we saw strong expense control during the quarter.
And as I said, I was pleased to see more of our top-line growth dropping into the bottom line. But we expect you will see more progress in this area as our productivity initiative moves ahead.
Clearly we had a good first quarter. I usually like to be more balanced with my remarks and highlight things that we can improve, but I had trouble finding much to pick on this quarter.
Now, I'm not going to promise you every single quarter in the future will be great. But what we are aiming for is that the overall trajectory should be up, and that's what we are seeing with this momentum we're building, especially at CTR.
It all started with brand, and we have a management team that is executing on our strategy like never before. While we still have some or a lot of heavy lifting to do with our digital initiatives, we are progressing on track with laying the foundation and continuing to build the infrastructure that we know will keep us strong in the long term.
And with that, I'll turn it over to Dean.
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [3]
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Thank you, Michael, and good afternoon, everyone. My comments today will be brief and centered around a few key areas.
First off, I'll note that we did not have any normalizing items affecting our quarter, as our valuation of the Scotiabank put was not materially different during the prior quarter -- from the prior quarter. As such, a fair value adjustment was not necessary in Q1.
Diluted EPS of CAD0.88 was flat to last year, reflecting the expected impact of the 20% interest in Financial Services' earnings now owned by Scotiabank. Consolidated revenue, excluding Petroleum, grew 2.2% over the prior year. Retail revenue, ex-Petroleum, grew 1% over the prior year and in this particular quarter lagged behind Retail sales, which were up 5.3% ex-Petroleum.
These quarterly variances between revenue and sales are not uncommon. You may remember that we commented on this issue last quarter, when our Retail revenue growth outpaced our Retail sales growth. As you can see from our results today, the patterns reversed over the course of several quarters and should be expected to eventually even out.
Our operating expenses, excluding depreciation and amortization, expressed as a percentage of revenue, typically rises in the first quarter given the additions to retail the Retail store base over the prior year, the gearing up of activity for a new year, and the fact that it is our smallest quarter. I was pleased that the Q1 ratio, after normalizing for the effect of the decline in Petroleum revenue, rose less than the typical amount, reflecting the lower than planned expense growth and an increased focus on managing our costs and productivity despite the higher levels of activity across the businesses.
Now, as Michael mentioned, though, the biggest contributor to this quarter was our Financial Services business. Once again, they delivered strong GAAR growth of 6.8%. And income before taxes increased 22.6% over the prior year, primarily due to revenue growth.
While I think you can tell how pleased we are with the results from the Financial Services division this quarter, we don't expect to see this level of growth continue for the rest of the year, as we anticipate the impacts of this growth to begin to leak into the results, dampening our ROR over time. In addition, given the higher level of uncertainty around the economy, we are taking a more cautious approach in our Financial Services business, which will slow down growth until the economic situation is clearer.
Earlier this week, CT REIT reported its Q1 2015 earnings and also announced their intention to redeem CAD200 million of the Class C LP units which mature later this month. We are working with CT REIT and evaluating the various options available for them to fund the redemption.
Our intention is to have CT REIT access public markets to fund the redemption, subject to market conditions. We have worked with CT REIT to put a mechanism in place to ensure we have the time required to facilitate a transaction. From Canadian Tire's perspective, if the redemption is externally funded, the proceeds would be used to fund the maturity of CAD300 million in Canadian Tire Corporate notes that are set to mature in June of this year.
Our consolidated Corporate inventory position is higher year-over-year but continues to be very clean across all categories. Stores are well stocked with spring and summer products, and extended winter weather in the Eastern part of Canada helped us to clear out winter-related seasonal products at both the Company and Retail store levels.
First-quarter Retail ROIC was 7.94%, up 15 basis points over Q1 2014, largely due to strong Retail segment earnings over last year. Compared to Q4 2014, the Retail metric was lower due to an expected working capital balance buildup in the first quarter.
Capital expenditures in the quarter were CAD117.4 million, up over the prior year largely due to increased IT and distribution capacity spending. Finally, subsequent to the quarter, we announced that Canadian Tire signed an agreement, subject to court approval, securing 12 leases on former Target properties. This was a great strategic and financial acquisition that will allow Canadian Tire to upgrade and expand some existing stores in its network by moving them to even better locations in a cost-effective and timely manner.
Now, when we laid out our capital guidance in November last year, we could not have anticipated that six months later this outstanding incremental acquisition opportunity would be possible. So of course we fully expect our capital spending in 2015 and 2016 to change as a result of this acquisition.
However, the transaction has yet to close and is still subject to various court and other approvals. As you would expect, there are many moving parts that we are working through, and we will provide an update to our CapEx guidance if required once we have reviewed the acquisition as part of our existing pipeline of capital projects, likely with our Q2 disclosure materials.
With that, I will turn things back over to the operator.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Peter Sklar, BMO Capital Markets.
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Emily Foo, BMO Capital Markets - Analyst [2]
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Hi, good afternoon. It's Emily Foo for Peter Sklar. On the gross margin, excluding gas, Retail gross margin was up 52 basis points; and you attribute it to some higher-margin products. So can you elaborate what categories they are and whether or not this mix has anything to do with the extended winter weather in the East?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [3]
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Well, I'll take a try, Emily, and if the business guys want to jump in -- I guess the way I would describe it -- I'm not going to get into specific categories. But what I would say, there's' a number of factors there. I would say that 52 basis point increase, we're incredibly pleased with that, obviously, in terms of the overall Retail segment, particularly what we saw in CTR and FGL.
And obviously, there was some challenge on the Mark's side. The guys there did an incredible job dealing with the headwinds associated with FX. But as you know, the Mark's business is the most susceptible to that and the most challenged by it.
So we really had very strong growth in CTR and in FGL offset somewhat by Mark's, albeit with the great sales result.
The kinds of things that are going on in there are numerous. I mean, there is a ton of them.
In terms of the work that the various businesses are doing to offset the FX impact, but also from a product mix point of view, there are some very strong efforts being made to look at the Good, Better, Best mix in CTR, as an example. In Mark's they are looking at, as we talked about before about putting more branded product in. And FGL just keeps chugging on.
So I know that's probably not as specific an answer as you would like, but it gives you an idea of the fact that there is a multitude of things going on in gross margin that all have a positive trend from our perspective.
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Emily Foo, BMO Capital Markets - Analyst [4]
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That is helpful. On the flip side, on the deterioration of the Canadian dollar and its impact on gross margin, can you quantify how that's impacted gross margin this quarter?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [5]
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Nice try, Emily. The reality is that, as I said before and it's true, the Canadian dollar has an impact on us, right? Obviously as I said just a moment ago, the greatest impact is on Mark's.
That said, as we've talked before, the businesses have a number of levers to pull, and exchange is just one factor in the determination of gross margin. And they've been doing an exceptional job of offsetting it.
So on an overall basis, you can look at the results. We were a net up 52 basis points. And I will tell you we are paying more for US dollar purchased goods than we did a year ago.
But there are a lot of other things going on in terms of how the guys are negotiating with suppliers, as an example; the mix of products; all those various kind of factors that go into creating the margin.
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Emily Foo, BMO Capital Markets - Analyst [6]
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Okay, thank you. Those were my questions.
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Operator [7]
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Derek Dley, Canaccord.
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Derek Dley, Canaccord Genuity - Analyst [8]
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Yes, hi, guys. Can you just comment on the promotional environment, given you saw a strong increase in margins? Was any of that from less promotional activity, or was it mostly mix?
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Allan MacDonald, Canadian Tire Corporation, Limited - COO, Canadian Tire [9]
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Hey, Derek; it's Allan here from CTR. In terms of the promotional work we are doing, it's really a little bit of both. We've been putting a lot of focus on revamping our assortment to make sure that we are really cognizant of where reg opportunities lie. We are seeing great traction there.
And we are looking at improving the effectiveness of our promo. So it's not just about the volume of promo, but it's how effective it is.
When you are in a cost-conscious environment, you are always trying to make sure that you are maximizing your investment in promo, so that if you have loss leaders they are very, very effective and whether or not you are trying to eliminate them. So from our standpoint really I would say it is a bit of both. We are improving the effectiveness of our promo, but we are also improving the effectiveness of our ability to sell it right.
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Derek Dley, Canaccord Genuity - Analyst [10]
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Okay, that's great. Then just following up on that, can you just give us an update on how the digital strategy is progressing at Sport Chek?
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Chad McKinnon, Canadian Tire Corporation, Limited - COO, FGL Sports [11]
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On the Sport Chek side, Derek -- it's Chad here -- we're moving along nicely on that. We'll continue to have -- Duncan and I have had lots of conversations. So we going to add more digital flyers this year than last year. We were highly successful last year.
The good news is we came up against our first comp digital flyer where we did double digits last year; did the same this year, so we are double-digit on top of double-digit. We continue to do innovative things with Facebook, and even testing some of the digital elements in our email to our fan base and even our e-comm.
Recently we did our first-ever Flash sale on e-comm, and we did 6 times what we would typically do on a one-day sale by buying for that and testing. So we are going to continue to test. We are going to continue to evolve, and all signs are very positive so far. And that will just dovetail with our work on our e-comm site.
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Derek Dley, Canaccord Genuity - Analyst [12]
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Thank you very much. Appreciate the color.
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Operator [13]
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Irene Nattel, RBC Capital Markets.
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Irene Nattel, RBC Capital Markets - Analyst [14]
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Thanks and good afternoon, everyone. Just wondering, if we look at CTR, in the MD&A you noted that sales of winter-related products were strong, but also the early spring in Western Canada had a positive impact. Just wondering whether there might be an element of borrowing some sales from Q2 into Q1, and how you are thinking about that.
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [15]
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Hi, Irene; thanks for your question. It's Michael. Yes, when you -- that's a great question. I will talk about it across all the banners; and then Allan and anyone else who wants to pipe in.
Really I don't think of weather as having a positive or a negative effect on us in Q1 at all. When we looked through all the numbers and we segmented them by banner and by geography, we didn't see it.
So while we were having a great cold January and February in Central Canada, it was unseasonably warm and without a lot of snow in Western Canada. And the real cold stayed on into March in Central and Eastern Canada, as you know, which would negatively affect you.
So when we looked at all the numbers together, we saw actually it didn't help us and it didn't hurt us. So I think that the sales and margins you are seeing are clean sales and margins, and I do not think that we borrowed from Q2 this year, as we might've done -- what was it, two or three years ago when we had that -- three years ago when we had that March that was so warm in Central Canada.
So I think we're on a very good seasonal pattern in terms of weather, which means it's up to us. We are not blaming the weather at this point.
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Irene Nattel, RBC Capital Markets - Analyst [16]
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That's great. That's really, really helpful. Then just if I might, a question on CTFS. In the commentary you noted that you are going to be more cautious as we move forward because of some of the uncertainty on the economic backdrop.
Is that really around just in terms of trying the acquisition of new accounts? Is it around closing open to buy and that sort of thing? Could you just provide a little color here, please?
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Mary Turner, Canadian Tire Corporation, Limited - COO, Canadian Tire Financial Services [17]
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Hi, Irene; it's Mary. Actually it's all of those things. I think what we are starting to do -- what we've already started to do is to be a bit more cautious with new accounts, a bit more cautious with our active customers, and also for folks who are inactive to curtail some of that risk. So I think that's all going to slow down our growth moderately, I would say.
But I think as we continue to monitor the situation and see what happens to the economy or get better clarity, we will know whether we need to get a bit tighter or whether we can relax back to more normal standards.
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Irene Nattel, RBC Capital Markets - Analyst [18]
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That's very helpful. Thank you.
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Operator [19]
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Jim Durran, Barclays.
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Jim Durran, Barclays Capital - Analyst [20]
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Yes. Partly wanted to follow up with Mary on the CTFS question. Is it that you are not seeing any real lift in Ontario and Quebec, while you are seeing some slowing in Alberta, that's causing you to take this stance?
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Mary Turner, Canadian Tire Corporation, Limited - COO, Canadian Tire Financial Services [21]
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Sorry, lift in write-offs or aging, Jim, is that what you mean?
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Jim Durran, Barclays Capital - Analyst [22]
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Yes, yes. I mean, it would be obviously risk and also just natural growth.
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Mary Turner, Canadian Tire Corporation, Limited - COO, Canadian Tire Financial Services [23]
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So I -- while we very much look at geography, it's a hard thing to be black-and-white about. Because even though Alberta obviously is having difficulties, it's starting from a strong place.
So what we are not doing is doing blank-outs of regional areas because of concerns about the economy. What we're really doing is fine-tuning our models and our tactics and our processes to try to be just a little less aggressive or a bit more conservative when we decide to say yes or no to a new or an existing customer.
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Jim Durran, Barclays Capital - Analyst [24]
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Okay, that's helpful. I guess, Michael, just on the newer Sport Chek stores, can you give us some idea how they are trending to your expected plan?
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [25]
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Sure. I'm going to ask Chad to answer it, if that's okay with you, because he is even closer to those than I am at this point.
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Chad McKinnon, Canadian Tire Corporation, Limited - COO, FGL Sports [26]
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And are you talking about our general real estate, or our flagships, Jim?
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Jim Durran, Barclays Capital - Analyst [27]
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Well, let's focus on flagship.
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Chad McKinnon, Canadian Tire Corporation, Limited - COO, FGL Sports [28]
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Yes, very encouraging. Like you said, the West Ed store set a new record for us in sales. We doubled our previous highest volume store.
We are comp year to date, and that's up against a CAD2 million pickup in 10 days last year with grand opening. So we are very happy there.
Even more excited about Metropolis. This is an interesting one: we didn't add any space. So in the same space we're up 58% year to date in there. So we are extremely excited.
We took out the outdoor business, converted it to all athletics, same space; and we're getting that type of productivity. So very excited in the two flagships and very excited now about opening two in the GTA in the fall.
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Jim Durran, Barclays Capital - Analyst [29]
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Great. Then last question and this is probably going to become my regular quarterly question. It's just on the ecommerce side, what kind of contribution are we seeing on the various banners -- I guess right now mostly Forzani, much less Canadian Tire -- in terms of ecommerce purchases into the comp store sales results?
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [30]
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It's Michael, I'll take that. Right now we are seeing, obviously, great increases across all of our banners on a percentage basis. It is off a small base; you're right. Sport Chek is off a slightly bigger base, but nowhere close to the base we're going to have.
So sure, it helps I guess on the very, very margin. But what you are seeing are bricks-and-mortar comps out of us at this point. Soon we would like you to see bricks-and-mortar plus e-comm/omnichannel comps from us.
So this is old school, hard work comps and we don't have ecommerce working for us yet to boost our comps.
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Jim Durran, Barclays Capital - Analyst [31]
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Okay. Then Dean, last question just -- the other income line was up quite substantially year-over-year and I know it's not something we can really accurately forecast. Is there anything extraordinary in that line item? And should we be aware of that for the full year, or do you expect things to normalize?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [32]
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I think, Jim, you've got to look at it as it's partly because it's such a small quarter, as you know, right? And it shows up in that Retail segment, so it kind of looks wacky.
But the reality is that what's in there is -- you have a little bit of a hit from a year ago in terms of disposing of property; and a little bit of a pickup in terms of disposing of property. And one was -- last year I think it was a small loss; this year it's a small gain.
But you put them together and they end up being a little more substantial than -- and particularly in a small quarter when it shows up in that Retail segment. But the answer to your question, in terms of over the course of a year, it's like I am not expecting any wild fluctuations there, unless of course we take an action to, say, move a redundant property and do it not to the REIT. You know what I mean?
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Jim Durran, Barclays Capital - Analyst [33]
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Yes.
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [34]
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Choose to sell it externally. But we'd talk about that. These were small, inconsequential things, but it was really a function of one set of signs going one way and one set of signs going the other way this year.
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Jim Durran, Barclays Capital - Analyst [35]
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Great. Thank you.
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Operator [36]
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Kenric Tyghe, Raymond James.
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Kenric Tyghe, Raymond James & Associates, Inc. - Analyst [37]
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Thank you; good afternoon. Michael, could you just highlight for us the performance of your Pro shops, and I think specifically how that performance is impacting your thinking with respect to the footprint and to the concept?
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [38]
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Yes. I mean, we are really, really pleased with the Pro shops. I think it's some of the best pace we've got in our stores going right now and has been for some time. Allan, why don't you give a little bit more color?
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Allan MacDonald, Canadian Tire Corporation, Limited - COO, Canadian Tire [39]
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Yes. I think the Pro shop for us is really manifestation of bringing to life specialization in some key categories more resonating with our target customers in various target markets -- whether it be living, hunting, fishing, some of the specialization in automotive we've done, and some that we have in the works. I think really another way to think about it is looking at the productivity of the space, looking at the particular needs of the market, and optimizing that.
We're going to continue to do that in the categories we're in today in terms of continuing to roll them out, and some categories we're thinking about for the future. So for us it's business as usual in that it's upping our game in terms of our Retail merchandise.
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Kenric Tyghe, Raymond James & Associates, Inc. - Analyst [40]
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Thank you. Maybe just staying on the sporting goods market or question, looking into your broader sporting goods business, are there any categories in quarter that you would highlight as either performing particularly well or that you are particularly excited about?
You obviously flagged there are opportunities you are looking at, and I know better than to try to push you too hard on that. But if you could just give us some color on where the wins were perhaps in quarter by category, or what you are most excited about within the sporting goods market currently.
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [41]
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Let's go to Chad first and then over to Allan, because it's across those divisions.
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Chad McKinnon, Canadian Tire Corporation, Limited - COO, FGL Sports [42]
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Yes. Michael talked about it earlier. We had this advantage of 188 stores across Canada that the weather didn't impact us. But we did move in the West -- where we made the decision to move up our seasonal changeover, and we flipped our stores earlier and had extremely strong team sports business.
So our baseball and soccer was up 30%; our cleated core was up 27%. Bikes, phenomenal start up, 44% this season, driven primarily in the West. Casual clothing up 12% and sandals up 37%. So we are getting a good kick on spring.
We are still very excited and bullish about tech accessories and wearables. It continues to be on fire, up 52% in the wearables technology for the quarter, so that continues to grow for us.
Then we also launched an initiative on training, which is one of our famous businesses and core and fundamental to all sports, where we launched our All Sweat Is Equal ad. We were up 17% in athletic apparel, which is a big dominant category for us and great margins; and 14% in training footwear. So we had very good success in some of our core fundamental businesses as well.
I will let Allan speak to CTR.
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Allan MacDonald, Canadian Tire Corporation, Limited - COO, Canadian Tire [43]
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Yes, Kenric, I think from our standpoint, we've been doing a lot of work to revamp, in our vernacular, our playing category, which is effectively sporting categories but also includes some more nontraditional ones like hunting, fishing and camping. What we saw in Q1 was a lot of the work we've done really take hold.
Hockey performed really well for us, as we augmented our assortments, being a little bit more relevant to our target market. We saw strong performance in outdoor, which is really encouraging, and early signs in categories that are leaning into the spring -- like bicycles performed well.
I think from our standpoint, the big step forward with the playing category is that we've become a lot sharper with our assortments and much more purposeful or intentional when it comes to things like accessories and how we broaden out Good, Better, and Best. Customers are providing us very good signs of engagement in Q1, and we are really encouraged with where we are at this point.
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Kenric Tyghe, Raymond James & Associates, Inc. - Analyst [44]
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Great color. Thanks very much. I'll leave it there.
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Operator [45]
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Mark Petrie, CIBC.
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Mark Petrie, CIBC World Markets - Analyst [46]
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Hey, good afternoon. I wanted to come back to the gross margin in CTR or in the Retail businesses, and particularly the reg/promo balance. Do you feel like that's a structural change in the business? And how far along in the process are you in terms of doing a better job on managing that balance?
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Allan MacDonald, Canadian Tire Corporation, Limited - COO, Canadian Tire [47]
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You know, I think whenever it works to your favor it's structural; and whenever it works against you it's circumstantial. Hey Mark; It's Allan.
Yes, you know, it's structural and that has been very intentional that we are trying to strengthen our reg offering and make our products stand on their own merit. But coupled with that we're trying to get a lot more considered and a lot more focused when it comes to investing in promo.
How far along are we is a great question; it's one that we ask ourselves. I mean we are going to continue to optimize quarter after quarter after quarter as best we can.
Some of that will be really down to how effective we are at executing, and some will be down to how receptive the customers are to us getting that balance a little differently than it is today. So in terms of -- we're going to continue to be a high-low retailer, of course. We are really excited about the effectiveness of our promotional activity. But we are also along with that very pleased with the response we are getting on our reg offering as well.
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Mark Petrie, CIBC World Markets - Analyst [48]
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And does this effort focus more on the everyday product or does it carry on into seasonal as well?
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Allan MacDonald, Canadian Tire Corporation, Limited - COO, Canadian Tire [49]
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Well, it's a bit of both. In terms of the everyday product, we've launched some new products, as you might have seen, the Frank brand; we think we've strengthened our offering, and that's something that's a traffic-driving product; it's a household consumable we are really pleased with.
And then it's hard for Canadian Tire to do anything meaningful that doesn't include the seasonal assortment as well, just because of our five categories and our seven seasons that we work towards internally. So you are seeing it, quite honestly, in both places.
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Mark Petrie, CIBC World Markets - Analyst [50]
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Does it impact the Dealers at all, or have they reacted to this?
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Allan MacDonald, Canadian Tire Corporation, Limited - COO, Canadian Tire [51]
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I'm not -- how do you mean? In what sense?
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Mark Petrie, CIBC World Markets - Analyst [52]
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Well, I guess as you are balancing that reg/promo and you're potentially shifting the types of products that you are promoting and how deep you are promoting, did the Dealers offer you any feedback on that?
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Allan MacDonald, Canadian Tire Corporation, Limited - COO, Canadian Tire [53]
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No, no, no. It's pretty much business as usual in terms of our model. It's going very, very well.
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Mark Petrie, CIBC World Markets - Analyst [54]
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Okay, thanks. Then just in terms of the sites from Target, I know you can't really comment on it; but in terms of the 12 sites that would be left over or with CTR moved out of, how many of those are owned, in the REIT or out of the REIT? And would some of them be repurposed to other Canadian Tire banners?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [55]
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That's still a bit in flux, Mark, but -- I can't remember the exact numbers. But I think eight of them are owned, if I am not mistaken, and -- no, nine of them are owned, sorry. Hand signals being waved here.
So as we move those nine stores to new sites or relocate to new sites, then we will have to determine what we do with the so-called redundant properties. And that may well create opportunities for the REIT; I expect it will.
But we haven't worked through all the mechanics as to exactly what banners would go in. I think it's more likely they would be developed for some other purpose than some of our existing banners. But that's not a firm statement at this stage.
Then there's another couple of sites that I think are existing leases, that we're moving out of an existing lease to the new site. And then there is one other which I can't remember exactly what the deal is there. Does that help?
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Mark Petrie, CIBC World Markets - Analyst [56]
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Yes, yes, that's fine. Thanks. And then, sorry, just on CTFS, I just wanted to be -- or just wanted to clarify. As you commented that you expect this rate of earnings growth is unsustainable, but the predominant driver of that is going to be slower revenue growth -- is that what you're saying?
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Mary Turner, Canadian Tire Corporation, Limited - COO, Canadian Tire Financial Services [57]
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I'm just trying to think how to say this simply. I think the -- you will notice if you look back the last couple years, our quarters are quite lumpy. So we'll have a year-over-year quarter where we will be up 30%, and then the next quarter we might be flat.
So we've had very strong growth on an annual basis, but it tends to come in chunks. There's a number of reasons for that, a lot of it when we acquire new customers. A number of reasons.
So I think we are signaling that if I am up 22% I can't necessarily deliver that every quarter. We expect to have decent growth in earnings on an annual basis, but I am also signaling or telling you that I have become more cautious because of the uncertainty in the economy, and that's going to suppress GAAR growth.
GAAR growth has been around 7% for over two years, which is well above the industry. And we are just -- just until we understand better the direction of the economy, we decided to be a bit more cautious.
We are cautious in a number of areas, but probably in particular on the new account acquisition front. So you will see those in the numbers going forward, a bit less GAAR growth and a slower growth of new account acquisitions.
I should also say we are lapping -- we introduced instant credit about a year ago which gave some real momentum to our new account acquisition. It is still working very, very well; but that was a bit of a one-time lift.
So I am lapping over those very strong numbers from a year ago. So you will also, I think, see the impact of that.
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Mark Petrie, CIBC World Markets - Analyst [58]
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Okay. Much appreciated.
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Operator [59]
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Keith Howlett, Desjardins Securities.
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Keith Howlett, Desjardins Securities - Analyst [60]
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Yes, I just wanted to firstly start on inventory. The inventory has been up the last few quarters; I think it's up about 12.6% this quarter over a year ago.
Is this a new baseline of inventory to better serve customers? Or is it still temporal?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [61]
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Keith, I mean, the business guys want to jump in here, I think the reality is it's a bit higher but -- and I think there is a structural increase here, right? But I know in the Mark's business that Rick and the team have put more inventory in the stores, and that's a function of some of the initiatives that the guys are chasing around branded products and so on. So there is a bit of a lift there.
On the FGL side, I would say it's just volume, right? You've been watching the numbers there. It's simply a function of -- I would put down to the growth in the business.
On the CTR side, I think the team there has moved up, as Allan alluded to, moved up in terms of reg and the Good, Better, Best; and basically taking up, if you will, the value equation to some extent in terms of the inventory that's on hand. But if you look at units versus just the dollar value, it's not as much a factor of the units as it is the dollar value.
I'd just reiterate that we watch inventory very carefully in terms of the quality of inventory, and we are exceptionally pleased with the quality of the inventory. It's just getting better and better, quite frankly, from our perspective. And nice comps help a lot.
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Keith Howlett, Desjardins Securities - Analyst [62]
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And just -- I know it goes up and down a bit each quarter, but the personnel expenses were up about 5.4% year-over-year. Is that -- do you think that is unusually high for any particular reason, or about where it will --?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [63]
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No, Keith, and this is where this quarter is really challenging because of the size of it, because I think it makes the numbers look quite wonky; and you've also got the Petroleum effect in here, right, year-over-year as a percentage of revenue. There is a lot of wonky in there.
But we are obviously watching our OpEx ratio very carefully around this place, just with the productivity work that we are doing. And I can tell you categorically that relative to what even our plan was we did better in terms of the absolute dollars we spent, number one.
Number two, the rate of growth in the OpEx ratio was less than it is historic. It's hard to trick it all out of the numbers from the perspective of Petroleum moving around and things like that. But the way we are watching it, very pleased with it.
Our objective, obviously, is to drive that ratio down as a percentage of revenue over the course of the year, and we are firmly on target to be able to do that. We said we were going to do that when we were together at Investor Day and feel very strongly about that.
Then specifically with respect to the personnel, I can tell you it is just simply a function year-over-year. It traditionally does go up and it's a function of the fact that we have a larger Corporate store system than we did a year ago, just with the addition of stores and so on. So there is an element of that that is just structural that just happens.
And then the second part of it is the activity level in the place is rising. Particularly in the IT area, but that's all planned and all part of what we anticipated, if you will, going into the year, with a plan to drive down the overall OpEx ratio over the course of the year.
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Keith Howlett, Desjardins Securities - Analyst [64]
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Then just on the marketing expense, it's pretty much flat; and last Q1 was elevated with I guess the Olympic programs. Is marketing expenditure for the year likely to be up or flat? Or how are you looking at that?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [65]
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I think as a percentage of revenue, I am not anticipating that it's going to go up. I am looking at the marketers in the room, and I keep telling them I have never cut a marketing dollar in my life as long as they deliver the top line, which they did in this quarter.
I expected somebody to ask why it was flat quarter-over-quarter when we had the Olympics a year ago versus this year. I get asked that quite a lot. The reality is, though, the teams did some really innovative incremental stuff in terms of the All Sweat Is Equal on the FGL side you heard from Chad, the Everything Jeans campaign. And those drove some great top line.
There is also a bit of timing in there, Keith. I hate to use accounting madness, but there is a bit of a timing in there where you pre-shoot some stuff for the balance of the year and the accounting as such that we have to pick it up in the first quarter.
But if you looked at it apples and apples, it would be down, but not down the full value of what we spent on the Olympics a year ago, because of some of those incremental programs. But the timing -- if I hadn't had the timing effect that's pulling some things forward that the guys will execute later in the year, it would have been a bit down year-over-year.
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Keith Howlett, Desjardins Securities - Analyst [66]
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Then just finally on the foreign exchange impact, which I know is a bit probably quite complicated. But is it -- you hedge when you place a purchase order. So is it the open to buy that affects Mark's during a particular quarter?
In other words, the things that they adjusted as the quarter went on. Or in other words, why is the FX not pushed out a bit if it's hedged, so to speak?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [67]
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Yes, you're right, it's complicated -- and I hate using that word to describe things. But in the end, the Mark's business has such a high percentage of its business that it's acquiring in US dollars, number one.
Number two, if the business -- with our hedging strategy, which I am not going to divulge all aspects of it. But with our hedging strategy, if the team drive incremental sales because we are hedging quite far out, they drive incremental sales and therefore that creates incremental purchases, that can have an effect, right? Because you aren't as highly hedged as you might have been otherwise.
So that I would tell you was a factor in Mark's in Q1. And just year-over-year, they are more susceptible to it.
So hedged or not, we are paying more for US dollars than we were a year ago, right? We were hedging a year ago; we are hedging this quarter as well. So the absolute dollars, if you will, that you're paying in US dollars year-over-year is going to be higher, simply because the hedges we put on some time ago, come to fruition in Q1 this year, are more expensive than the ones that we put on a year ago and prior.
So I don't know if that is making any sense. This is why it's complex, but once you get into it you can make yourself crazy. But we're watching it and so far the results have been pretty good.
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Keith Howlett, Desjardins Securities - Analyst [68]
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Thanks. I'm crazy enough as it is. Just in terms of the tools and home-improvement category, I know that is one you are working on. Can you just update us how that is going and what you are doing?
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Allan MacDonald, Canadian Tire Corporation, Limited - COO, Canadian Tire [69]
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Yes, Keith; it's Allan. We were really pleased with the quarter. Overall, the performance isn't quite where we want it to be, but we saw encouraging signs.
It's really the tale of two categories there. Categories that are very static but make great margin contribution.
There is another half of the equation that is very elastic and very prone to promo pressures and competitive pressures in the market. The work we are doing tackling the more difficult aspects of the category is actually very encouraging and paying off.
And the other is much more within our control needed to fix. So I would say generally speaking -- and I know it's a bit of a leap of faith -- but we are seeing an improvement in that business that we are very encouraged in. And the work over the last year is paying off for us.
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Keith Howlett, Desjardins Securities - Analyst [70]
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Thank you.
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Operator [71]
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Patricia Baker, Scotiabank.
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Patricia Baker, Scotiabank - Analyst [72]
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Thank you very much. I have two very quick questions. First of all, If I could address my first question to you, Dean, Canada's CFO of the Year 2015. (laughter)
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [73]
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Yes, yes, yes. We're running out of time, Patricia.
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Patricia Baker, Scotiabank - Analyst [74]
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You always say that, Dean. At the Investor Day, when you gave your presentation and you talked about a lot of the initiatives that you were going to be charged with, but basically really came down to you were almost going to be Captain Productivity for the Company. Can you talk about what's -- how much progress you've made, what you are pleased with, and what we can look forward to, the next 12 to 18 months, on that front?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [75]
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Yes. Well, we are making progress is the first statement I'd make. Obviously, I think you are aware, we've got Lisa Greatrix as point on this initiative, which is very, very good for me in terms of, quote, being Captain Productivity.
But we had three buckets that we were chasing: the non-merch category, in other words, working with our suppliers to get greater value, and I would say we're making great progress with that and we are going to see discernible benefits in 2015 that will filter in. And we are already starting to see that and very encouraged about that.
On the, if you will, for lack of a better word, the overhead side of things, we've got all the businesses stepping up doing some very, very good work in terms of looking for ways to make our processes more efficient from a back-office point of view, and already very good strides being made there with some early results that we are going to see early this year with a number of initiatives like -- a number of initiatives underway in terms of looking at other areas of the Company, so -- and good engagement with respect to that.
Then the third bucket, which was the biggest bucket, was more around -- I described it as the processes that follow product from the moment it's made right through to where it shows up at the customer's door. That one is more complex, it's going to take more time.
We've got, I would say, an infrastructure in place and resource in place now with great engagement, particularly from -- I will throw a rose to Allan here, because I need him -- in terms of engagement in his business and his team in terms of looking at CTR and charging forward with some of those cost initiatives. So I think -- and then an overall exercise at visibility to where cost comes from in our organization, and we've really started down that road.
So I am very pleased about it, and I will ask my boss to chip in here. But I am very pleased with the progress that we are making. And as I said right from the beginning, we want to show you on this as opposed to just talk about it; but it's got to show up in the numbers.
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [76]
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Yes, I mean I am never completely pleased with it, but
--
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [77]
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I'm aware of that.
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [78]
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I think we are making good progress. We don't talk about it a lot because we just think this is the way you've got to operate your business. But the tone at the top internally is -- and we talk about it a lot internally. So you shouldn't mistake our -- the fact that we don't want to talk about it, we want to show you these numbers, as a feeling that we are not making progress or that we are not committed.
We are absolutely committed to getting these, and we're going to do it in the right way, and we are starting to get them now. So you will see that come out. Some of them, as Dean said, take a little longer, and some you just go get.
So that -- the team is really doing a good job. And Lisa now in there a few months is leading it very well.
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Patricia Baker, Scotiabank - Analyst [79]
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Tremendous. No, that's very helpful. I'm assuming that with good top-line momentum when you're going after people to look at costs a lot differently, that that momentum that we are seeing in the top line makes it a lot easier for Dean and Lisa to get people to pay attention to the cost side.
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [80]
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Absolutely. Yes; I know that people are easier to talk to when they are in a good mood.
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Patricia Baker, Scotiabank - Analyst [81]
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Just my second question is for Allan; it's just a small one, but I think it's been a while, you've gone through a few seasons now or a few different seasons with the showroom. What have you learned from that experiment, Allan? Is there good learnings from that, that you're going to be able to take back to the rest of the business?
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Allan MacDonald, Canadian Tire Corporation, Limited - COO, Canadian Tire [82]
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Hey, Patricia. Yes, I mean we are really -- the showroom for us is I think we would have articulated this at the beginning, it's a way for us to look at bringing some new merchandising strategies to light and testing some new categories or presenting categories in a different way. And part of the growth that you are seeing is us taking those learnings and sharing them with the rest of the network.
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Patricia Baker, Scotiabank - Analyst [83]
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Okay.
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Allan MacDonald, Canadian Tire Corporation, Limited - COO, Canadian Tire [84]
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We are thinking about our product composition, our category compositions a little differently, between big-ticket discretionary and how we can better leverage accessories and other high-margin, high-turn products that are associated with it - patching, rings, things like that.
I think as you see some of our new stores come online and some of our refreshed stores, you're going to see us incorporating a variation of the merchandising that is somewhere between the showroom and what we have today. So to be honest, I don't really have anything to criticize about in terms of the showroom.
You won't see exactly that but you will see a variation of it. I think probably the best example will be the store we're about to open in South Edmonton Common where we are actually -- I don't want to ruin the surprise here, but we've incorporated the showroom strategy in a category-by-category way throughout that store. It's going to be pretty impressive, in my view.
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Patricia Baker, Scotiabank - Analyst [85]
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Okay, excellent. Can you remind us when that one is set to open?
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Allan MacDonald, Canadian Tire Corporation, Limited - COO, Canadian Tire [86]
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Well, we don't -- we are not announcing the date publicly yet; but look for late May, early June.
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [87]
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Yes, we're not trying to be cagey; it's just that we don't open the doors until we really (multiple speakers)
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Patricia Baker, Scotiabank - Analyst [88]
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Until you think it's perfect. No, I get that.
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [89]
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Well, perfect is a high standard, but we try for it.
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Patricia Baker, Scotiabank - Analyst [90]
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Okay. Thanks a lot, guys.
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Operator [91]
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As there are no further questions at this time I will turn the call over to Michael Medline, President and CEO, for any closing remarks.
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [92]
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Thanks. I think those of you who were at the AGM or listened in have heard enough from me today. So thank you very much for your time and for tuning in; and as always our Investor Relations team or any of us are here for you if you have any further questions or comments. Thank you.
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Operator [93]
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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 the Canadian Tire Corporation, Limited, Investor Relations website for 12 months.
Please contact Lisa Greatrix or any member of the IR team if there are any follow-up questions regarding today's call or the materials provided. This concludes today's conference call. You may now disconnect.
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