Canadian Tire Corporation Ltd at Scotiabank Back to School Conference
Sep 20, 2016 AM EDT
CTC.A.TO - Canadian Tire Corporation Ltd
Canadian Tire Corporation Ltd at Scotiabank Back to School Conference
Sep 20, 2016 / 01:00PM GMT
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Corporate Participants
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* Allan MacDonald
Canadian Tire Corporation, Limited - President, Canadian Tire
* Dean McCann
Canadian Tire Corporation, Limited - EVP & CFO
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Conference Call Participants
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* Patricia Baker
Scotiabank - Analyst
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Presentation
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Patricia Baker, Scotiabank - Analyst [1]
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In what's become a bit of a tradition over the course of the last several years we are kicking off the conference once again with Canadian Tire Corporation. And we have here with us today Allan MacDonald, President of Canadian Tire retail; Dean McCann, who most of you know, CFO. We also have the investor relations team sitting right here at the table and, in addition, we have the new CEO, the new old CEO, Stephen Wetmore at the table.
So Allan, Dean sit down. So I think it's -- I'm pretty happy that we've got Allan here today. And, Allan, you are the executive that's in charge of Canadian Tire's largest business, Canadian Tire Retail.
And it has the largest proportion of the Company's square footage asset base. And you've got the important, meaningful distinction of actually being the Canadian Tire legacy business. How do you see the business that you are running fitting into the entirety of CT Corp.?
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [2]
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Well, it's interesting. This is going to sound terribly self-serving because I happen to run CTR. CTR is CTC when you think about the business since 1922.
Our mission is to help Canadians enjoy the jobs and joys of life in Canada. And we focus on four primary divisions: fixing, living, playing and driving. And when you think about the evolution of our brand and focusing on active families for the jobs and joys, everything that we do should flow from that and should make the triangle stronger.
The triangle and CTR have to be one and the same and have to be synonymous. That's the role that we've carved for ourselves. And over the course of the last decade, two decades, the moves that we've made to strengthen the triangle have also been intended to strengthen CTR and vice versa.
So you will see some natural extensions in categories like soft goods with Mark's or our playing business with FGL which is an extension not only to increase the relevance that Canadian Tire plays to active families in those categories and sometimes in increasing that relevance you use other banner strategies to accommodate different ends of the spectrum. Overall everything that we do should ultimately increase Canadian Tire's relevance to our target customers in those categories or help us build capabilities that allow us to be even more relevant. So these are really important mantra for us internally because we know a strong CTR is a strong triangle which is a self-fulfilling prophecy in terms of the whole organization.
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Patricia Baker, Scotiabank - Analyst [3]
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Dean, turn it to you now. And turn that same question, ask it to you in a different way. How do you see where you sit at CT Retail helps inform the tactical and strategical agenda for Mark's and FGL?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [4]
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So as Allan was articulating there, I think the reality is when you look at Canadian Tire Corporation and all of the banners, and we have like 10 banners if you think about it and step back from it, and you look at it through the eyes of that vision, the jobs and joys of life in Canada, serving active families is sort of the primary target category. Think about it from a customer point of view and then think about the products that we need to have in order to service those customers.
Then you go to the various banners. And so you start thinking about the Company of it differently and looking across the banners and how those products can be delivered, if you will, to customers by all those different banners and vehicles. And that's I think the way that it all ties together.
So, Allan, I don't want to steal Allan's thunder here, but if you think about simple category like rubber boots, we were just talking about this. And you go across all of the banners from Mark's through to Canadian Tire, you've got every kind of rubber boot on the planet Earth. And the reality is it's a huge opportunity to think about that across as a product that's available in all those various banners and can service the whole customer lifecycle of our customer base, and a growing customer base.
And you could even think about that and having that travel outside of Canada. So there's huge opportunity here and I don't know why the guys haven't got at it already. Sorry, inside voice.
But the reality is there's a huge opportunity there. So when you talk about the fit, if you will, it's really the fit of thinking about the Company as one Company and the opportunities that creates. And I think Allan will touch more on that today.
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Patricia Baker, Scotiabank - Analyst [5]
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Listening to what both of you said, I detect a real shift here from the way you would've talked about the business several years ago. You had a more silo-based approach and is it fair to say that there's much more integration and interaction between the different businesses now then there might have been in the past?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [6]
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I think we had graduated from the silo base over the last number of years. But certainly the opportunity to think about serving customers right through the lifecycle with that jobs and joys of life being what we are about and then looking at the products necessary to service those customers, that's a bit of a shift. It's a growth, if you will, in the way we are thinking about the business and creates huge opportunity.
And some of the capabilities that Allan and team and, frankly, across the businesses have been developed with respect to product I think is a huge opportunity for us. So that linkage and the way the businesses work together I think is a real growth opportunity for us. And looking forward I see huge opportunity for us with respect to that.
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [7]
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I think there is a big question to be asked to say with our 10 banners we believe, it's funny when you say it, but one of the questions is how do they make an individual contribution in terms of their financial performance? And then what contribution do they to make the whole the greater CTC stronger?
And that's typically making a contribution to either give us capabilities that allow us to financially perform better or create a better experience for our customer or capabilities internally that allow us to either bring products to market in a different way faster or build even stronger brands and assortments. So ultimately they have to contribute to making the core either stronger or more relevant.
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Patricia Baker, Scotiabank - Analyst [8]
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So if we looked out five years at that growth opportunity that Dean referred to is there -- will we see a Canadian Tire Corp. that's got more shared services model and better leverage of all the infrastructure?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [9]
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You know, the back-office stuff we've done a lot of that stuff. But the opportunities going forward in terms of the kinds of competencies that are going to make this vision with respect to jobs and joys in servicing the customer right through the lifecycle, things like data, things like digital marketing, things like the back end around supply chain, we've gone at that to put an enterprise solution together with respect to that.
So all of those things are the things that will tie the Company together. Product development, Allan and team have done great job, and you should talk about this more, about design and some of the areas like Christmas and things like that. It's absolutely fascinating what Canadian Tire has been able to do with respect to that.
So that siloed, I mean I just put that aside. And as Allan was talking the opportunity to look across the business through that customer lens in service of customers and reaching more customers, be it in Canada or, quite frankly, taking it on the road, as I like to say, is a huge opportunity for us. And I think that any of that barrier to that I think we are well on our way to being totally past that and creates, as I say, opportunity.
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Patricia Baker, Scotiabank - Analyst [10]
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Allan, you and I have many discussions about retail and every time we talk about retail it morphs into a discussion about brands. So I'd be quite remiss if I didn't ask you about the Canadian Tire brand, how you want to see the brand enhanced over time?
And related to this on earnings calls you always manage to talk about private label and the exclusive brands that you have within Canadian Tire Retail. And I don't think people, not everybody recognizes just how strong that piece of the business is, not simply at Tire. So I'd love you to provide your thoughts on brand private label exclusivity, how you look at that.
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [11]
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Well, it's interesting because there's two layers to that. There is the triangle and then our private label brands. We are one of the few companies, the only Company I know of, that has a brand committee of the Board and we take the brand management incredibly seriously.
We have 12 to 16 measures that we report on quarterly to the Board in terms of the health of the triangle, how it's being perceived and its relative strength. And that cascades right down into the Canadian Tire Retail's operating plans where we have a very specific brand management metrics and plans and then, of course, private label metrics and plans. Because it's not just about the revenue that they are generating, but it's about the health of these incredibly valuable assets.
So to your first question where I'd like to see the triangle I would like to see the triangle get more credit for just how relevant it is to life in Canada. When you think about, and I will use the rubber boots example we were just talking about, we sell every type of rubber boot there is from Hunter rubber boots at FGL and Atmosphere which are high end and fashionable to industrial rubber boots, rubber boots made specifically for the oil and gas industry to at Mark's right through to Canadian Tire, the rubber boots you walk your dog in for your little kids on rainy days going to school. And that's kind of a silly category, but if you put all the rubber boots we sell they would take up this entire stage and it makes us incredibly relevant to life in Canada.
But I'm not sure that Canadian Tire Corporation gets the credit it deserves for just how prolific we are in this category and how much of a role we play. If you extrapolate that to any of our 192 categories you will see that we are actually more important to life in Canada than we get credit for.
I think we have some work to do there to be able to get our rightful spot in terms of the role we are playing. And that's one of the things that we are working on.
And one of the things as you talk about thinking of the business across silo we've done the work, we just have to get the credit. That's part one.
Part two would be on the private label side, Canadian Tire historically punched above its weight because it was one of the first companies to go offshore in terms of direct sourcing products. It gives us a competitive advantage from a price and margin management standpoint. And we are going up against companies many, many times bigger than we are.
Over time you develop a great skill at that, not only design but sourcing and transportation. We are a high, low seasonal retailer in a wholesale hybrid model, which means we have to be adept at managing inventories for seasons that are very short. That means we have to be of the take orders from customers that are big and customers that are small.
It means that we have to be able to manage margin in terms of being able to sell at reg or promo. So these are skills we've developed over time. And I think what's become really apparent to us, especially as we are seeing the transformation of the e-commerce, that's an incredibly value competitive skill set.
One of the things that we've been talking about in terms of defending ourselves against the Amazons of the world and something that makes us uncomfortable is when you look at a product that's nationally branded that's available on Amazon and six retailers come up, your decision to buy that product is no longer about the retailer. It's about the products. You choose the product first.
The retailer is second and that's based on speed of delivery, price. So we are relegating in that instance the retailer to a commodity sale.
From our standpoint we have this great capability to actually step away from that competitive set and make our own space with our own products. And we've been doing it for years. So over the course of the last two or three years -- and I'd give Stephen full credit for this, this is his leadership in terms of the first part of what I was saying and opening with brand -- we've moved from managing our product sourcing to fulfill a promo strategy and fill the flyer to category strategies, brand strategies and making sure we are bringing products to market that are relevant for our customers.
Over the course of the last three years, and especially if you saw the new Canadian Tire WOW Guide which I brought I had on my desk to bring with me, our assortment has changed dramatically. CANVAS, Woods, NOMA, Outbound, FRANK, the private label brands that we've brought to market have been incredibly successful. We are seeing our customers react really strongly to them and, quite frankly, it's a whole asset base that we've always had but have struggled to really manage properly until the last couple of years.
Three years ago, well, two years ago actually, we bought Woods, Woods and Outbound, two brands together, which were a small company doing less than CAD15 million in sales. We completely revamped the camping category, which at Canadian Tire had been roughly flat for the last 10 years. This year we are on track for Woods to do, Woods the Outbound combination, to do about CAD150 million in sales.
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Patricia Baker, Scotiabank - Analyst [12]
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So a 10 times increase in two years?
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [13]
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24 months, 10 times increase. Not to brag but also we had to move out some inventory from our old brands which talks about the value of brands, the value at -- price points have increased because quality has increased. We have been much more purposeful in terms of the breadth of our assortment.
And I think where we relegated to cheap and cheerful by our own design chasing promo sales, we've actually gone a little bit upmarket and our customers are loving it. We are moving more units at better price points. And we have an asset now that not only provides us with a defense against that scenario I talked about with Amazon, but we can actually use Amazon outside of Canada as a competitive tool against to enter new markets.
So there's nothing stopping us from putting our Woods assortment on Amazon in the UK, for example. And the nature of how Canadian Tire's evolved, we have all the tools to do that. We are already a wholesaler, we already know product design, quality control, international sourcing and so on.
And then when you look at the siloed nature of our business you say, well, where can it go? Well, we've got an incredible soft goods depth in Mark's. We've got a great sporting goods business in FGL, Atmosphere, and National Sports.
So really the world is our oyster. And we see categories that are very brand-centric that we have a great share in today that we think we have a huge opportunity to build even stronger assets. Sorry, that was a long answer to a short question.
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Patricia Baker, Scotiabank - Analyst [14]
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No, you got Dean riled up here.
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [15]
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In a way what Allan is talking about in terms of the strength of these brands and the opportunity created by that, it reminds me of the real estate portfolio in Canadian Tire. To me it's the same kind of thing. So we had this incredible brand value and these incredible lines of product across the broad range of the category, rubber boots being an example, and I don't think the value of that, even we have recognized the true value of that, and the opportunity that that creates not only within our current boxes but as Allan said internationally there's nothing to stop us from taking that on the road from the perspective of making it available to others.
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [16]
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Let me leave you with this because I'd hate to leave you with the rubber boots example. That's my fault but (multiple speakers) let me leave you with Christmas. Five years ago we would have been very opportunistic in Christmas and had a product of the season.
By shifting to the CANVAS brand, being very purposeful -- hot off the presses, to be released in the next couple of weeks -- by shifting to the CANVAS brand, being very purposeful in terms of what it should stand for, the types of products that it should bring to market, being very purposeful in terms of what active families in our target customers want in Christmas we are able to build an assortment that is incredibly relevant.
Not long ago I was walking through our seasonal set-up area and a really junior employee who has been a couple of years out of school stopped me and took me on a tour. And they were articulating this is our color of the season, this is what our home decor strategy is, here is how we are going to think about home entertaining, here it is what the designers come up with in terms of the right mix between licensed ornaments and in-home ornaments, soft versus hard. And it was incredible to watch.
This is a transformation away from an opportunistic promo-driven strategy to a category customer-driven strategy. And I would argue that when you look at it, and, please, I hope you all do, our Christmas assortment would go up against any company's in the world.
I'm not sure there's a company that could beat Canadian Tire, even a specialty retailer in terms of what we've created for Christmas. And the best part about that is it's under our brand and we've sourced it virtually all of it.
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Patricia Baker, Scotiabank - Analyst [17]
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I think you probably left everybody, both of you, quite intrigued with your notion that you could go international with these brands. I'm sure you're going to get a lot of questions on that.
Dean, if we go back to the last Investor Day in 2014 you introduced everybody to a big new push at Canadian Tire around productivity and driving efficiency. And I think at the time you acknowledged that the retail environment was undergoing a big transformation that would require necessary investments in new capabilities, be that digital, etc., etc.
But in order to fund that you really need to take out costs and get more efficient. How has that journey gone for you a little over two years? Where have you seen the wins in there and is that broader initiative made any more difficult by the complexity that you have, having the 10 brands?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [18]
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You know, the reality is, I mean, I'm very pleased thus far with how the organization has embraced productivity. And everybody knows what productivity is. You could label it whatever you want, operational efficiency, whatever.
The reality is that Allan really started this in terms of capturing this wave, if you will, that's moved across the organization with respect to finding ways to basically be not only more efficient but to capture more opportunity. And some of the things that we've been talking about are examples of that. The focus on brands, the looking at our products across the various banners and looking for opportunities to change our retail processes in ways that are going to allow us to really capitalize on those opportunities.
And it's things like using data in different ways. It's things like taking advantage of the learnings around digital marketing and applying those across the organization. Those are the real wins for the Company.
Taking nickels and dimes out of costs here and there, that's not the real win. The real opportunity has been looking deeply at how we do business and bringing changes to processes and then applying those across the organization. That's what has got me excited about it and I think the reality is we will never be done.
I think there's much more we can do and I think the minute you think you are done is probably when you need to start again, quite frankly. But as a practical answer to your question, yes I'm extraordinarily pleased with the momentum that we've got with respect to this.
And Allan through his leadership, as I said I've got to throw him a rose because we still need him, has really embraced this right out of the gate. And we probably should've started earlier in the other areas as well, but getting that momentum in CTR has paid a lot of benefits in terms of, as I say, creating that momentum across the entire organization.
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [19]
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Productivity can be a lot of fun for the organization. It's not just necessarily cost-cutting. But when you look at the productivity of your asset base, part of what we just discussed with private brands was what's the productivity of those assets.
They are not assets you traditionally think of, although they are obvious when you say them. So we found productivity is not just about, again, where your investment needs to be cut in terms of cost, but also where there's opportunities within the business. So it's been quite invigorating for the Company.
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Patricia Baker, Scotiabank - Analyst [20]
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I guess we can't have a fireside chat in 2016 if we don't talk about digital and e-commerce and you referenced Amazon earlier. There's a lot of digital elements.
I think I'd have to say that Canadian Tire in the context of Canadian retail, starting first with the Sport Chek and then following up with some initiatives, particularly the South Common store in Edmonton, you've got a lot of digital elements. Anybody who's been to your head office recently has had a digital transformation.
How do you think about e-commerce generally in digital? Is it an opportunity, a threat? Are your efforts offensive, defensive?
And, Dean, you must be focused on the cost associated on that and ultimately getting a return. So what do you both think about e-commerce?
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [21]
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Do you want me to go first?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [22]
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Yes.
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Patricia Baker, Scotiabank - Analyst [23]
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Both a threat and an opportunity.
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [24]
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Yes, yes.
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [25]
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And it's expensive.
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [26]
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E-commerce is just one part of digital. And I think you can't have the e-commerce conversation without having the digital conversation. For us our pre-shop digital engagement and transactions at store almost operate on a one-to-one basis.
So we have spent a lot of energy and in making sure that we are engaging our customers in a meaningful way. And everything from store product locators to the role that our app plays to how people engage with our digital catalog, merchandising opportunities in the digital space haven't been figured out yet. And part of the moves that we are making internally is to try to bring those two capabilities together, so we use merchants to merchandise the website, not digital people.
This WOW Guide, I feel like I'm selling the WOW Guide to you, I'm really not, but this is really meant to be a paper segue into a digital space so we can get our customers more engaged in our digital catalog which isn't released two times a year. It's released every day, and it's dynamic and it's constantly being updated. It allows us so much more opportunity to engage in our customers, so we have to be great at that.
The next of course appropriate segue is into e-commerce and we are being very mindful of where that's disrupting our business, what categories are going to be really important to be great at. Our customers are always going to be in control when it comes to e-commerce, so the basic elements like having a great destination delivery, we are going to do it at the appropriate pace.
But I think it's really important that we manage e-commerce on a category by category basis. We were just talking about this off-line that when a category becomes right to be attacked by e-commerce and it shifts over we are going to be there and we are going to play our role. But that's not to say that that part of the store then goes dark.
It's incumbent upon us to then look at how we're going to continue to have every square foot of our retail space as productive as possible in addition to being really productive in an e-commerce world. The branding strategy, the category expensing strategy, being very grounded in jobs and joys allows us the time right now that we're thinking about, which categories would we like to get into next?
Are they a very competitive e-commerce category, are they not and is there an opportunity for us to start transition some of that square footage? So it's a very dynamic environment. The pre-shop is as important as the post-shop in my mind, and we are working really hard to stay relevant.
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Patricia Baker, Scotiabank - Analyst [27]
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Is there one of those categories that you said you have to be mindful of the categories where it can be disruptive for you? Can you identify any of those categories and what you might have done?
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [28]
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Well, you know, soft goods is a great example and I will speak more generically. And the work we have been doing in the hunting space, let's say, we come out with the Huntshield brand, which was a great partnership between Mark's and Canadian Tire, which gives us an exclusive range and category built specifically for hunters in Canada.
We're not naive enough to think we're going to change consumers' behavior because that's up to them really. But it does give us a great defense about how we're not relegated to just an also-ran in terms of those categories that are really important to us.
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Patricia Baker, Scotiabank - Analyst [29]
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Dean?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [30]
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Yes, on the cost side we are going to invest what we need to invest in order to be competitive, as Allan said. But I look at it and I think there's more opportunity for us in e-commerce than there is in threat. And for many of the reasons that Allan just said, in terms of the products that we have and the ability to basically expand, if you will, our universe in terms of the nature of the products that we sell and where we sell them, e-commerce essentially is a channel.
And we've got some work to do on the CTR side. And we've been very successful and our Dealers have been incredible, shown incredible leadership with respect to the work that's been done in terms of click and collect and basically getting our promo business completely online. So great strides there.
More work to do with them, but as we've talked about many times the relationship is at an historic high. And the Dealers are fully supportive of that and know that we are going to need to go where the customer is going to take us at the end of the day. And we need to do that in a profitable, logical way that meets our customers' needs, so slam-dunk.
Things like FGL, they are there. We are doing the same-day delivery test in Toronto, as an example. So great examples there and another example of the Company learning across the enterprise as to what we find out from that activity, and Mark's has been there from day one.
So I'm not worried about it at all. I think it creates, the more I think about it the more we look at it I think there's more opportunity than there is threat for us.
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Patricia Baker, Scotiabank - Analyst [31]
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What about loyalty? That's something that you haven't quite figured out yet. Can you talk a little bit about what your vision on loyalty is and what you are working on?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [32]
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Yes, this is a bit of an interesting one. So I think what we have today is really a rewards program, you think of [Tim] and Canadian Tire Money, those kinds of things. And that's rich with respect to the data that it provides.
But I think we've got another tremendous asset which is our CTFS, our Financial Services business, and the credit card business. And that really, if you step back from it, is the one thing that crosses every whether it's banner and ties everything together and has the opportunity to tie everything together with some of our most valuable customers. And as we step back and we are working through this now but I really think that creates a point of integration across the business that I think we really have the opportunity to capitalize on.
More to come on that. But it's a bit of a newer way of thinking about what CTFS can do. And it really ties to into what we've been trying to do with CTFS for a number of years now in terms of that work to integrate it with the retail businesses and I think it's just taking it to a new level.
That will be great from a growth perspective for the Financial Services business. But it really provides that leverage point into across the organization and across our customer base and tying it all together. So more to come.
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Patricia Baker, Scotiabank - Analyst [33]
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Just, Allan, one thing, at Canadian Tire Retail how important is the toy business to you? I know most people would have seen yesterday that Hudson's Bay Company announced that they would get back in the toy category having taken some learnings I think from Germany back to the Canadian business. So how important is toys to you?
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [34]
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It's interesting. We had a conversation, so this year we launched an animated TV ad called Canada's fun store which is focused on kids' fun. And we've had a conversation internally, call it a year ago, when active families being our target customers, kids play a huge role, and the toy business is one that's complex and very competitive.
And we started looking at our role when it comes to kids and people typically define the toy business as toys, so they think about birthdays and Christmas as two big occasions. Our definition of kids' fun is much broader than that. And if you think about how many kids' occasions there are in the run of a year and if I said name a toy store you might not come up with Canadian Tire.
Well, in fact, when you think about first skates, toboggans, fishing, backyard fun, pool, going to the cottage, Canadian Tire, sidewalk chalk, you name it, we play a huge role in kids fun all year round. And we were being shortchanged in terms of our role when it comes to being Canada's fun store.
What you've seen us to open the last year is we've started to elevate that thinking around our brand, one of our brand metrics in terms of how we're resonating as a fun store and a kids store, and we're starting to augment our assortment. Toys has been one element of that, but you are going to see us continue to own all of those other occasions that I think the other kids companies really envy.
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Patricia Baker, Scotiabank - Analyst [35]
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We are out of time now. I want to thank you both for coming and thank you.
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire [36]
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Thanks very much.
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