Q1 2016 Canadian Tire Corporation Ltd Earnings Call
May 12, 2016 AM EDT
CTC.A.TO - Canadian Tire Corporation Ltd
Q1 2016 Canadian Tire Corporation Ltd Earnings Call
May 12, 2016 / 06:00PM 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 - President, Canadian Tire
* Mary Turner
Canadian Tire Corporation, Limited - SVP, Finance Transformation & President and CEO, Canadian Tire Bank
* Duncan Fulton
Canadian Tire Corporation, Limited - President, FGL Sports
* Rick White
Canadian Tire Corporation, Limited - President, Mark's
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Conference Call Participants
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* Irene Nattel
RBC Capital Markets - Analyst
* David Hartley
Credit Suisse - Analyst
* Peter Sklar
BMO Capital Markets - Analyst
* Patricia Baker
Scotiabank - Analyst
* Jim Durran
Barclays Capital - Analyst
* Mark Petrie
CIBC World Markets - Analyst
* Keith Howlett
Desjardins Securities - Analyst
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Presentation
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Operator [1]
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Good afternoon. My name is Annie 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 2016. 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 would now like to turn the meeting over to Mr. Michael Medline, President and CEO. Please go ahead.
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [2]
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Good afternoon. Thanks, operator, and thanks, everyone, for joining us today. Before we begin with today's earnings call, I would like to take a moment to address the catastrophe that has taken place in Fort McMurray.
We at Canadian Tire are working closely with local authorities to provide assistance in any way we can to the thousands of Canadians affected by this historic disaster. We have strong roots in Fort McMurray with hundreds of employees working at five stores in the region and we're doing everything we can to help the community.
Turning to our results, we are pleased with our Q1 retail results. When you look under the hood, our top- and bottom-line performance looked even better, especially driven by our core Canadian Tire Retail engine. Q1, like Q4, was not winter-like in terms of weather and there was definitely no early spring. And we are still waiting for spring in central and eastern Canada.
Canadian Tire Retail sales were very strong when you adjust for winter weather categories and when you consider that we were lapping solid first-quarter 2015 comps across all of our three retail banners. Our results continue to highlight the consumer strength in all our businesses in Ontario and British Colombia. And even with foreign exchange pressures, we put up the numbers.
Q1 is our smallest retail quarter and typically financial services makes up most of our earnings in the quarter. Having said that, I'm encouraged by our top-line results, strongly-managed margins, which were up again this quarter, and continued productivity savings.
In Q1 in certain areas of the country we saw the true power and flexibility of our dealer business model shine through. As you know, weather patterns across central Canada fluctuated quite a bit during the quarter. Our dealers on the ground can respond immediately by switching up assortments on the floor to changing weather and customer needs. If they saw a week of warm spring-like weather ahead, they brought out the patio sets, gardening supplies, and backyard categories. Then when the weather turned again a week or so later, they would put us switch back to bringing the winter-related merchandise back out.
Clearly it took some time and resources to keep making these nimble shifts, but their ability to get ahead of the trends and be flexible drove sales at their stores and contributed to our performance during the quarter. This was truly a fantastic effort by our dealers and testament to how our model is a core differentiator for us.
Canadian Tire Retail once again led the way in terms of margin improvement in the quarter with merchandising and productivity efforts more than offsetting the FX pressure the merchants faced. And of course, I want to talk about the WOW Guide, our digital catalog that we launched a few weeks ago. I don't like that word catalog, because it sounds old-school, but let me tell you our catalog, our WOW Guide is far from old-school.
We created the guide as a pivotal marketing tool that serves to educate our customers on our wide seasonal assortment and on our digital capabilities. And it is an important investment in driving traffic to our website. It is a big step forward in bridging the gap between the physical and digital worlds and absolutely exemplifies the importance that we place on being innovative in how we reach out and connect with our customers. We are to date extremely pleased with the results of the catalog.
FGL once again put up with impressive numbers, with Chek posting an impressive 12.3% comp. FGL is driving ahead on e-commerce; sales are growing strongly as we improve the online customer experience and the functionality of the site. Our e-comm margins are also healthier since we took back the business from a third-party provider last year and brought it under our own supply chain.
And the team is working to launch same-day delivery at Chek stores in the GTA in the second half of the year.
Mark's comp sales result of positive 0.8% was actually a bit stronger than we had expected given the continued headwinds this business is facing with the downturn in the Alberta economy and the negative impact that has had on sales of industrial wear and industrial footwear. We continue to expect this business to be negatively impacted for the foreseeable future, but I am pleased with the work the team has been doing under Rick White's leadership to ramp up sales of casual wear, denim and casual footwear, and Mark's focus on executing their strategy.
As Dean and I mentioned on our call last quarter, we knew our financial services business results would be challenged this quarter as they were coming up against record earnings, strong GAAR growth last year, and planned in-year investments in fueling future GAAR growth. However, the business performed in Q1 a little better than we had expected. We anticipate continued and heightened pressure on earnings from our financial service business in Q2 due to planned investment to drive active account growth, but we should see some improvement in the second half of the year as GAAR growth begins to pick up.
And with that I'm going to turn it over to Dean.
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [3]
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Thanks, Michael, and good afternoon, everyone. There are only a few topics that I will comment on today.
As Michael mentioned, Q1 is a very small retail quarter and, as you know, the financial service business typically contributes the majority of earnings in Q1. Overall, financial services had a solid quarter, particularly in light of the fact they were up against a record Q1 in 2015. Financial services did continue to feel the effect of low GAAR growth, rooted in a lower number of active accounts, which as we've discussed previously, can be traced to tightening of our credit standards in late 2014. This, combined with changes regarding the regulations governing interchange, translated into lower revenue this year versus last year.
As indicated in Q4, the team has focused on marketing to drive growth in 2016 with increased emphasis on in-store financing, which we expect will get a boost from the WOW Guide, as well as increased emphasis on activation and retention programs that stimulate active account growth.
Turning to the retail segment, while it was a small quarter for retail, the positive trends we have been seeing continued this quarter. Our retail segment gross margin, excluding petroleum, was up 46 basis points, reflecting continued work on merchandising and productivity initiatives at Canadian Tire Retail that once again successfully offset the negative impact of FX costs.
In addition, as Michael mentioned, the weather continued to be less than optimal and we chose to be not overly aggressive in respect to clearance at FGL and Mark's, which also protected margin.
Our OpEx, excluding depreciation and amortization, as a percentage of revenue and normalized for petroleum, continued to trend in the right direction, down 10 bps versus last year. We continue to focus on managing our OpEx trend down over time. However, we will also continue to balance needed investments in key events and initiatives, such as marketing, to capitalize on our association with the Olympics, the WOW Guide, and productivity, which may cause quarterly fluctuations in our results but which will pay dividends in the future.
Q1 inventory ended heavier than expected coming out of Q4. Overall, corporate inventory is up CAD182 million versus the prior year. Canadian Tire Retail represents a small portion of the increase and it is largely in winter-related goods, namely tires and batteries. Dealers are a bit heavy in these areas as well, but it is not significant in the context of the volume and merchandise shipped to and purchased by dealers in the back half of the year.
FGL and Mark's made up the majority of the remaining overall inventory increase, but made progress bringing down their winter stock position from the end of the year. And they did not choose to panic sell when the weather was challenging, particularly in February, so they will carry the winter stock over and adjust their 2016 buying to compensate.
First-quarter retail ROIC moved up to 8.1%, up 16 basis points over Q1 2015, largely due to strong retail segment earnings over last year. While ROIC improvement remains our most challenging metric to date, we are still focused on driving it up over time. The headwinds of FX in Alberta that have consumed a good deal of the gains achieved by the productivity program thus far, and as we've indicated many times, productivity is going to be a critical factor in moving us toward our ROIC aspirations.
Our operating capital expenditures were down slightly over the prior year, largely due to timing of store projects at Canadian Tire. Our DC CapEx was up roughly CAD20 million over the prior year, largely related to costs for the Bolton DC; however, the project remains on plan and we are also on track to close the sale-leaseback of the DC to the REIT next month.
Depreciation and amortization was up roughly 11% over the prior year. This was expected and is in line with the level of capital investments that we have been making over the past several years.
And with that, I will turn things back over to the operator for the question-and-answer session.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Irene Nattel, RBC Capital Markets.
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Irene Nattel, RBC Capital Markets - Analyst [2]
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Thank you and good afternoon. One question, if I might, to start with on the gross margin gains in the quarter. You've talked a little bit about productivity, so how much is left in the tank on that?
But also in terms of the sourcing, the mix, the promotional level; how should we think about all of these going forward? And is it reasonable to expect that you can keep growing gross margins through the balance of the year?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [3]
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Maybe, Irene, I will start and then I will turn it over to Allan, who will talk a bit more about some of the specifics in terms of what they are doing to continue to work on margin.
From a productivity point of view, in terms of the initiatives underway, obviously we are really pleased with the progress the guys have been making in terms of being able to offset, to date, the impacts of FX. But FX will remain a challenge in terms of a year-over-year basis, so we need productivity.
From that perspective, there's much more to do would be the way I would characterize it. We're not taking the pressure off my friend Lisa here or any of the teams in the room. And as we've talked before, we are taking these initiatives on the road. CTR has shown unbelievable leadership in terms of embracing this and, as I say, we're taking it on the road to the other businesses so there's lots more work to do.
In terms of the kinds of things that are going on, in terms of balance your question, Allan, do you want to --?
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [4]
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You know managing the improvement in the margin has really come from a number of things that have sort of been born from a productivity focus, but continue on through the business. That's everything from vendor management to making sure that we have the right brands, the right mix of private-label within the category, the rate assortment mix whether it be big-ticket discretionary items or more usable and consumable items, and then watching our promote optimization. So it's really about getting the volume right and having the right products from the right source within the category.
That takes a long time because, as you know, to start a category optimization at the assortment level take months, if not years, so we're continuing to work through it. I would say that we are a third of the way through the journey maybe, optimistically, and we have a lot further to go. It has more become a best practice at Canadian Tire as opposed to a productivity initiative.
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Irene Nattel, RBC Capital Markets - Analyst [5]
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That's really helpful, thank you. Then I'm not sure whether this is or is not a related question, but clearly the WOW Guide is something that the entire CTR team has worked very hard on. It's clearly something that you are putting a lot of focus on and seems to be, if you will, a bit of a roadmap for the way you want to sort of manage CTR as we go forward.
Could you talk a little bit about your expectations for the WOW Guide, the consumer reaction, and whether we can and should expect Canadian Tire Retail to continue to -- will we have two and three WOW Guides the year? Is this kind of where we are going?
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [6]
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For me, the WOW guide really is born from the products within it. That's the result of a three-year journey to really re-orient our assortment. And I think I'm personally very, very proud of that work the team has done. Bringing it to life in the way that we did is a mix of good marketing and I think we've demonstrated great strength there historically, and some innovation around IT.
So at its foundation, really what you are seeing is us putting more marketing weight behind telling Canadians just how far we've come with our assortment. That is, for us, I think a turning point, and you have rightly said it, where that's going to be more business as usual. I would expect to see two, at least, paper editions a year, but more importantly, as we migrate more and more of our readership online to see a very, very dynamic and robust digital catalog evolve from this. All supported by continued improvement in the assortment level.
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Irene Nattel, RBC Capital Markets - Analyst [7]
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That's great, thank you.
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Operator [8]
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David Hartley, Credit Suisse.
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David Hartley, Credit Suisse - Analyst [9]
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Thanks. Just a few questions, on the FX -- I appreciate the productivity gains you are making. When I'm thinking of those productivity gains, should I think of them as lasting, meaning they are cost savings that transcend or held on to over time or is this more related to working with vendors to offset costs and promotional changes that you mentioned, etc.?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [10]
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Maybe I will start, David, and Allan can speak to some of the systemic changes that the guys are doing. As you rightly point out, FX is going to be a challenge for the business going forward on a year-over-year basis because our effective cost of FX will continue to rise and that's a challenge. To date, the teams have been doing a great job offsetting that.
The productivity initiatives under way, they are really about systemic change to our business and CTR has been leading the way with respect to that. It's not about just one-and-done, beat a supplier up kind of thing. This is about a systemic change in the way we do business.
I don't know if, Allan, (multiple speakers) any color there.
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [11]
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It's a skill set change. I can tell you, David, what we haven't done is taken out one-time costs only to be concerned about them creeping back in. This is more systemically things like having a much more robust should-cost sourcing model that's now implemented across the buyer group. So we have really been changing our way of doing business and the way that we are monitoring the business to manage the cost, as opposed to opportunistically just relying solely on one-time cost eliminations.
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David Hartley, Credit Suisse - Analyst [12]
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Okay. So just as a follow-up to that then, I shouldn't expect when the currency goes the other way that you're going to find yourself with a huge gain? This is part of managing a process so that -- this is an ongoing opportunity, as opposed to taking costs out over the long term and seeing benefits against a better exchange rate?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [13]
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I think, David, the way I'd describe that is, quite frankly, nobody ever talked to me about FX when the dollar was on the rise. So if you sit back and think about that comment for a minute, I think there was almost a lack of understanding of that impact. And I think probably many retailers share this.
What we're trying to build is a situation where we have strength in terms of the visibility and the understanding of our merchants and the ability to forecast and understand the impacts to costs of things like FX, such that if rates change -- and that will probably be an over-time thing given our hedging program -- then we are in a position to make decisions with respect to what the implications of those changes are on margins and be more deliberate in how we manage margin on a go-forward basis.
Because as I said, I think the real systemic changes here that are underway are going to be about the data, the visibility, the cultural, if you will, kind of change management that the teams have; are putting in place in order to be able to manage margins on a more systemic way. I hope that helps, but that's really what this is about.
Then, from a competitive and market point of view, that will dictate how we manage margins on a go-forward basis. Because at the end of the day you've always got to be competitive.
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David Hartley, Credit Suisse - Analyst [14]
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Okay, thank you. Second question I guess would be just around the balance sheet when you break out the retail CT, REIT, and financial services. If I just look at the retail, you have a net cash position ultimately there based on that breakdown.
Is there anything preventing you from really ratcheting up a buyback program on your shares or is the aggregate amount of debt for the corporation as a whole, including all the businesses, a limiting factor? Can you give me some guidance there?
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [15]
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We have a balanced approach to capital allocation. It's Michael; thanks for the question. And we like being BBB+. We have to invest smartly in our businesses and I think we are at a pretty well a high right now in terms of investing in our businesses.
And then we have had a very good track record of increasing our dividends. We understand that we want a productive and efficient balance sheet and, depending on other things we do, we have shown a proclivity to buy back shares where that is a good investment. And so for it's been a very good investment for us.
So I don't want to go further than that because I don't think it's appropriate, but that is the way we think about capital allocation. And I think you've seen over the last two or three years that's the way we do it.
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David Hartley, Credit Suisse - Analyst [16]
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Okay, thank you very much.
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Operator [17]
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Peter Sklar, BMO Capital Markets.
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Peter Sklar, BMO Capital Markets - Analyst [18]
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Back on the retail margin and your opportunity to put through price at retail. As I recall last quarter when you talked about this, I think you said that you had put through some price but it was very selectively and very modestly. I'm just wondering if that has changed at all.
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [19]
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Thank you for the question. It's Michael. It has not changed. Just to start, go back a little bit: inflation did not have any meaningful impact on our same-store sales in Q1. As we discussed last quarter, you're right; we have increased, in certain categories, prices at Canadian Tire Retail, but we have taken a conservative approach to pricing decisions overall.
As you know, pricing is only one factor in the balancing equation. We're also striving to maintain margins, manage our inventory volumes, and manage our market share. So, yes, what I had said last quarter is how we are proceeding.
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Peter Sklar, BMO Capital Markets - Analyst [20]
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Right. And, Dean, this rally we have had in the Canadian dollar, not over the last couple of weeks but this general rally we have had, does that help you at all? Or does your hedging just kind of glide you through all of the ups and downs?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [21]
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In the short term, Peter, it's less impactful, but if you -- with our hedging program we look out and we try to take advantage obviously of those kinds of rallies. But hedging is not about playing roulette here; hedging is about buying certainty over time.
Obviously, we would like the Canadian dollar to improve some over time. I think that would be good for us, but as I say the real value of hedging is it's like dollar cost averaging, quite frankly. You kind of buy yourself some certainty and don't get clobbered by one-day variances at any given point in time.
Suffice it to say, an improving Canadian dollar over time would be a helpful thing over the longer term.
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Peter Sklar, BMO Capital Markets - Analyst [22]
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Okay. And I just wanted to ask you about your fuel, your retail fuel business. I believe the comps were negative and I am just wondering if you could talk a little bit about that and if you thought you had any issues in terms of your merchandising strategies on your retail fuel business.
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [23]
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It's Michael. They used to report to me and I guess it does in some way. It's a darn good business to us because it drives our CTFS and CTR results; we really like this business.
You can't honestly -- reported to me for a long time; you can't look at revenue for gasoline, unlike our retail businesses (multiple speakers).
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Peter Sklar, BMO Capital Markets - Analyst [24]
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I meant -- I was referring to the volumes.
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [25]
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Oh, the volumes. Okay, comps. In terms of the volumes, I think that was mostly weather-driven and there might have been some economics in Alberta affecting it. If that goes up and down in very small increments and what the margins are like in that business are a factor of 8 or 10 times to what moves in terms of volume. So they are down a little bit.
We are -- our plan is to ensconce the petroleum division even stronger into our group of businesses, our family of companies including Canadian Tire Retail and CTFS. And the more we do that the more we will be able to drive. We're also doing a lot in terms of our loyalty offering at CTFS, so I am not too concerned about volumes in the long term. They will remain steady or probably in the long term a tiny bit up, but they don't move that much.
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Peter Sklar, BMO Capital Markets - Analyst [26]
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Okay. Then just lastly, Michael, I think you said in the annual meeting this morning that with -- or concurrent or shortly after the introduction of the WOW Guide that your e-commerce revenues doubled. Is that true? And are you referring to the Canadian Tire banner?
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [27]
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It's true, because I said it (laughter). But, yes, look, it's the Canadian Tire -- obviously the Canadian Tire banner because that was what the WOW Guide was attached to. We saw a take-up in terms of our app and online sales and sales, especially of the items that were in the WOW Guide, took off.
At the same time, remember the bulk of our business is still in bricks and mortar and the bulk of it will remain there for a long time. But we are seeing enormous growth off a relatively small base in all of our banners and online, and that is where we are putting so much of our attention. Because it's high growth; we can be very good at it and we saw through the WOW guide some of the things we can do to boost interest in our online business.
Is that okay, Allan?
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [28]
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That's absolutely right. I think the encouraging thing there, Peter, was less about the doubling in revenue and more about the reaction of the WOW guide. It gave us a measure of just how it was resonating. And it wasn't a promo-driven event, so it was another good affirmation that our assortment is striking a cord with Canadians.
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Peter Sklar, BMO Capital Markets - Analyst [29]
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No, I assumed it was off a very small base ensuring your infancy. Thank you for your comments.
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Operator [30]
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Patricia Baker, Scotiabank.
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Patricia Baker, Scotiabank - Analyst [31]
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Thank you very much, and maybe I will apologize in advance because I think I might have four questions. First of all on the gross margin at retail, and just trying to get at a little subtlety here, but you certainly indicated that Canadian Tire Retail had a better gross margin and that Mark's had a worse -- had a lower gross margin.
Didn't make any reference to Forzani Group. Are we to assume that it was flat year on- ear, the gross margin?
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [32]
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It was pretty close to flat in Q1. You're right, we were (technical difficulty) CTR. Forzani was pretty flat. Mark's was, of course, down over the year.
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Patricia Baker, Scotiabank - Analyst [33]
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Okay, that's helpful. Then just two things I noticed on the WOW Guide, and maybe this has always been done or just it's the WOW Guide that's got me paying a lot more attention, but I thought it was really interesting in the presentation of products, particularly bigger ticket items, you gave the cost per month. And I assume that that's a way to try and drive credit card purchases with the WOW Guide and that CTFS and CTR are working together on that. Is that a joint strategy?
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [34]
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Patricia, it's Allan. Yes, we've been doing that for a while now and really this is about just getting sharper at marketing. We started with (inaudible) a couple years ago in the flyer and to a limited degree of success. And we decided to really go strong with that message of our in-store financing offer around the Options MasterCard and the WOW Guide.
I think we're getting better at telling that story. It's a slightly different story than talking about products and promote, so it took us a little while to really find our rhythm, but I think you are seeing it come alive much better in the WOW Guide.
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Mary Turner, Canadian Tire Corporation, Limited - SVP, Finance Transformation & President and CEO, Canadian Tire Bank [35]
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I wanted to just pile because I'm very excited about the extra exposure that we have had in the last number of months in the flyer and in the WOW Guide and other channels, because for us this is a really big opportunity to drive growth in our business, which as you know we had slowed down growth because of our concern about the economy. And we just see this as a perfect fit between us and the retail banners as a way to drive our business while helping our partners grow sales and give better value to their customers.
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Patricia Baker, Scotiabank - Analyst [36]
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Perfect. This is a personal note, Allan and Michael, but it really makes a big difference when you market a product in the WOW Guide or any kind of a flyer and you tell me which aisle I can get it at at Canadian Tire. I think that's really important.
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [37]
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Stay tuned. We're going to do even more of that.
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Patricia Baker, Scotiabank - Analyst [38]
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That will be very helpful. Now just sticking with the WOW Guide and everything else that is happening, I'm just trying to square the discussion that both Michael and Dean had around ROIC at retail. Was nice to see that improvement in this quarter and we know what the longer-term goals are.
But just with respect to that and productivity -- and not that I expect you to give me a number. But looking at the potential that I think that this WOW Guide could have at CT Retail in terms of driving better sales and volume, Allan, do you have within your -- looking at your business, do have specific sales per square foot targets? Not that I expect you to share, but I would be very surprised if you didn't tell me that you have to -- you should be working to deliver a higher than CAD400 per foot over the course of the next two years if all these things work.
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [39]
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You're right on both counts. There's two things at play here really. One is, I'm really proud to say, the productivity of the marketing spend that we have had. We (technical difficulty) a lot of marketing to add the WOW Guide with virtually no increased marketing spend. That, first of all, was a big win for us and that is productivity.
Of course, we're expecting that in incremental contribution to the business across a number of fronts, partly in terms of the traffic it's driving to store, the productivity of our linear space, but also our digital productivity and the traffic it drives to our digital site. So the notion of introducing an integrated program like the WOW Guide has very specific performance targets that we think are going to be incremental across those properties.
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Patricia Baker, Scotiabank - Analyst [40]
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Perfect, so a little bit more on the Wow Guide and you gave a little bit of an answer there, but I was wondering just how big a project that was. And I'm assuming when you said it didn't have any incremental marketing spend, it meant that you reallocated marketing spend. But just how big a project was that? How long did it take? Just in terms of scope, how much spend would have there been on that?
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [41]
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In terms of the project itself, believe it or not, we made the decision to do it and started design work in about, literally, the amount of time the laws of physics would dictate you needed. So it would happen really quickly.
To be honest, the driver magazine that we have been producing historically at CTR Auto really helped us with the layout and formatting of the print publication. And the work that we've been doing on a number of fronts with in-store technology and our really, really good IT team made the IT component of the WOW Guide come to life really quickly. So the fact that we've been doing so many small projects that were aligned to this, we really just aggregated them and made them into a big one.
In terms of spend, I will defer on that one, but suffice it to say, we were able to manage the spend, especially outside of the commodity aspects like paper, really, really closely because we were able to do virtually all of it in-house.
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Patricia Baker, Scotiabank - Analyst [42]
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That's really interesting. Basically the way you described that you are talking about leveraging off of other projects, which means in an indirect way this all feeds into Dean's push for productivity.
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [43]
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Absolutely. We had the skill set in almost every aspect in different manifestations of it and we were just able to repurpose them. We literally had an executive team meeting in the lead up to announcing it in September of last year where we went green light around the table because everybody understood their component part. It was just originally focused on a smaller project.
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Patricia Baker, Scotiabank - Analyst [44]
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Fantastic. It's a great [app].
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [45]
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They can do even more, Patricia.
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Patricia Baker, Scotiabank - Analyst [46]
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Yes, Dean.
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Operator [47]
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Jim Durran, Barclays.
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Jim Durran, Barclays Capital - Analyst [48]
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I just want to start off with e-commerce as a sort of follow-on. Can you just give us a sense of where you feel you are on that journey? Like how fully deployed you are now at Sport Chek and how far along you are at CT Retail and when do we sort of feel that Mark's will get up the curve additionally?
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [49]
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Okay, that's a great question. I'm just going to say a few words and I'm going to let the business leaders talk individually for a couple seconds. Because we are at different points in sophistication; I think Sport Chek is, as you said here from my script, is running really fast now. Mark's is further ahead than I think people know.
And CTR is doing an unbelievable job in getting that infrastructure for a much more difficult online experience due to the nature of our business, a few differences in our business from the other banners that we have. And they're really using a test-and-learn approach and testing things in the Ottawa and Ottawa Valley region. So this is -- there's some really great stuff and if we hadn't invested in that infrastructure over the last number of years, especially in technology and servers, and we've got a -- we wouldn't have been able to do the WOW Guide and we certainly wouldn't be where we are today in terms of digital, especially e-commerce.
Why don't I -- why don't we start with SGL, go to Mark's, and then you hit CTR?
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Duncan Fulton, Canadian Tire Corporation, Limited - President, FGL Sports [50]
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Jim, it's Duncan.
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [51]
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Welcome to the call, Duncan.
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Duncan Fulton, Canadian Tire Corporation, Limited - President, FGL Sports [52]
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Thank you. It's my first call. I've been sitting in them for five years and now I get to talk. (laughter)
Overall, very happy with the growth that we are seeing with Chek e-comm. Obviously with the platform that Eugene Roman's team put in for us and the kind of content we have, my expectations for growth are always going to be higher than what we do. So we're going to continue to drive that as hard as we can.
We are seeing the effect of digital marketing on traffic to online as well as traffic to store. And we're beginning to measure a web-to-store conversion as well, because we are seeing people look for things on our website and are actually driving to the store to buy them as well as buy them online, which is the exact kind of omnichannel world that Mike has talked about so often.
So overall, very happy. The message is our team is you can't grow fast enough to meet our expectations.
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Jim Durran, Barclays Capital - Analyst [53]
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So is e-commerce a material contributor to comp store sales or too early for that?
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Duncan Fulton, Canadian Tire Corporation, Limited - President, FGL Sports [54]
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I think we're beginning to see an impact when we have a good e-comm day and a bad e-comm day, but I don't think we're there yet, Jim.
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Jim Durran, Barclays Capital - Analyst [55]
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Okay, that's helpful.
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Rick White, Canadian Tire Corporation, Limited - President, Mark's [56]
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Jim, it's Rick. I'll talk about Mark's for a moment here and just let you know where we are on the journey. We launched our L'Equiper site in the province of Quebec. It's the first transactional site we've ever had there. We launched that in November and it's doing exceptionally well.
We redid the Marks.com site and relaunched actually in January of this year. And the site that we did really follows Dean's model of saving costs, because what we did is we used the Chek platform, leveraged that, and just basically reskinned it and saved a whole bunch of money in doing so. So we've been kind of following behind them, a little bit in lockstep with them and it has been working very well for us.
We are also currently working on a B2B platform we plan to pilot out in December of this upcoming year, so we are moving along. Not quite as quick as I'd like to, but we are moving along.
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [57]
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Jim, it's Allan. I am really, really pleased and as I've said before, we really focused on much more the capability and the complexity of being able to manage the inner workings of e-commerce than we are on immediate results. And between what we are doing in the Ottawa trial, understanding the implications on our supply chain of cube and an assortment that is as big as broad as ours, and just how our customers are going to react to things like the WOW Guide, I got to tell you I am really, really pleased at the learnings we've got, at the progress we're making. And I don't see any reason why we can't continue to occupy the same space in e-commerce that we occupy in bricks-and-mortars in the not-too-distant future.
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Jim Durran, Barclays Capital - Analyst [58]
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Where do you see delivery to home versus store pickup [volume] for you guys?
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [59]
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In terms of CTR? I think it's going to be really interesting. I think as volumes continue to increase, delivery to home will be more and more the norm and we are going to -- we are watching very, very closely what our customers are doing. And one of the reasons why trials are so important.
We are going to continue to be the same leading retailer, the same e-commerce space as we are in bricks and mortar. So we will follow along with customer behavior, but as it stands right now, just sheer volume I think is going to make repurposing retail or click-and-collect difficult as time marches on.
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Jim Durran, Barclays Capital - Analyst [60]
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Last question, just back to productivity. Some of the heavier lifting projects were presented as being further out on the horizon. Like, how far away are we from that? It even sounds like, to some respects, maybe you've tackled some of them earlier than I would've thought.
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [61]
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Absolutely, Jim. I think I am really pleased with -- you remember I put those three buckets out there and we are well into the third bucket now. And really I give the credit to that to Allan and team. Guys like Greg Hicks and so on on Allan's team have really grabbed hold of this stuff and made it happen, with much more to come.
And as I say, we are going to take this on the road and the other businesses I think are seeing the opportunity that is created in some of these initiatives. We've got ramped up resources on this and support for the businesses, but at the end of the day the credit for actually realizing on these things goes to the businesses and how they support it. Because if they get into it then that's kind of a mantra around Canadian Tire, once they grab a hold of something they will make it happen.
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Jim Durran, Barclays Capital - Analyst [62]
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And so when you define that third bucket, is this sort of the end-to-end category review? So it's not just about procurement savings, it's about how you source, how the merchandise mix is done, etc.? How much structural change has to take place to capture all of what that third bucket is defined as?
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [63]
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It's Allan here. I think this is -- it's structural, but not necessarily just in the organizational structure sense. It's in the how you are doing business sense. And what we have been adopting is an incredible commitment to scrutinizing the value we are delivering with every process, every investment, every piece of capital.
We have got a long way to go but it's not because necessarily we're working through a list, but because we are changing the way we are doing business. So we're looking at the productivity of our inventory, the productivity of our linear space, the contributions of our assortment, categories we are in. And I'm really, really pleased that the CTR team has adopted this as a new way of continuing to scrutinize the business.
We got lots of opportunity in front of us, for sure, but it's less, like I say, of a checklist exercise and more of a running the business, quite honestly, in a more sophisticated way. And by the way, full credit to Dean and his team and their leadership, because that level of sophistication isn't born within a business unit. Typically it takes an external catalyst and they did a great job of providing it.
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Jim Durran, Barclays Capital - Analyst [64]
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Dean, if you were to sort of go back and look forward, would you say, based on the learnings you guys have had over the past year or two as you went down this road, that there is a fourth bucket out there that you hadn't perceived before? Or has the third bucket just become a bigger bucket?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [65]
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I want to -- let's not get ahead of ourselves here. The reality is it's the third bucket and let's also recognize that sometimes having no choice makes decisions easier. So the reality is we have a huge mountain in terms of FX to deal with, so that has clarified the minds around the table as to the importance of this.
And I think, as was referenced earlier on the call, this is not one-and-done stuff. This is systemic change, as Allan has mentioned. That's the exciting thing about this, but I would still put it all in the same category.
This is what we envisioned is this sort of -- from the factory to the customer's car to go home kind of thing is really what this is all about. And I think the other opportunity is taking this on the road to the other businesses and applying some of this across the entire company.
So I still think it's three buckets. I think there's probably more opportunity than we thought, but there needs to be given the pressures on the business and the challenge in terms of moving our ROIC up over time, which is where we started thinking about this whole exercise.
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Jim Durran, Barclays Capital - Analyst [66]
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I believe Allan suggested that you are kind of 30% of the way through your categories from an end-to-end standpoint. How long is it going to take to get to the finish line, the elusive never-ending finish line?
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [67]
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I think if this is successful, this is never-ending. And I mean that in all seriousness. It's about systemic change and the dream is you create a culture of a company that comes in to work every day and everybody is sitting around going, okay, that's how we did it yesterday. How do we do it differently tomorrow? And are continuously trying to improve our organization.
Like I say, at Canadian Tire if something catches fire, generally it will keep burning. But you got to have the right people, the right cultural change implemented into place and there's some encouraging things happening.
And to date -- as I always say, to date they've done a great job offsetting the pressures of FX, but I also want to say let's not get ahead of ourselves here. There's lots of pressures and lots of hard work ahead. This stuff is not easy and so far, so good, but lots of hard work ahead of us. And some investment probably and additional resources that we're going to need in order to accomplish this. So so far, so good.
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Jim Durran, Barclays Capital - Analyst [68]
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Great. Thanks to everyone for the answers.
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Operator [69]
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Mark Petrie, CIBC.
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Mark Petrie, CIBC World Markets - Analyst [70]
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Good afternoon. I wanted to follow-up on the discussion on e-commerce opportunities and the challenges of improving retail ROIC.
And I guess recognizing that investment in stores is crucial, how do you look at the square footage growth today? We're at 3% in the quarter year over year. And your absolute level of capital spend on the stores and a focus on Canadian Tire Retail?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [71]
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I'll take that, Mark. The reality is typically, as you know, historically we are sort of in the 1% camp in terms of retail square footage growth. I think as a retailer we still see a combination of bricks and mortar and e-commerce as being the future.
But I think from a practical perspective, we're going to get more and more selective with respect to the retail square footage we add and the real focus, quite frankly, as you've been listening, is about the productivity of the space we have. That's one of our biggest assets is the space that we own, and Allan and team have identified that as one of the best opportunities in the future for improvement of margin, profitability, and frankly, assortment that meets what customers are looking for. So very exciting.
Then you wrap that into e-commerce, so we think it's an ecosystem; one needs the other. Allan referenced the complexity associated with CTR and figuring that out, and the test in Ottawa is part of the work to be able to do that.
But short answer to the question is retail space is part of it, but the real gem here is to get more out of our existing retail space as opposed to too much focus on growth in new space. But we will do some of that, we'll just be choosier.
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Mark Petrie, CIBC World Markets - Analyst [72]
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So this is peak square footage growth for the rate?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [73]
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I don't really know how to answer that. I think we will be choosy and I think, going forward, if you looked out long term will our growth rate in the retail square footage be the same as our growth rate over the last five years? Probably not. It will probably be a little less, but that will depend on the opportunities that present themselves.
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Mark Petrie, CIBC World Markets - Analyst [74]
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Okay, thanks. On the financial services business, obviously a number of puts and takes in the quarter in terms of impacting the gross margin. But maybe just taking a step back, how do you feel about the quality of the portfolio there and credit losses going forward over the next two years?
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Mary Turner, Canadian Tire Corporation, Limited - SVP, Finance Transformation & President and CEO, Canadian Tire Bank [75]
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Mark, it's Mary. We are actually feeling pretty good about the quality of our portfolio. As you know, we took a more conservative stance a while back when we -- when the economy started to wobble, so I think that certainly helped us on the absolute write-offs.
We are seeing some softness in Alberta, as you would expect, but it's a fairly small part of our portfolio. So I would say actually we're feeling quite confident about the quality and our metrics and our ability to manage through whatever happens, because as you know, that's really a core competency for us to be able to deal with delinquency levels and our analytics about credit risk. We feel quite confident.
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Mark Petrie, CIBC World Markets - Analyst [76]
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Okay, thanks. That's helpful. Then just last, I guess I just wanted to clarify -- I think you sort of addressed this early on, but just in terms of the economic backdrop across the country. Basically negative trends in Alberta, but any sign of slowing down Ontario, BC, or Quebec?
And I guess any change in the patterns from the consumer in terms of how they are accepting some of your higher price-point products?
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [77]
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Michael for the first part and then I'll -- the second part do you want to CTR or --?
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Mark Petrie, CIBC World Markets - Analyst [78]
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Yes, I was focused on CTR, yes.
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Michael Medline, Canadian Tire Corporation, Limited - President & CEO [79]
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All right. The first one is we are seeing no slowdown in Ontario at all. It's been going on for quarter after quarter and British Columbia, honestly, is even stronger than that across --. The stories are the exact same in all of our banners, so I can generalize; same direction. Tiny bit different numbers, but same places are booming.
And obviously Alberta has slowed and has gone negative, but the other provinces are making up for it.
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [80]
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In terms of product and spending, it's going -- when you look at the results that we are posting and the kind of weather patterns, I think what we're seeing is affirmation that the consumer behavior is going in stride with our forecasted sort of trends. What we are investing in in terms of the WOW Guide, the product assortment that we've pulled together and the product that we've brought in is all moving according to plan. So that's a good affirmation that things are as we expected them to be sort of 12 months ago.
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Mark Petrie, CIBC World Markets - Analyst [81]
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Good stuff. Thank you very much.
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Operator [82]
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Keith Howlett, Desjardins Securities.
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Keith Howlett, Desjardins Securities - Analyst [83]
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Yes, I had a question on the SG&A. I was referencing note 11 in the other category that I guess is the most rapidly increasing one. Can you just speak to what's in the other bucket of expenses?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [84]
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Keith, it's Dean. Probably one of the biggest factors in there is IT, but that's a sort of catchall bag. And I think probably better just take that offline and we can give you some better understanding of the depths of that.
But IS costs, information support costs would be a big factor of that, but there's also mixed bag of stuff in there. That's what you call it other.
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Keith Howlett, Desjardins Securities - Analyst [85]
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Then just on the financial services business, is the cadence of the development of the new business or account acquisition model, is it going as expected? Do you expect 2Q to be similar in performance as 1Q? Or was there any shifting of activity from one to the other, quarter to the other?
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Mary Turner, Canadian Tire Corporation, Limited - SVP, Finance Transformation & President and CEO, Canadian Tire Bank [86]
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Keith, I think what I would say, because we are focusing more with our integration with retail, I would not have expected Q1 to have been where you would see the big impact because a lot of what we are doing with retail will show up in Q2. So we are doing more advertising, more financing inside the store. I think you're going to see a ramping up of the activity to drive growth in the business and the expenses that go along with that.
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Keith Howlett, Desjardins Securities - Analyst [87]
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And is that about what you expected going into the year? I presume I guess.
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Keith Howlett, Desjardins Securities - Analyst [88]
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Yes, I think it is what we expected. I think I have said in the past this is going to take a bit of time for us. It took a bit of time for the growth to slow and it takes a bit of time for it to come back up. I believe we have all the components in place to drive the growth that we need, but it's all in the execution and the time it needs to come to fruition.
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Keith Howlett, Desjardins Securities - Analyst [89]
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I just had a -- I will call this the Ottawa question, but I noticed that you bought five stores as of April 1 in Ottawa. I wondered if you could just -- FGL Sports speak to that. And then also on the e-commerce test in Ottawa, if you could just maybe amplify what's going on in the Ottawa market, the Canadian Tire Retail store test.
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Duncan Fulton, Canadian Tire Corporation, Limited - President, FGL Sports [90]
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It's Duncan. On the FGL side, as you know, Sports Expert stores have primarily and historically been inside of Quebec, and there's been a few legacy examples where we had that brand outside of Quebec. Ottawa was the most prominent. I think we saw an opportunity to get those back, turn them over to Chek, put in the best of our Chek concept into that market and we took advantage of that.
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Rick White, Canadian Tire Corporation, Limited - President, Mark's [91]
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It was very difficult to run corporate stores and franchise stores in the same market. We've been looking to do this for years. It came about and we are very pleased. And we will be working on those stores.
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [92]
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I think in terms of the Ottawa trial, we are first using that to understand the implications of our unique business model and assortment in an online space from a whole bunch of different perspectives. What we're seeing right now, I must say, is really encouraging both from an economic standpoint, customer response, dealer engagement and we're going to be continuing it.
But you'll start to see different elements of that test come to life in market and some of the learnings influence the solutions that we put in place going forward. So long story short, the market is outperforming the rest of the country and really, really pleased with the learnings we are taking away.
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Keith Howlett, Desjardins Securities - Analyst [93]
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Is it across all dealers in the Ottawa area?
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [94]
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It is, 22 stores including the Ottawa.
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Keith Howlett, Desjardins Securities - Analyst [95]
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Thank you.
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Operator [96]
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This concludes today's conference call. A webcast of the conference call will be archived on Canadian Tire Corporation Limited investor relations website for 12 months.
Please contact Lisa Greatrix or any member of the IR team if there any follow-up questions regarding today's call or the materials provided. You may now disconnect.
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