Q3 2015 Canadian Tire Corporation Ltd Earnings Call

Nov 12, 2015 AM EST
CTC.A.TO - Canadian Tire Corporation Ltd
Q3 2015 Canadian Tire Corporation Ltd Earnings Call
Nov 12, 2015 / 06:00PM GMT 

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Corporate Participants
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   *  Michael Medline
      Canadian Tire Corporation, Limited - President and CEO
   *  Dean McCann
      Canadian Tire Corporation, Limited - EVP and CFO
   *  Allan MacDonald
      Canadian Tire Corporation, Limited - COO, Canadian Tire
   *  Rick White
      Canadian Tire Corporation, Limited - COO, Mark's
   *  Mary Turner
      Canadian Tire Corporation, Limited - COO, Canadian Tire Financial Services

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Conference Call Participants
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   *  Irene Nattel
      RBC Capital Markets - Analyst
   *  Peter Sklar
      BMO Capital Markets - Analyst
   *  Kenric Tyghe
      Raymond James & Associates, Inc. - Analyst
   *  Mark Petrie
      CIBC World Markets - Analyst
   *  Brian Morrison
      TD Securities - Analyst
   *  Jim Durran
      Barclays Capital - Analyst
   *  Chris Li
      BofA Merrill Lynch - 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 Angel, and I will be your conference operator today. At this time I would like to welcome everyone to the Canadian Tire Corporation Limited third-quarter results conference call. (Operator Instructions)

 Earlier today, Canadian Tire Corporation Limited released their financial results for the third 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 applies to the discussions during today's conference call.

 I will now turn the call over to Michael Medline, President and CEO. Please go ahead, sir.

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 Michael Medline,  Canadian Tire Corporation, Limited - President and CEO   [2]
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 Thank you. Good afternoon and thanks for joining us. You've heard me say that the fundamentals of our businesses have improved over the last few years, and you can see it in the numbers that we hit this quarter. And I really like how we were starting to stack our comps at Canadian Tire and FGL with this being our third consecutive Q3 where we have posted solid same-store sales growth in those businesses.

 Over the past year, I have given you my assessment of our retail businesses by walking through four criteria. While I still look at these areas, I'm going to change up my comments starting today and provide you with some new perspectives. I spoke last quarter about the great work that we were doing to improve our bottom line through productivity initiatives across our retail businesses and by taking a hard look at our SG&A.

 We really saw that come through this quarter with our earnings results. And I'm encouraged with the momentum we are seeing to reduce costs and improve efficiencies across this Company.

 I continue to have tremendous confidence in the execution that we are seeing across the board in all of our businesses. At FGL, we are four years into a five-year strategic plan, and FGL has executed on every single aspect of that plan. The results are strong, and we still see unlimited runway for this business.

 Our Mark's business, which was coming up against strong comps last year, is being hurt by FX and the Alberta economy, and this is having a significant impact on our high-margin industrial business. Despite that, Mark's is executing on their strategic plan, and the business is managing very well through this period of rapid change. When the cycle does shift, Mark's will come back and will be even stronger than it was before.

 Financial services continues to put up solid results, and as you'll remember, they were up against strong IBT growth of 23% last year. But today, I want to focus on Canadian Tire and why I have more confidence in the business today than I might have had even a year or so ago.

 The consistent numbers Canadian Tire continues to put on the board highlight the momentum we're seeing. We posted 3.4% comp store sales growth this quarter, and that was on top of 3.2% comps last year. And that growth came from all our divisions which we like to see, but I'll take a second to recognize the contribution from our automotive division, which saw solid results in tires and in auto service. There's so much that has been going well behind the scenes to get the kind of top and bottom line performance we are seeing at our largest division.

 People always want to know the one or two things that we are doing to revolutionize the business, but those who know retail well know that it's not and never has been just one or two things. There are so many aspects of the business that have to be strong. It really comes down to good execution, the hundreds of things that we are doing right and the strong team and processes we have in place.

 With that said, there are three areas out of the dozens I could cite that I want to highlight today, which I hope will give you a better sense of what is contributing to the great results and momentum we are seeing in the Canadian Tire business.

 First, let's look at the top line. The success we are seeing here really comes down to how our customers view our brand. Over the last few years, our advertising has exemplified life in Canada. And we have focused our products, marketing and store experience to reach a new younger demographic, the active family, that is responding very positively to our efforts.

 We also launched our Tested for Life in Canada initiative where we have 15,000 Canadians, our customers. We have given the responsibility of testing over 4500 of our products to date; they are giving us their uncensored feedback on the quality of the products and their experiences using them. We take this feedback very seriously, and as a result of our renewed focus on quality, we have reduced the number of customer negative quality perceptions by one third and have improved the product defect rate compared to last year. This program is engaging our customers like never before, and we are making great strides in understanding the needs of Canadians.

 We've also gone through a transformation of our assortments. We have launched new national brands, new private label brands and improved the quality, value and range of choices for our customers. For example, one of our top-performing businesses this quarter was camping, and we know that is largely due to the positive customer response we are seeing towards our woods and outbound product offering. These are brands that we own, and in both cases we have improved product quality, style and design and, therefore, are able to command higher prices for the products we offer.

 Second, I'll turn to the bottom line. While the economy and weather and a variety of uncontrollable factors will always impact our results, the underlying execution I'm seeing across every area of CTR does not compare to anything I have seen before. How are we doing it? We are challenging all aspects of the business. We are using data to guide the profitability of our business through analyzing our buying, sourcing, marketing and pricing processes.

 You have heard us talk about the great work that our merchants have been doing to manage our margin performance by working with our vendors on sourcing costs, making changes to our product mix and analyzing and managing our promotions to name a few. In fact, we fully offset the FX headwinds that we were facing this quarter and last quarter as well. So the fundamentals are there.

 And finally, we're making investments now for the future. You've heard me say that digital disruption is all around us. Nothing is exempt today's world, and there is a lot of complexity involved in creating and bringing innovative digital technology to our stores and to our customers.

 In a lot of cases, it's uncharted territory for us, and we've been laser focused on honing our expertise and finding ways to better manage our processes. The best example of this is perhaps the Edmonton showcase store that we launched earlier this year. It has been a top-performing store across the network since we opened, so clearly the benefits of that work are coming through and we will continue to learn from this as we launch new technologies such as mobile apps and find new ways to bring a more digital experience to our customers.

 And, of course, what we are doing today at Canadian Tire would not be possible if our dealers were not on board. Because it is our dealers who are driving our in-store business and delivering a hyper local experience to customers in communities across Canada. You have heard me say that our relationship has never been stronger, and you can see the proof of that in the work that we were doing in-store and, of course, the results that we are generating in our quarters.

 As you probably can tell, I'm pleased with how our core Canadian Tire banner is performing, but I don't want to leave you with the impression that everything is perfect because it is not. And you know I like to give a balanced view of our performance.

 For example, we're making great strides in e-commerce across all of our businesses, and you've heard me say that we are not yet where we need to be. But over the past three years, we've been putting in place the necessary infrastructure and talent to be a world-class e-commerce organization and we are starting to see the fruits of that labor.

 Today we hear a lot about the innovation happening in e-commerce, and already our efforts online are helping to drive our current sales momentum. But one of the least acknowledged benefits of online innovation is its usefulness in helping better serve customers in store.

 Earlier this week we opened our first Sports Experts flagship store at Carrefour Laval in Quebec, and next week we are opening two FGL Sports flagship stores in the Yorkdale and Square One shopping centers in the GTA. These stores have an important role to play in making a statement for our brand and creating that deep emotional connection with our customers. And we know that it is these loyal customers who visit our stores more often and generate higher basket sizes which ultimately drives our sales.

 So we are bringing our in-store customer experience closer to being real-time with extended aisle capabilities. We have installed in-store e-commerce stations at our Maple Leaf Square concept store where customers can complete their transaction, even if we do not have the specific color or size in store that they are looking for. And they will do it online while standing in the store, allowing them to leave feeling satisfied with their experience and with the assurance that the exact product they wanted will soon be arriving at their home. We see this as the next step in our digital evolution and another way that we can enhance our connection with customers in store.

 We also see it as a key differentiator that will help us drive comp sales growth today and into the future.

 I've talked a lot today about the great execution that we are seeing at Canadian Tire, but before I turn the call over to Dean, I want to reiterate how pleased I am with the quarter's performance and the strength I'm seeing in the retail fundamentals across all of our businesses. Now, we just need a little cold and snow; we like that. Dean?

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 Dean McCann,  Canadian Tire Corporation, Limited - EVP and CFO   [3]
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 Thanks, Michael, and good afternoon, everyone. Before I discuss our performance for this quarter, I'll touch on a couple of announcements that we made earlier today which support our balanced approach to capital allocation.

 First, we increased our annual dividend 9.5% from CAD2.10 to CAD2.30, in line with our dividend policy of paying out 25% to 30% of the prior year's normalized earnings.

 This is the sixth time in the last five years that we've increased our dividend.

 We also announced our attention to buy back CAD550 million of our Class A non-voting shares by the end of 2016. In today's announcement -- or including today's announcement, our buyback program will reach over CAD1.3 billion of our shares since 2013.

 Now moving to the quarter, our Q3 results are largely a retail-driven story, so my comments today will be centered around a few key areas. Topline results were strong this quarter with retail revenue up 2% or 5.9% excluding petroleum. Retail gross margin rate was up 89 basis points, which included a very strong margin performance by petroleum. Excluding petroleum's results, overall retail gross margin was down to 33 basis points, which is entirely attributable to Mark's owing to the impacts highlighted in our previous quarter. FX and Alberta and the resulting shift in sales mix away from higher-margin industrial products.

 Backing up Mark's, our retail margin actually expanded in the quarter on exceptional performance by Canadian Tire who continued to embrace initiatives that today are more than offsetting the effects of higher FX costs, net of the benefits of our hedging program. We look forward to these efforts continuing going forward.

 You will note that other income was up significantly in the quarter, the result of a real estate pretax gain of CAD29.2 million from the sale of a surplus property sold to a third party. This was a unique situation for us and part of our continuous review of our real estate portfolio to identify opportunities to realize more surface value.

 In this case, the property is in an urban market where we already are well stored, and this particular property is more suited to residential use, hence was not a strategic fit for CT REIT. So we took advantage of a very hot real estate market to realize the optimal value for this property. We have many more opportunities like this one in the portfolio and will continue to identify the highest and best use for them going forward.

 Our operating expenses were once again well-managed during the quarter. Our consolidated OpEx ratio ex depreciation and amortization and ex petroleum as a percentage of revenue was down 86 basis points versus the prior year. So we made good progress this quarter. And year to date we are down 48 basis points.

 Financial services had another solid quarter, despite planned lower GAAR growth. And as Michael mentioned, they were up against a very strong result in Q3 last year.

 Our consolidated inventory position is higher year over year but continues to be very clean across all categories. The increase can be largely attributed to planned efforts to increase inventory positions at Pro Hockey Life and to support relaunch of our e-commerce website at Sport Chek, as well as new store openings coming up.

 In addition, Mark's has invested in inventory to support its new casual wear and casual footwear assortments. Third-quarter retail ROIC was up to 8.26%, up 63 basis points over Q3 2014, largely due to higher retail segment income before taxes, which also includes a boost from the real estate gain. But even if we back that out, we are still making progress on this metric.

 Compared to Q2 2015, the retail ROIC metric was up 20 basis points for the same reasons I just mentioned, as well as higher accounts payable to support increased inventory levels.

 Today we are reaffirming our guidance for the estimated 2015 effective tax rate of 27.5%, and our 2016 effective tax rate estimate for planning purposes will also remain at 27.5%.

 We remain on track to be at the lower end of our previously stated range for 2015 operating CapEx of CAD600 million to CAD625 million. Capital expenditures for additional DC capacity may come in below the low-end of our previously announced range of CAD175 million to CAD200 million for 2015 due to some planned costs that have shifted to 2016 related to the DC we are constructing in Bolton. That said, the project is on track and on budget, and we expect to be fully operational in 2017.

 Looking ahead, we forecast operating CapEx of CAD625 million to CAD650 million for 2016, primarily due to increased spending on the retail network expansion, including the costs to open 12 former Target locations in 2016, as well as the continuation of the FGL Sports growth strategy, as well as for continued investments in digital and technology initiatives, although at a somewhat slower pace than we've seen in the past few years.

 This range does not reflect spending for additional DC capacity which we expect will land in the range of CAD150 million to CAD175 million or for the Company's support of third-party acquisitions by CT REIT.

 Now finally I'll remind you of a couple of items that will impact our Q4 numbers. Q3 is the last quarter where our prior-year results reflect 100% of financial services business. So beginning in Q4, year-over-year comparisons will be aligned. And because of 2014 results included a 53rd week, our Q4 of 2015 numbers will reflect one less week of activity on a year-over-year basis.

 And with that, I'll turn things back over to the operator for the Q&A session. Operator?

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) Irene Nattel, RBC.

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 Irene Nattel,  RBC Capital Markets - Analyst   [2]
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 I was wondering if you could just give us some tangible examples of some of the SG&A and OpEx initiatives that you've put in place at Canadian Tire Retail and your assessments at this point around sustainability or perhaps whether there's more to come?

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 Dean McCann,  Canadian Tire Corporation, Limited - EVP and CFO   [3]
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 Irene, it's Dean. So there's a number of things that we have going on, but I'd characterize the overriding kind of opportunity as just a general sense in this place to put more rigor into the amount that we are spending on overhead. And that may sound kind of motherhood-ish, but the reality is across the executive team, there's a recognition that controlling overheads over the long-term to get more leverage out of this business is the right thing to be doing. So that's one.

 Two, then there is just a myriad of various things, everything from looking at how we purchase from in terms of like our non-merch procurement practices, having more rigor in those, doing more consolidation of suppliers, those types of things. There's nothing particularly sexy about it, but it's effective in terms of keeping a lid on overhead costs and keeping certainly a lid on any growth in them and, frankly, driving them down over time, which associated with revenue growth is going to give us nice leverage over the long-term in our view.

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 Irene Nattel,  RBC Capital Markets - Analyst   [4]
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 That's very helpful. Thank you. And in your assessment, if we were to use a baseball analogy, what inning do you think that we are in on these initiatives?

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 Dean McCann,  Canadian Tire Corporation, Limited - EVP and CFO   [5]
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 I know what you're trying to do to me. I think the reality is we like the trend that we are on here, and we've said all along here we are not going to overpromise. We're going to try to overdeliver. I think there will always be fluctuations in, if you will, that OpEx rate from quarter to quarter as decisions are made around levels of marketing and all those kinds of things.

 But I think in general, as we look forward, what we're really trying to do is increase that leverage rate. So I'd say we're still in the early stages of where we would like to be over the long-term, but we are definitely on the verge of a double here.

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 Michael Medline,  Canadian Tire Corporation, Limited - President and CEO   [6]
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 Irene, it's Michael. I think you have got to look across the different portions of the business. So I think CTR is because it had to and because it has really got its business going on is I think further ahead than anywhere else in terms of really taking costs out of the business and running the business even more efficiently, and you can see that.

 I would say in terms of the overhead that that's just behind CTR, but we are, as Dean just said, for the first time probably in our history, we are taking down much of our overhead costs, and now there's other places in the Company that we talked about in productivity, and there's other divisions that we're going to go at it in a smart way as well.

 So I think it's different timing in different areas but overall early innings, and we've got a lot more to do. But our starting pitcher looks pretty good.

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 Irene Nattel,  RBC Capital Markets - Analyst   [7]
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 That's great. Thank you. And just one more question if I might, more from the demand side. Could you talk about the cadence of demand as you went through Q3 and into Q4 on a regional basis and really how you are feeling about what we're likely to see in this key winter season, winter holiday season?

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 Michael Medline,  Canadian Tire Corporation, Limited - President and CEO   [8]
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 It's Michael. Great question. Let me talk about the regions for a second because I think -- I'm not sure people are getting it overall, and maybe they're not getting it for us. And let me preface my comments because this is going to sound a little harsh at some point by saying that we have two divisions and lots of friends. And I worked three years in Calgary.

 It is clear that Alberta is going through hard times right now, and I'm not the expert but I probably think there's a little bit more to come in Alberta before it starts to get better. So file that away and let me sound a little bit cold, which is at different points in a cycle, different regions do better than others. And I'll talk about the divisions in a second.

 What we are seeing in the province of Ontario through consumer behavior -- and also I think taking some market share but a lot of consumer behavior are extraordinary results out of Ontario that I haven't seen -- and I don't remember ever seeing.

 Quebec, which had been lagging, is doing very well. Not quite up to Ontario for what we're seeing across all our divisions, and I don't think anyone sees across as many divisions as we do. But Quebec is strong, and BC is booming. Taken together -- and put away the dollar for a second and we're going to park Mark's for a second -- for CTR and FGL -- and I wish Alberta was doing better, but the rest of Canada is more than making up for what's going on in Alberta.

 And just think about it. We have four provinces which generate the lion's share of our revenue and the lion's share of our profits, and you know which four they are. Three of them are doing better -- and this isn't just the last quarter; I'm talking about a number of quarters now in a row. Three are doing better. We have -- to be cold about it, we have more stores and more population in Ontario and especially in those three provinces than you see in the one province. I'd love to see Alberta better from a business and for personal reasons, but that will happen in due course. But the rest of Canada is doing that.

 So I think people are getting a little overwrought maybe, and when I hear what some of the other retailers are saying or how people are looking at other retailers and they may be seeing it about us, but just take into consideration, Alberta is going to be weak for a while. What we're seeing is great strength in other places.

 The only difference is from our great but smallest division in Mark's which is more hit by Alberta because it has a bigger portion of their business, and it has -- it's an industrial business which is being hurt by the oil sands. So it's a bit of a double whammy there.

 And Mark's is, as Dean has said, is having both sales and margin challenges, but it's our smallest division, and the other divisions we expect will be able to overcome that as we go forward in time.

 So, as we see it going through these quarters, we're seeing the exact same kind of behavior over quite a while now, right? And I expect to see that behavior for some time going forward. How much now is us stealing market share from others, and how much is consumer confidence? I think the numbers we're seeing in Ontario and Quebec and BC are showing some consumer confidence as well as our strength. So you can talk to other retailers as well.

 So it was long answer though to a very -- this is not an easy answer. It's not a recession where you go, oh yes, everybody is suffering. This is very different by retailer, by division and by province and where your business is. And right now as you saw from this quarter, okay, it turned out on the whole very well.

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 Irene Nattel,  RBC Capital Markets - Analyst   [9]
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 That's great. Thank you, Michael.

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Operator   [10]
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 Peter Sklar, BMO.

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 Peter Sklar,  BMO Capital Markets - Analyst   [11]
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 Thank you, Michael and Dean. Most of the comments you just made regarding cost savings initiatives at the Company, I got the sense that they more related to corporate overhead SG&A, but also you've made reference this quarter and the previous quarter as well that in terms of your cost of goods sold that you've been able to take quite a bit out of the cost structure to the effect that it actually offset the foreign exchange impact. So I'm just wondering if you could give some specific examples of what you're doing on your cogs to save costs?

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 Dean McCann,  Canadian Tire Corporation, Limited - EVP and CFO   [12]
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 So Peter, I don't want people to think that I was ignoring what's going on in cogs and margin because that is absolutely the most exciting thing going on with respect to the productivity initiative without question. So people are kind of focusing on the SG&A because we had a good solid performance there and that's great.

 The reality is the most exciting work is what Allan and his team are doing in terms of driving productivity to preserve margin, and you are absolutely right. In this quarter, Mark's aside -- and Mark's for the reasons Michael has talked about and I talked about in terms of the challenges there. But in terms of the CTR margin, we had positive margin growth this quarter. So margins were up, despite a significant variance year over year in the cost of foreign exchange, and that's only happening because of what Allan and team are doing in terms of driving productivity.

 You know there's a number of things that are going into that. I don't know, Allan, if you want to comment on a couple of them?

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 Allan MacDonald,  Canadian Tire Corporation, Limited - COO, Canadian Tire   [13]
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 Yes, I mean, hey, Peter, it's Allan. The team is doing a great job, and to be honest, you know retail is a SKU by SKU fight. We are looking at it from if you break down your procurement cycle, speaking in this case in terms of cogs management, you've got -- are we managing our vendors right in terms of how many vendors we have, and are we consolidating the buys? Are we consolidating our purchase order so that we're getting good clean run where -- are we optimizing production runs? Are we getting rid of vendors that have odd terms? Are we managing currency between the RMB and the Canadian dollar and the US dollar appropriately? You know are we managing our contracts well? Are we eliminating products that on a fully allocated basis aren't as profitable as they could be?

 And, you know, you go through this very methodically, and I think really the productivity component of that is less the decisions we're making in terms of each individual product and more the decisions we're making around changing the process across the organization so all of our buying teams are using this kind of analysis in making their decisions. And that's where we're really seeing it bear fruit.

 So it's SKU by SKU, but it's really just better buying from start to finish.

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 Peter Sklar,  BMO Capital Markets - Analyst   [14]
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 That's helpful. And in terms of your gross margin performance during the quarter at Canadian Tire, would there have also been some price in there, or are you still holding back on price increases?

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 Michael Medline,  Canadian Tire Corporation, Limited - President and CEO   [15]
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 Hi, it's Michael. No, as I said last quarter, we are trying not to pass price increases on -- which I know some retailers are now doing. We haven't had to so far, and we've had other ways to attack the business, which are more sustainable honestly.

 And so in our comps, there is little if no inflation in those comps, and we went all the way through it, and we went through the categories sometimes SKU by SKU to look at that. So there's no inflation in that.

 Now we'll have to continue as other retailers are doing, and some are choosing to raise prices across the board or as much as they can. We'll continue to look at that. We haven't had to do that yet, and I would like to take some market share if we can hold off doing that for a while.

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 Peter Sklar,  BMO Capital Markets - Analyst   [16]
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 Okay. And just my last question if I can just switch to the Financial Services business. Can you just give us an update on the backdrop? I know you have indicated that you have slowed your growth in receivables, but how is the portfolio performing in terms of write-off rates, et cetera?

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 Mary Turner,  Canadian Tire Corporation, Limited - COO, Canadian Tire Financial Services   [17]
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 Hi, Peter. It's Mary. So, as you know, we purposely slowed down our GAAR growth about a year ago, I guess a little less than that because of our concerns over the economy. And we did that primarily by tightening our requirements for new customers.

 So we are starting to carefully take our foot off the brake as we continue to see signs of improvement in the economy, but I think it's going to be a couple of quarters at least I would think before you're going to see return to levels that we've been delivering in recent years.

 On the write-off rate, let me just say that there's two things going on. One is, we are seeing some increase in write-offs, which we would expect over the last few quarters because the economy has been a bit soft. So that has raised the rate a bit. But you're also seeing the impact of reduced growth.

 So when growth slows down, your denominator starts to slow down more quickly than the write-offs that are coming into that number because write-offs are still coming in on a lag basis from previous growth. So some of the reason the write-off rate is going up is just because we slow down growth. So I hope that helps you understand better what's going on in our business.

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 Peter Sklar,  BMO Capital Markets - Analyst   [18]
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 Thanks, Mary.

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Operator   [19]
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 Kenric Tyghe, Raymond James.

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 Kenric Tyghe,  Raymond James & Associates, Inc. - Analyst   [20]
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 I wonder if I could take a slightly different tack on the Mark's discussion, Michael, which is could you give us some color on how the store within store Mark's are performing relative to the stand-alone? And I think what I'm trying to get out there or get to is whether there's any sort of halo effect from being a store within store versus stand-alone and, to the extent there is, whether that might have an impact on your thinking for that footprint going forward?

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 Rick White,  Canadian Tire Corporation, Limited - COO, Mark's   [21]
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 Hi, it's Rick White here. I'll field that question. We're certainly having very positive results on the store within store concept, and primarily we're referring to two areas. One is the denim area where we've added some national brands specifically, really Levi's, Silver and Buffalo and in the footwear area where we've added approximately 19 different national brands to augment our private-label selection there. And we've done that -- in the footwear area, we've done that in approximately 300 stores across the chain, actually 315, and in the denim area, we've done about 235 stores. And it's really just been more about size of the stores and actually being able to fit in the fixtures.

 And in every case where we have done that, we've experienced essentially double-digit increases in all of those areas. So it's been very solid for us.

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 Michael Medline,  Canadian Tire Corporation, Limited - President and CEO   [22]
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 And what about where we are located with the Canadian Tire store?

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 Rick White,  Canadian Tire Corporation, Limited - COO, Mark's   [23]
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 Where we are located within the Canadian Tire store, generally we are in 5000, 6000 square feet. So mainly in those locations, we've not been able to put the full shop in shop. We have shared some of the assortment within the store, but we actually physically have not put in the fixtures for it. So we still see increases in those stores, but not to the same extent where we put actual fixtures in shops and called it out, and we've been able to put in fit guides for the consumers.

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 Kenric Tyghe,  Raymond James & Associates, Inc. - Analyst   [24]
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 Great. Thanks very much. I'll leave it there. Thanks.

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Operator   [25]
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 Mark Petrie, CIBC.

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 Mark Petrie,  CIBC World Markets - Analyst   [26]
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 Michael, I like the baseball analogy. I can picture you guys doing back flips in the office after that. (laughter)

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 Michael Medline,  Canadian Tire Corporation, Limited - President and CEO   [27]
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 Thanks, Mark.

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 Mark Petrie,  CIBC World Markets - Analyst   [28]
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 I just wanted to follow-up on the COGS savings, could you just talk about your attitude towards promotional strategies? I know that's an area where you guys have invested resources. How has the progress been there, and how material is the contribution to gross margin, and what's the sort of outlook?

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 Allan MacDonald,  Canadian Tire Corporation, Limited - COO, Canadian Tire   [29]
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 Hey, Mark. It's Allan. You know, our promo -- I wouldn't say that our promo strategy has really changed at all. Whenever you introduce the productivity initiative and that way of thinking that I outlined when I was talking about procurement, you know you address -- you adopt that to every aspect of your business, whether it be operating expense, procurement or promo for that matter.

 So we've been looking at optimizing our promo as a matter of just good business practice.

 What that means is looking at the implications in terms of the cost of promo from start to finish and, of course, the benefit of it in terms of its appeal to our customers and the growth in categories that we are focused on.

 I can say that I think we have a much better balance today than we have had historically, so we are being much more considered when we are putting products for promo. We're obviously trying to optimize in terms of profitability and scale back in terms of breadth whenever we can.

 So you're seeing some contribution there, but that's less of a pricing discussion and more of an optimization discussion going on.

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 Mark Petrie,  CIBC World Markets - Analyst   [30]
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 Understood. That's helpful. Thanks. Just broadly, I know marketing and advertising expense was something or plans were something that you invested in historically. It's kind of been flat this year. What's the attitude on that going into 2016?

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 Allan MacDonald,  Canadian Tire Corporation, Limited - COO, Canadian Tire   [31]
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 For CTR, you know in terms of our spend, we are happy with where we were, and of course, we're coming out of an Olympic year into a non-Olympic year, so we've made some adjustments in terms of where we're putting our focus.

 We're going to continue to with the balance that we have right now, I'm really happy with our branding work, which is really an important part of our overall growth at the Canadian Tire level, and then with our product level, we are between Tested For Life in Canada and other sort of innovation platforms.

 So I think what you're going to see is it continued about the same level we are at now. What you may or may not have seen is we're starting to shift more of our advertising to digital. So the launch of the Woods campaign this year was 100% digital. We didn't use TV for that, and that was a great learning experience for us. The first time we launched a major brand without traditional media, and we're really -- it was very successful from a learning standpoint, and we're very, very pleased with the performance of the brand as well. So you will see next year more of a transition to away from the traditional media into sort of new medias.

------------------------------
 Mark Petrie,  CIBC World Markets - Analyst   [32]
------------------------------
 Okay. Thanks. And then just my last question, just if you could comment on dealer inventory levels, I know it was pretty clean coming out of winter last year, and so I imagine there was some restocking to an appropriate level in the Q3 numbers. But just a comment on dealer inventories would be great.

------------------------------
 Allan MacDonald,  Canadian Tire Corporation, Limited - COO, Canadian Tire   [33]
------------------------------
 Yes, I'm feeling very, very comfortable in terms of inventory levels. Third transitioning into fourth quarter, as you know, is always a tricky one because we're loading in for Q4. That's really largely where the variances that you're seeing are coming from and overall very happy with the fact that it's very clean.

------------------------------
 Mark Petrie,  CIBC World Markets - Analyst   [34]
------------------------------
 Okay. Thanks very much.

------------------------------
Operator   [35]
------------------------------
 Brian Morrison, TD Securities.

------------------------------
 Brian Morrison,  TD Securities - Analyst   [36]
------------------------------
 Good afternoon. I just want to follow-up again on the gross margin performance. As I listened to the initiatives that were mentioned by Allan, are you seeing items that you've learned at CTR that can be implemented across other banners within the organization? In general, are you seeing opportunities greater than what you thought when you announced the initiatives back in 2014? And also I don't know if you'll go into this detail, but can you provide a breakdown or composition of the Mark's decline relative to CTR's gain within that 33 basis points ex petroleum?

------------------------------
 Dean McCann,  Canadian Tire Corporation, Limited - EVP and CFO   [37]
------------------------------
 Hi, Brian. It's Dean. So I think in general, yes, I think some of the learnings that are what we're getting with the work that we're doing with Allan's team I think are applicable in other areas of the business for sure, and we will look for those opportunities as we go forward.

 I think, as we've said all along, we are not putting numbers to this, but I wanted the actual results to speak for themselves here. And I think you're seeing some of that with respect to CTR, so we are very happy about it.

 So when we talked about this initially, I think we had high hopes, and I think some of those hopes are coming to fruition. So that's encouraging, and I think, as I said, I think we can take this on the road.

 The second part of the question around kind of getting a sense with respect to the Mark's relativity versus kind of the rest of the margin, I think as I said, the CTR margins, the Canadian Tire Retail margins were net positive, were up nicely. The impact on overall retail segment margins of negative 33 basis points was more than 33 basis points related to Mark's.

 So in other words, we had a greater decline associated with just Mark's if you isolate it than 33 basis points, offset to the tune of a net of 33 basis points with the positive performance out of CTR.

 So very encouraging, and we know what's going on with Mark's. I mean the guys are doing what they can there to offset the impact of FX and oil on industrial, but the performance out of CTR in particular, very, very encouraging.

------------------------------
 Brian Morrison,  TD Securities - Analyst   [38]
------------------------------
 Hey, Dean. One more question if I can. When I look at the renewed buy back of I think it was well over CAD0.5 billion here, what was the thought process coming up with -- the thought process behind coming up with this figure as opposed to the CAD400 million that you announced last year?

------------------------------
 Dean McCann,  Canadian Tire Corporation, Limited - EVP and CFO   [39]
------------------------------
 So Brian, that's been an exercise that's been ongoing as we sort of work through what our capital allocation priorities are 2016 as part of our overall planning process, and we walked the Board through all of those exercises as we go through the year.

 I think the reality is it reflects basically the same things we've always been saying that our priorities have not changed. First and foremost, invest in the business. Protect our credit rating which is very important to us in order to preserve flexibility. We are committed to our dividend policy, the 25% to 30%, and we want to have flexibility to grow and ensure that we have the resources and capital to be able to continue to grow. But the share buyback is part of that analysis, and we landed where we landed this year with that approach.

------------------------------
 Michael Medline,  Canadian Tire Corporation, Limited - President and CEO   [40]
------------------------------
 Hi, Brian. It's Michael. You know there's a lot of ways to look at it, but four of the ways I look at it is that we are generating more cash than we were generating before. That we have more confidence in our underlying business fundamentals than we had before. That I believe we understand the financial flexibility and the inherent strength of this Company financially better than we did before. And last to me is to do this sort of thing and to put 550 in, I believe we are undervalued and that our retail businesses are not trading at a multiple, and you've got to invest in your company in a significant way when you think that.

 So I think the balanced approach that Dean talks about is right, and then to get to a number, you have to look at factors, many, many factors, but before I just pointed out, especially the last one really had a lot of weight.

------------------------------
Operator   [41]
------------------------------
 Jim Durran, Barclays.

------------------------------
 Jim Durran,  Barclays Capital - Analyst   [42]
------------------------------
 Just a few questions. First of all, we haven't heard much talk about M&A for a while. Can you just update us on where your head is at with respect to that initiative?

------------------------------
 Michael Medline,  Canadian Tire Corporation, Limited - President and CEO   [43]
------------------------------
 Yes, I probably will never update you on exactly what we're going to do, Jim. But you know, I guess where my head is is we've been incredibly successful on our two big acquisitions we made in March and Forzani Group which is now FGL Sports. We think we have even more capabilities today to bring to an acquired business, and we certainly have under our balanced financial approach more than enough financial flexibility if we feel like it to make an acquisition.

 We will not be forced to make an acquisition, I said before, because we are in a hurry or because we have cash or people just want to go and make acquisitions. I know how tough it is to make a good acquisition and then integrate it and make it successful. I don't like a lot of evaluations that are out there. I'm concerned that a lot of historically attractive targets are not moving as fast as we are in the new world of retail, and I don't want to buy their headaches. And I think that there are possibilities for acquisitions out there, but you know how picky we are. The core businesses are all firing along, and the fundamentals are good.

 So, as we said, we are looking for acquisitions. We are always looking for them. They've got to be good, and we have no problem, as you saw today, returning cash to our shareholders, which is our cash when that's appropriate as well.

------------------------------
 Jim Durran,  Barclays Capital - Analyst   [44]
------------------------------
 Second question is auto service. Once the new IT platform got put in place on the auto side, we were all eagerly awaiting an improvement in terms of the auto service experience and the growth of that business. It sounds like I've heard at least this quarter, maybe a couple of quarters in a row now, a bit of a positive undertone about the auto service contribution to the business. Can you sort of tell us where you think that's at, and to use the baseball analogy, what inning are you at in terms of it all?

------------------------------
 Michael Medline,  Canadian Tire Corporation, Limited - President and CEO   [45]
------------------------------
 You all know I like baseball, you're going to get something out of me.

------------------------------
 Jim Durran,  Barclays Capital - Analyst   [46]
------------------------------
 We all like baseball now, right. (laughter)

------------------------------
 Michael Medline,  Canadian Tire Corporation, Limited - President and CEO   [47]
------------------------------
 Yes, we all do now.

------------------------------
 Allan MacDonald,  Canadian Tire Corporation, Limited - COO, Canadian Tire   [48]
------------------------------
 Hey, Jim, it's Allan. So we are in early innings, but we have a big lead. You know the auto service, the auto team and the dealers have done an amazing job, and to your point, we probably undersold it. Not meaning to be subtle, just with so much going in the business, you always struggle to capture everything.

 Auto service has really turned a corner. The auto team has spent tireless hours working with their dealers to really bring this part of our business to life. As you know, it's very, very complex. It's not just about systems. It's about people. It's about service. It's about tires. It's about lube. Managing auto parts. And we've seen across the board substantial moves forward. So I'm very, very pleased, and we are seeing it in our customer satisfaction result as well that Canadians are responding. So I couldn't be happier.

 And with respect to baseball, do we have lots of runway left? Absolutely. So we are by no means stopping. This is a new way of life for us.

------------------------------
 Jim Durran,  Barclays Capital - Analyst   [49]
------------------------------
 That's great. E-commerce, any contribution to Canadian Tire's comp store sales number, and can you give us any idea how much it's helping drive Forzani's numbers?

------------------------------
 Michael Medline,  Canadian Tire Corporation, Limited - President and CEO   [50]
------------------------------
 It's Michael. I'll talk across the board, which is I believe that in both cases this is driving our numbers in more than what we're selling online. Let's take Canadian Tire for a second. If you go on our site today -- and we're going to keep making it better. This is a very good site and I believe the most visited site in Canada. You might not know that. And it is becoming better and better from a customer interaction, especially because they can have trip assurance knowing that we have the products in-store.

 So I'm happy in terms of what is driving the business. The dollar value of our straight e-commerce sale is small and growing by a percentage that I guess you would believe. But it's incredible percentages, and we're going to get that number pretty big in the next two to three years in terms of our e-commerce sales in all of our divisions.

 So as a percentage of our sales right now, small and isn't driving our comps. I mean I wish it was driving. We would be seeing some real good comps. But we are driving these comps the old-fashioned hard way right now just basically out of the stores.

------------------------------
 Jim Durran,  Barclays Capital - Analyst   [51]
------------------------------
 Okay. That's great. And last question just with the Target stores on the horizon in terms of the ones you've bought, I assume you'll end up with some redundant properties. Can you give us any idea as to whether your intention would be to vend them into the REIT or to sell them as you did with this recent property?

------------------------------
 Dean McCann,  Canadian Tire Corporation, Limited - EVP and CFO   [52]
------------------------------
 Any of those decisions, Jim, are situational, but clearly there will be opportunities with the REIT for those properties, some of those properties. But we are just still working through all that analysis, but I would expect that some of them will go into the REIT as redevelopment opportunities. But we've just got to work that all through. (multiple speakers)

------------------------------
 Jim Durran,  Barclays Capital - Analyst   [53]
------------------------------
 Great. Thanks very much, guys.

------------------------------
Operator   [54]
------------------------------
 Chris Li, Bank of America.

------------------------------
 Chris Li,  BofA Merrill Lynch - Analyst   [55]
------------------------------
 Over the last few years, there has been a focus within CTR to deemphasize the lower margin products like electronics and appliances to higher margin products like automotive fixing and playing categories. And if I'm looking at the numbers correctly, that mix shift has definitely contributed to the retail gross margin improvement since 2011.

 And so at the risk of overusing the baseball analogy, what inning are you in (multiple speakers)? And if you were to hold everything else equal, do you expect this shift to continue to have a positive impact on gross margins over the next number of years?

------------------------------
 Allan MacDonald,  Canadian Tire Corporation, Limited - COO, Canadian Tire   [56]
------------------------------
 Allan here. I think you're absolutely right, but I think of it slightly differently in terms of the motivation. What we were doing is looking at the active families and how well our assortment was resonating with active families. And because we have lots of low-margin products, you can probably guess a few in the wholesale consumables division, for example, that are very, very relevant to our target customers, and we are going to continue to sell them for a long time.

 In other areas, we perhaps were guilty in the past of chasing revenue and low-margin products that have a lot of velocity, and we evaluate those on a regular basis and say, is this a business we should still be in, is it still relevant to our customers? And in a period of growth like the one we're enjoying right now, that's when you want to be making those tough decisions to wean yourself off those products.

 So when I look at our assortment, I'm very, very happy with the tact that it's taking. I don't see as much high velocity, low-margin products that were opportunistic as we had in the past. So I'd say in terms of where we are on the journey, we are quite a ways down the path. But you're going to continue to see our assortment evolve, and it won't be based on margin decisions although we'll always try to maximize those. But it will be based more on making sure that we're as relevant as we humanly can possibly be to our active families and our target customers.

------------------------------
 Chris Li,  BofA Merrill Lynch - Analyst   [57]
------------------------------
 Okay. Great. That's helpful. And maybe just a couple of questions for Dean. The revenue growth to the dealers at CTR were quite strong this quarter, up 5% when compared to retail sales growth of only 1.5%. I recognize there are some timing differences. Was there anything else that you want to highlight, or was there anything that explained that big gap?

------------------------------
 Dean McCann,  Canadian Tire Corporation, Limited - EVP and CFO   [58]
------------------------------
 No, just other than throw another rose to Allan and his team. I think that reflects basically very strong take-up of the programs that the guys have in place for things like Christmas and that kind of thing. So nothing unusual other than it's a good thing.

------------------------------
 Chris Li,  BofA Merrill Lynch - Analyst   [59]
------------------------------
 Okay. And then just lastly on depreciation, I think you answered last quarter about it's going higher because of CapEx, but you know there's still quite a meaningful gap between D&A versus the CapEx level. At what point do you expect that gap to narrow materially? Is it next year, or is it going to take still a few years before D&A kind of matches where your CapEx level is?

------------------------------
 Dean McCann,  Canadian Tire Corporation, Limited - EVP and CFO   [60]
------------------------------
 We probably should take that one off-line.

------------------------------
 Chris Li,  BofA Merrill Lynch - Analyst   [61]
------------------------------
 Okay.

------------------------------
 Dean McCann,  Canadian Tire Corporation, Limited - EVP and CFO   [62]
------------------------------
 But I think over time, right, everything rationalizes out. But rather than just given off-the-cuff answer, we probably should just do that off-line.

------------------------------
 Chris Li,  BofA Merrill Lynch - Analyst   [63]
------------------------------
 Okay. Thank you.

------------------------------
Operator   [64]
------------------------------
 Patricia Baker, Scotiabank.

------------------------------
 Patricia Baker,  Scotiabank - Analyst   [65]
------------------------------
 Thank you very much. I have three questions. My first one is for you, Dean. And just twice, two or three times on the call you did make the important point that the decline in gross margin at Mark's more than accounted for 33 basis points that we saw overall. And I understand that you may not want to tell us what the Mark's number was, but can you share that with us, or would you prefer not to?

------------------------------
 Dean McCann,  Canadian Tire Corporation, Limited - EVP and CFO   [66]
------------------------------
 I'd prefer not to, and Rick would really prefer me not to.

------------------------------
 Rick White,  Canadian Tire Corporation, Limited - COO, Mark's   [67]
------------------------------
 That's correct.

------------------------------
 Patricia Baker,  Scotiabank - Analyst   [68]
------------------------------
 Fair enough. I just thought I would ask. Okay, now you really have to answer this question for me. (multiple speakers) I want to come back to productivity and to the SG&A, and it really was nice to see the progress that we saw in Q3 there. And I want to sort of get a real sense maybe philosophically about how you're thinking about this because there's probably two ways to think about it. And it seems to me that people seem to be approaching this and thinking about it as if there's some finite amount or some target number that you want to get to. Whereas, I'm wondering if what it really is a big change in culture, and essentially what you're really hoping to accomplish is almost a permanent focus on just always trying to do what you can to take costs down?

------------------------------
 Dean McCann,  Canadian Tire Corporation, Limited - EVP and CFO   [69]
------------------------------
 Thank you, Patricia. The check is in the mail. But that is exactly what -- if we are successful, it's like Allan talking about the systemic change in CTR around deporting COGS. We need a systemic change in this organization around how we approach overhead and how we think about it and a continuous cycle of challenging what we do and what we make our people do every day, do we still need to keep doing that. Because at the same time, there's pressure to do different things, more important things that support becoming the world's most innovative retailer, right?

 So that's the motivation, if you will, that I think around the executive table that everybody is kind of on this same page now to how do we continuously drive down that cost as an overall percentage of our revenue as we go forward. And it's something that let's call it what it is. We haven't been very successful with that over the years. We've had kind of fits and starts at it, but I think that cultural change that you reference is terrific. That's a great way to put it.

------------------------------
 Patricia Baker,  Scotiabank - Analyst   [70]
------------------------------
 Okay. Thank you. And when we look at like Michael loves to talk about innovation and I love listening to that. It's a fundamental shift in the business, but I think that this whole cultural shift there on the cost side is equally as important. And then if you look at the way I look at Canadian Tire Retail and what I'm seeing and what I'm hearing from you guys, all the little projects and things that Allan has been doing to focus on the COGS and everything else, that also seems to be a very different approach to the business and really doing everything he can to run that dealer-based business as a real retail operation.

 So that wasn't the question. That was a statement, and I do have a question for Allan. And my question for Allan is the following. Do you want to share with us what your thinking is, Allan, behind this FRANK program that you have, what the SKUs are, and what we can expect to see there, and how that will contribute to margin, and how you hope that will drive, I guess, the top line a little bit as well?

------------------------------
 Allan MacDonald,  Canadian Tire Corporation, Limited - COO, Canadian Tire   [71]
------------------------------
 Well what we did with FRANK, we were really lagging in the household consumables, which is a really important category for our key target customers, back to family and just for Canadians in general. And our private-label brands were not performing well. The quality was terrible, quite frankly, in a lot of cases.

 So we drew a line in the sand and said Canadian Tire is going to be the destination for national brand quality household consumables, and we come up with this identity, FRANK, which is really about being frank, being honest, which is one of our core attributes at CTR and at CTC.

 So we started down that path. It was going to be an EDLP strategy, but we found that there were some areas where that didn't resonate as much with Canadians. But I can promise you, I can tell you that the FRANK products have been performing very, very well. They're a hit with our most loyal customers, and the quality and the lengths we are going through to make sure the quality is right -- and to your point earlier, it signals a cultural shift.

 When we chose the FRANK coffee for the coffee pots. We had everybody at Canadian Tire go down through our cafeteria in the course of a couple of days and test it, and we had a vote. I can tell you that there are two people in this room who personally chose the flavor of the potato chips. I'm one of them when it comes to barbecue, and I'll let the other person decide if he wants to talk about his role.

------------------------------
 Michael Medline,  Canadian Tire Corporation, Limited - President and CEO   [72]
------------------------------
 I've got to hit the gym, Patricia. (laughter)

------------------------------
 Allan MacDonald,  Canadian Tire Corporation, Limited - COO, Canadian Tire   [73]
------------------------------
 And we are having a lot of fun with that brand. I think it's an interesting commentary on the state of CTR right now. I mean we've got -- it's a nice brand, it's making of really bold statement about quality, and I think the engagement we've had internally is saying something about a cultural change, too.

------------------------------
 Patricia Baker,  Scotiabank - Analyst   [74]
------------------------------
 Okay. Thank you very much. Pleasure.

------------------------------
Operator   [75]
------------------------------
 Ladies and gentlemen, we have reached our allotted time for the question and answer session. Please reach out to investor relations for further questions. And I will now turn the call over to Michael Medline, President and CEO, for any closing remarks.

------------------------------
 Michael Medline,  Canadian Tire Corporation, Limited - President and CEO   [76]
------------------------------
 I have no closing remarks. Have a great day, guys.

------------------------------
Operator   [77]
------------------------------
 Thank you, ladies and gentlemen. A telephone replay of today's conference call will be available for one month, and the webcast will be archived on Canadian Tire Corporation Limited's 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 your lines.




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