Q3 2016 Canadian Tire Corporation Ltd Earnings Call
Nov 10, 2016 AM EST
CTC.A.TO - Canadian Tire Corporation Ltd
Q3 2016 Canadian Tire Corporation Ltd Earnings Call
Nov 10, 2016 / 06:00PM GMT
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Corporate Participants
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* Stephen Wetmore
Canadian Tire Corporation, Limited - President and CEO
* Dean McCann
Canadian Tire Corporation, Limited - EVP and CFO
* Rick White
Canadian Tire Corporation, Limited - President, Mark's
* Mary Turner
Canadian Tire Corporation, Limited - SVP of Finance Transformation, President and CEO of Canadian Tire Bank
* Allan MacDonald
Canadian Tire Corporation, Limited - President, Canadian Tire Retail
* Duncan Fulton
Canadian Tire Corporation, Limited - President, FGL Sports
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Conference Call Participants
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* Kenric Tyghe
Raymond James & Associates, Inc. - Analyst
* Peter Sklar
BMO Capital Markets - Analyst
* Irene Nattel
RBC Capital Markets - Analyst
* Jim Durran
Barclays Capital - Analyst
* Mark Petrie
CIBC World Markets - Analyst
* Derek Dley
Canaccord Genuity - Analyst
* Vishal Shreedhar
National Bank Financial - Analyst
* Patricia Baker
Scotiabank - Analyst
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Presentation
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Operator [1]
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At this time, I would like to welcome everyone to the Canadian Tire Corporation (technical difficulty) includes cautionary language about forward looking statements, risks, and uncertainties, which also apply to the discussion during today's conference call. I will now turn the call over to Stephen Wetmore, President and CEO. Stephen?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President and CEO [2]
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Thank you, operator. Good afternoon, everyone. Let me start today by reiterating how encouraged I am by the performance of each of our retail banners this quarter. Our results were generated by great retailing from our team and actions that they took many quarters ago in product and assortments that are the foundation for our growth.
This can be seen in both comp sales and margin growth (technical difficulty) quarter. Our CTR revolution was not quite aligned with our point-of-sales growth; otherwise, bottom line would have been even better. And Dean is going to comment on that in a few minutes.
However, as we move forward on our journey, we are spending a significant portion of our time looking well beyond the next quarter to build the types of capabilities and programs for the future. CTC is at its strongest when we have a one-company approach. Each of our banners has its specific strengths, and we are working through bringing these capabilities together to (technical difficulty) for CTR.
TJ's role will not only be focused on our existing private brand portfolio, but also on the identification and acquisition of product brands that have runway for growth, and development of new product brands that would be a logical complement (technical difficulty) or extension to our existing portfolio.
I won't cover any more of the details (technical difficulty) billions of dollars in sales and provide us with an (technical difficulty) incredible competitive advantage, made possible with our experience in products, quality management, and direct sourcing. Exclusive brands like NOMA, CANVAS, Mastercraft, and FRANK will continue to set CTR apart from the competition, whether online or in the store.
The development of our private brands also gives us control over the whole process from design to manufacturing, which allows for greater visibility to costs, quality, and style. This is a tremendous opportunity to make use of our current capabilities, bring together the best talent to drive our private brands business forward, and strengthen the Canadian tire marketplace.
Over the past few months, one of my top priorities has been concentrating on and driving our customer experience. Given that the majority of our customers visit our Web properties before purchasing, let me make a few comments on our digital and e-commerce journey. Digital communication and transacting with our customer requires us to examine the full lifecycle of the customer experience. (technical difficulty) financing at the point-of-sale for CTR that will also be rolled out to Mark's in the near future.
(technical difficulty) we have established a deliver-to-home model which we continue to evolve. A few weeks ago, we implemented a distributed order management system that will determine the most efficient method of fulfillment to customize and allow for shipments from both store inventory and from our distribution centers.
We also have our pilot underway in the GTA for Sport Chek that provides same-day delivery for online purchases. These are important developments for Sport Chek, but also for the rest of the Company, as we will take advantage of the learnings and put them in our other banners.
Mark's has a well-established deliver-to-home model, and we will also be establishing that distributor order management system for Sport Chek as well. At Canadian Tire Retail, we are exactly what we need to be with our total e-commerce journey, based on evolving customer expectations. (technical difficulty) dispersed across the country in our 500 store locations, a definite competitive advantage.
Our previous investments in real-time inventory availability and in-store fast buying for trip assurance were prerequisites to our launch. Next, we tested and rolled out online promotions, clearance products, and cyber events -- all of which (technical difficulty) the experiences learned from each stage of the journey enable us to create better customer experiences and evolve our models.
Our enterprise, the Corporation and our Canadian tire dealers is always committed to meeting our customers' demands. And you should know that since I joined Canadian Tire in 2009, we have together overcome every hurdle and arrived at solutions that are the best for our customers and our enterprise.
Gerry Feist, the new President of the Canadian Tire Dealers Association and his Board are leaders, expert retailers, and our working relationship has never been better.
(technical difficulty) to move on, earlier today we announced an increase to our dividend of 13%, and we renewed our share purchase program for 2017. As you have also seen, while we have reduced our capital guidance for both this year and the upcoming year, investing in the business remains our top priority in terms of capital allocation.
Over the past five years, we have made significant capital investments of over CAD3 billion in our store and supply chain networks, our digital infrastructure, and our online capabilities and Web properties. As I referenced earlier, I believe that we have made the right investments in terms of putting in the foundational platforms to support our e-commerce and digital technology, and I have recently done a deep dive and reviewed virtually every one of our capital projects to ensure that we are focusing our attention on the appropriate projects -- in effect, realigning our capital spending.
While our capital spend has come down, we will continue to prioritize capital for technology and digital initiatives while remaining committed to investing in our in-store networks. However, we will be more strategic with our real estate decisions, with an eye to making our existing assets more efficient while ensuring that we keep our network current. We continue to believe that our balanced approached overall capital allocation benefits both our shareholders and our organization.
Now, before I head off to Dean, I just want to comment on our financial services business, which is executing on their strategy as we had planned. And its performance is now embedded in the operations of our CTR retail business.
It's exciting to see the operators of both businesses working together, and much of that success should be attributed to Mary Turner, who has worked tirelessly over the last few years to execute on this strategy of collaboration. Nothing can accelerate their growth more than working with retail and being an integral part of our retail offerings.
And speaking of Mary, it is with mixed emotions that I tell you that today's earnings call is her last call, as she has made the difficult but exciting decision to retire at the end of the year. Mary has been with Canadian Tire for 25 years; and while many of you may know her best as the President and CEO of Canadian Tire Bank, her exemplary career at CTC spanned roles in finance, operations, risk management, customer service, and IT. For good reason, Mary has not asked me for any advice on how to enjoy her retirement.
While Mary may be retiring at the end of the year, her successor, Greg Craig, is more than qualified to continue leading the business, as he has both a background in retail as well as in financial services. And he's been working closely with Mary over the last year in anticipation of this transition. And Greg is certainly pleased to know that we are committed to reinvesting in financial services in 2017 to build our financial services brand and invest and increase -- to increase its connection with CTC's retail businesses to drive growth.
And with that, I will now turn the call over to Dean.
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Dean McCann, Canadian Tire Corporation, Limited - EVP and CFO [3]
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Thank you, Stephen, and good afternoon, everyone. I will keep my comments brief this quarter and focus on a few key items. To start, I will remind you that last year we recorded a one-time real estate gain of roughly CAD29 million or CAD0.33 per share, which is included in our prior-year earnings comparatives.
There were also a few unusual items that impacted our operating expenses this quarter. But when you tie them all up, they net to zero, so we opted not to normalize our results for them this quarter.
I will also reiterate our announcement earlier today that, based on the strength of our results to date and our outlook for the future, we increased our annual dividend by 13% to CAD2.60 a share. Along with this, we also announced our intention to repurchase an additional CAD550 million of our class A nonvoting shares through to the end of 2017, which will take effect once we have completed our current share repurchase commitment for fiscal 2016.
Turning now to the quarterly results, as Stephen indicated, our top-line and margin results were also solid -- were solid this quarter, with a positive contribution from all three key retail banners. At CTR, all major categories were up year-over-year, which is especially impressive given that we were comping against some very strong results from each category last year.
Automotive, as expected, was challenged in terms of tires due to the higher inventory position carried over from last year. It was still a positive contributor to the quarter overall.
As you'll see, there have been some timing issues, where retail revenue growth lagged our retail sales growth in the quarter. This was due to a couple of reasons -- namely, lower shipments to FGL franchisees, as they had more winter inventory on hand coming out of Q1 this year; and as sometimes happens at CTR, our in-transit shipment volumes to dealers resulted in lower year-over-year revenue being recorded in Q3.
This is timing. And on a year-to-date basis, retail sales and revenue growth are more in sync, up 4% for retail sales and up 3% for revenue -- and in line with what we expected going into Q4. Weather aside, heading into Q4, CTR has put in place great assortments for our biggest season, supported by the most recent version of the WOW Guide.
The retail gross margin rate, excluding petroleum, was strong this quarter -- up 114 basis points over the prior year. To date, the team has exceeded expectations with respect to margin performance, given the ongoing headwinds related to FX -- which, as we told you last quarter, continues to be a significant challenge. The improvement is coming from the work done at CTR to include product assortments, including expansion of brands unique to CTR; increased uses of data to make pricing and promotion decisions; and a redesigned approach to purchase negotiations, including the use of more data and upfront analysis. Both Mark's and FGL margins also improved in the quarter, and they each have launched operational efficiency initiatives, drawing on the learnings from the work done by CTR.
Now, turning to our consolidated offering expenses: excluding depreciation and amortization and excluding petroleum, we were up 49 basis points over the prior year due to a number of puts and takes in the OpEx during the quarter. These included an increase in personnel costs due to severance charges made this quarter. And as we indicated last quarter, we increased our marketing and advertising expenses to support the Olympics as well as the World Cup of Hockey. Offsetting these costs was a higher-than-normal property tax refund that we wouldn't expect a repeat the future.
The Q3 OpEx ratio was also impacted by lower revenue growth in the quarter, as discussed earlier. And overall, on a year-to-date basis we are only up 17 basis points heading into our largest quarter of the year.
Our ROIC metric for Q3 was 8.15%, which is down 11 basis points over the prior year. As the metric is calculated on a rolling 12-months basis, the decrease is largely due to prior-year real estate gains dropping out of the calculation. And while the progress towards our 9% ROIC aspiration still seems slow, we are making progress, considering the significant headwinds that we have been facing in terms of FX pressure and the impact that this has had on our retail earnings. Our focus remains on increasing the underlying retail earnings, which is the biggest driver for ROIC improvement, as well as being selective in terms of our capital investment.
Turning to our inventory position, we are up CAD69 million year-over-year, most of that at FGL, as planned, and related to a number of new (technical difficulty) store openings.
Our current view is approximately CAD150 million lower, to a range of (technical difficulty) to CAD500 million. The CAD150 million reduction in our 2016 estimate is a function of fewer real estate opportunities than we anticipated and the inclusion of a reserve for productivity in our original guidance that has not been needed. Our estimate for technology CapEx in 2016 has not changed, and all projects are on-track and on-budget.
We have also reduced our 2016 estimate for DC CapEx spend from CAD150 million to CAD175 million to a range of CAD100 million to CAD125 million, with a portion of that spend moving to 2017 to support bringing the new Bolton DC online. Looking ahead to 2017, we expect annual capital expenditures to be within the range of CAD400 million to (technical difficulty); this range excludes DC capacity and any third-party acquisitions.
And this also does not account for funding that we have earmarked to address opportunities to invest in operational efficiency initiatives that we may identify throughout the course of the year. We will update you on those as they arise rather than include them in our operating capital outlines.
As well, for fiscal 2017 the Company expects capital expenditures required for DC capacity to be within a range of [CAD25 million to CAD50 million]. This amount includes capital expenditures required to bring the Bolton DC into active service.
And finally, our effective tax rate in 2016 is also expected -- is expected to comment a bit lower than we had originally planned and now looks to be trending at around 26.5%. Looking ahead, the effective tax rate for 2017, we expect, will come in at roughly 27% on a full-year basis.
So in summary, an extremely solid quarter and encouraging indicators as we finish our year, as well as a quarter that has allowed us to continue with our share buyback commitment and increase our dividend. Our 2017 business plans have been finalized. And as you saw this quarter, our program to drive operational efficiencies is on track as we complete 2016 and head into another exciting fiscal year.
And with that, I will turn it back over to the operator for the Q&A.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Kenric Tyghe, Raymond James.
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Kenric Tyghe, Raymond James & Associates, Inc. - Analyst [2]
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Just a question with respect to Mark's same-store sales performance. Clearly, given the backdrop, you have to be doing something right, or there have to have been some changes with respect to how you are approaching that market. It certainly would not appear to be the macro backdrop that is supporting the performance. Could you speak to some of the decisions you've been making that drove the performance in the quarter?
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Rick White, Canadian Tire Corporation, Limited - President, Mark's [3]
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Certainly. Thanks the question. It's Rick White here. We've been trying a couple different things: focus on casual clothing, led by denim, which has been very good for us both in men's and women's; and the introduction of casual footwear in men's and women's to complement that denim assortment. That, coupled with some outerwear, has really given us some offset to what has been happening in the oil patch and, by virtue of that, what's happening in the industrial apparel and footwear business.
So it's really an offset. It's not that we have picked up business in the industrial area.
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Kenric Tyghe, Raymond James & Associates, Inc. - Analyst [4]
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Thank you, Rick. And if I could, just a quick one for Mary on the CTFS: GAAR growth -- obviously encouraging, and nice to see that trend continuing. What I am intrigued by or would like to understand a little better is the share of wallet. How is that trending? What are you seeing with respect to share of wallet?
With respect to new client acquisition, obviously good; new account acquisition, obviously positive. But could you speak to how you are seeing that sort of ramp on that new account acquisition, the share of wallet, the adoption by way of new financing product through the base? Just a little more color around the health of new product adoption and the cycling of that new account as you enroll forward?
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Mary Turner, Canadian Tire Corporation, Limited - SVP of Finance Transformation, President and CEO of Canadian Tire Bank [5]
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Thanks, Kenric. It's Mary. So I would say -- I think for us, this has been a big quarter for us, because we feel like we have turned the corner on growth in our business. And I think there's a number of things that are going on that are helping that.
For sure, the retail integration is really starting to pay off in benefits. So we are starting to see new account acquisition really climb as a result of the better understanding of our products, better integration inside the store, and much stronger presence in all the marketing channels -- particularly at CTR, but also at Mark's as well. It's been a great ride there for us as well.
So what we're starting to see, though, because our value proposition gives Canadian Tire money to customers who shop in any of our banners, we are actually seeing double-digit sales increases on our card in all our banners. So I think that tells us there is even more to come, because we still haven't really got this nailed. We have been working hard at it, and it's getting a lot better, but I think there's lots of runway.
So certainly our in-store financing program has been a big hit with our customers. It certainly helps them buy higher-ticket items, helps them decide to shop at Canadian Tire as opposed to somebody else.
But what it's doing for us as well on the financial services side is it lets us grow our business with -- to some extent with a little bit more upmarket customer, so we can build our balances higher, and we can manage to grow without having to really take on additional credit risk. So that is a big part of the growth story.
And I would say the other thing I do want to point out is we always work very hard. It's one of the strength of our business is our -- is how strong we are in credit risk management and in customer service and how we deal with our customers. So we continue to evolve using analytics, and data, and just operational practices always improving, so that we can take on more business without increasing risk.
So it's a combination of those two things. The second one I talked about is kind of what we've always done, and the first one is what we have been very much focusing on the last few years. And it's been exciting to see it really start to come to fruition.
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Kenric Tyghe, Raymond James & Associates, Inc. - Analyst [6]
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Thank you, and all the very best.
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Operator [7]
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Peter Sklar, BMO Capital Markets.
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Peter Sklar, BMO Capital Markets - Analyst [8]
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Stephen, there seems to be a subtle change in focus in terms of how you view free cash flow generation and returns to shareholders. So, for example, this quarter the CapEx outlook for both this year and next year has been moved down quite considerably. And I would say your dividend and -- increased the scope of the dividend was unanticipated. So my question: is there any change in view or philosophy that you or the Board have in terms of cash flow and returns to shareholders?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President and CEO [9]
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No, short answer. The balanced approach we put in place quite some time ago, and I think it's served us extremely well.
During that period of time, though, over the last three or four years, we have continued to increase our dividend as it makes sense and as our confidence in the future increases. And we have continued just about every year to ratchet up our share buyback as the strength of our cash flows continue. That has served us extremely well.
Our view on CapEx is really more aligned with how Dean explained it in terms of the availability of some of our real estate investments, firstly. But secondly, we put in a fairly big reserve that could have been drawn on. And we wanted to put it in because we like to do our cash flows in that way and our metrics in that way.
That could have been drawn on should we have been able to see productivity initiatives that required an injection of capital in order to really automate new processes. And I'm not saying -- that in the future will be there. And when we look at 2017, we will take a similar view in terms of ensuring that we have adequate capital set aside for any productivity initiatives.
And our -- while I did say I went through all the capital projects, that is really just to ensure that we are driving the right things in the right timelines and cadence, if you will. So that I am quite confident with.
And our investment in 2017 is still very, very high in terms of investing in the future. So there's no fundamental change whatsoever. But we were very pleased to be able to increase the dividend at a slightly higher rate than we have over the last few years.
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Peter Sklar, BMO Capital Markets - Analyst [10]
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Okay. And I also wanted to ask you just something specifically on your e-commerce strategy, something you spoke about at length in your introductory comments. Canadian Tire has certain categories that particularly lend itself to competition from online rivals. And the categories I'm thinking of would be auto parts and accessories, tools, kitchenware, small kitchen appliances.
Just wondering, does Canadian Tire -- are you feeling the online competition in those categories? And what do you think is the appropriate response for Canadian Tire in the categories that particularly lend themselves to competition from online rivals?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President and CEO [11]
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Yes, I will make a couple of comments, and then I know Allan can fill in some real detailed blanks behind what I comment on. But one of the -- firstly, obviously, everybody is losing some sales to online. And I'm not going to say that there isn't categories that obviously people are buying online.
What I found to be extremely encouraging in this quarter is just about every one of our categories is outpacing the market. So if we are outpacing the market, that's a very good sign. And those categories are not growing at the percentages that we are achieving in our business. So congrats to the retailers. And that's really how I opened my comments -- by saying it's very good retailing.
Much of it is supported by new product introductions. I believe that in short and long term that we are best positioned where we can look at our good/better/best assortments, both in terms of what we have today in national brands, then fill in with those brands a real strategy that draws on our own expertise of building our own private label and private brands.
In some of the categories that you referenced, our private brand penetration is not where any of us would like to see it. So therefore TJ Flood does have marching orders in some of these right out of the gate in order to assist us.
That protects us, I think, in the future much more securely than simply carrying brands that everybody else does. I think they have to be unique. I think they also offer us an ability, as I mentioned, to control the whole process here.
But in none of those categories are we -- our categories are very unique, even in the ones that you mentioned that are referenced. So you have to take even automotive and break it down into its component parts of those do-it-for-me and do-it-yourself, and what parts they are trying to buy, and for what cars, and what assistance that you need in order to actually get the accessory or part that you want.
So anyway, enough on that. Allan, do you want to make any further comments?
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire Retail [12]
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That's really it. We are, as Stephen said, outpacing the market and seeing good growth across categories, and margin continues to perform.
So beating the competition -- it's a challenge every day, and it comes in a bunch of different forms. But we've also put a lot of effort into our digital engagements: the drop of the WOW Guide last week, for example. We are watching the interaction with the digital guide on a day-to-day basis and the implications that is having for sales.
And I would say that our strategy of focusing on having the best products, best assortment, making sure that we are able to offer them as much of a unique proposition as any retailer has served us really well. We're going to continue to focus on it.
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Stephen Wetmore, Canadian Tire Corporation, Limited - President and CEO [13]
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I should have also said, probably, that the ability to have trip assurance, especially when you referenced things like auto parts or accessories, it's something that you want. You don't want to wait many days for it. You want to be able to go to the store, pick it up, get some advice, and leave.
So I think our ability now to -- literally within minutes to keep our inventory in-store up to date, so that the customer knows that the product is there when they show up, and to be able to click and pick it up in store is critically important to what you just asked.
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Peter Sklar, BMO Capital Markets - Analyst [14]
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Okay. Thanks very much.
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Operator [15]
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Irene Nattel, RBC Capital Markets.
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Irene Nattel, RBC Capital Markets - Analyst [16]
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Looking at your year-to-date performance, you are doing a really good job of driving your same-store sales growth, of delivering the gross margins, and focusing at the same time on productivity. So I guess I'm wondering, first of all, what the key drivers of each of those are? Presumably they interact with one another.
But also, as we look ahead, how much do you think is still left in the tank? Or do you think that you are delivering -- you are getting it earlier than you expected, but the magnitude is going to be similar?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President and CEO [17]
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All right, great question, Irene. Some similar questions that I have, actually. (laughter)
So let me tell you what I've been told, and then --
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Unidentified Company Representative [18]
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We're right here with you.
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Stephen Wetmore, Canadian Tire Corporation, Limited - President and CEO [19]
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Yes, and they are right here behind me, they said. And -- Allan, you may want to kick in here.
You're right; they are intertwined, and you are seeing the efficiency come through in both top line and in through margin. So much of it has been a concentration on our products, our revenue, our mix -- promo kind of optimization, what to promote when; what products to put on; what are the drivers. That we include in our operational efficiency/productivity. I also reference it as great retailing.
And -- but combined with that is some real hard-core initiatives to drop our pricing, to get better products made with higher quality at lower prices, by ripping -- literally ripping the product apart, putting it back together again. And excellent sourcing.
A lot of those initiatives -- and the money is really in, obviously, in your cost of goods and in your revenue. So that is where your billions of dollars flowthrough [in a] CTR. Those types of programs and expertise that the CTR folks have gone through the learning here in the last 12 to 18 months in many of their initiatives they wanted to take on is now rolling across all our banners. So very, very beneficial across the board.
Those, though -- the focus on being able to go after the correct mix of product by season, by month, by category, along with the best pricing and promo activities, never ends. We discount, as you well know, off our [rent] prices hundreds and hundreds of millions of dollars. And so therefore if you can get that right, it goes on for a long period of time.
And by Allan and team at CTR introducing the private brands that I spoke of -- and I did reference the fact that now he can control them from manufacturing to shelf -- allows us to have control both in terms of cost, but quality right across the board as well. So it affects your returns, because you are doing -- you are tested in Canada; you're putting those labels on it. Your quality is there. You're saving money right across the board. There's better inventory management, etc., etc.
So this goes on for quite some time. And I think Allan would say that this is a few of the many views that he has of Canadian Tire Retail in order to make both top line grow and margin grow with it, with a higher customer satisfaction. That's my take on it. And I'm sure I missed a few things, and Alan can fill in. It's a great question, by the way.
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire Retail [20]
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And he did -- Irene asked us the same question [online]. When you think about -- I will give you one small example. Grab the WOW Guide that launched last week. Have a thumb through it and look at the great array of kids fun that we've introduced.
Think about the marketing campaign we did this year. We said we were going to focus on categories that were important to our target customers and active families. Obviously, kids are important. The breadth of the assortment we have brought to life (technical difficulty) is nothing short of impressive. And it's really resonating with our customers.
You look at NOMA and what we've done with Christmas lights this year -- unbelievable investment in quality and great innovation. That's a private brand that we own that is performing really well. If you look at the Christmas decor under CANVAS, it's inspiring. It's got the colors of the season; it's got great style and design.
That is supported by a great marketing. The WOW Guide itself is doing really, really well. I think it represents Canadian Tire in a way that we haven't shown before.
The TESTED for Life in Canada moniker and the badge of the approval of quality really helps us reiterate our customers our reinforced focus on quality. And we've been engaging with our dealers to make sure that the stores have lots of inventory. Greg and the team have done an amazing job in engaging dealers early in the process. So they know what's coming down the pike with the WOW Guide, they know what the hero products are, and they are ready for business.
So from design right to execution, with our customers in mind, I think we have put a new face on it. And in terms of runway, that process -- if you get it right -- provides a huge amount of opportunity. We are in 192 different categories, and they are changing constantly. So we are -- we have as many opportunities as we have hours in the day. And we're really excited about the progress we've made so far.
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Irene Nattel, RBC Capital Markets - Analyst [21]
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That's really helpful. And just to come back to the WOW Guide -- and clearly, to your point, it really is a different way of presenting Canadian Tire. When you look at the sellthrough from the WOW Guide, are you seeing the beneficial impact on mix? And what learnings did you take from the first WOW Guide to incorporate in the one that you just dropped last week?
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire Retail [22]
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Yes, it is certainly helping with our margin story. It helps with our brand story.
And I think the learnings come from knowing how to lay it out. The product density is a little different in this one; how we engaged our store is a little bit different; how we chose to integrate the WOW Guide in terms of the assortment message by category, and then how it ties to our promo and advertising plans we've adjusted.
So overall -- I mean, the first one we did is always a sort of starting point, and you continue to refine it. I don't think we have as many big operational gaps as one would reasonably expect from a new venture like this. So I was really, really pleased with the success of the first one.
The second one seems to be, seven days in, a huge complement to the business. So I'm very, very pleased.
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Irene Nattel, RBC Capital Markets - Analyst [23]
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That's great. Thank you.
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Operator [24]
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Jim Durran, Barclays.
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Jim Durran, Barclays Capital - Analyst [25]
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I just wanted to step back and talk to the consumer a little bit. Have you seen any further deterioration in Alberta? And then elsewhere across the country, if possible by province, how strong or weakening is the consumer spending interest?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President and CEO [26]
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Okay, I'll take a shot at it. I'm sure each banner has a slightly different take on this.
But from Alberta -- Alberta has a few stories in it, I think, from a Canadian Tire Retail point of view. But nonetheless, if you want to look at it as a complete province, it has, if you will, bottomed out, I believe. Starting to grow.
Our dealers are extremely good. This is where I always give them huge credit in being able to adapt to the environment in terms of how they promote and carry.
I would think Alberta is still, from a Mark's point of view and Sport Chek's point of view would say about the same, except you have to isolate industrial a bit. It's difficult when it's 18 degrees in Calgary to tell you how Alberta is actually doing, when we have companies here that are quite reliant on outerwear.
But the -- but in general, I think that would be our comment: that we see some strengthening, and keep our fingers crossed a bit. Some of it seems to have spilled over to British Columbia, because we see British Columbia doing quite well. I don't think they are picking up all of Rick's industrial market, but it's a little bit stronger than it was, so there's something positive happening there.
And I don't think, really, when you go across the country, that there is a substantial difference that we're seeing in consumer confidence that hasn't existed for a number of months. It is continuing -- or a number of quarters, actually.
So I won't go through every province, but I think the trending within the country appears to be about right. And our gasoline and petroleum sales are continuing along the same sort of line.
So in general -- and I don't think our credit card business is seeing anything unusual, either. It's performing pretty consistently across the country.
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Jim Durran, Barclays Capital - Analyst [27]
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Okay. And just on a follow-up basis, how much FX pass-through was there into the retail pricing in this quarter?
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Dean McCann, Canadian Tire Corporation, Limited - EVP and CFO [28]
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Jim, we don't go specifically into that, other than to say that Mark's probably moved collectively some prices right, and I think (technical difficulty) but very selectively. So that's probably where most of it occurred.
Quite frankly, the impact of inflation, if you will, one our business, right, as I look at POS and comps and so on is negligible. It's really just -- particularly in the case of CTR, where we look at it a lot -- the guys really focus on it -- it's completely negligible.
It's the types of activities that Allan was referring to in terms of the mix of product that we are selling, and some of the comments Stephen gave around good/better/best -- all those great initiatives that basically are just appealing to customers and driving top line for it.
It's just not -- it's not focused on price, although, as I have said before, FX has been in a way a mixed blessing -- and the blessing part being, if you will, the focus that it created in terms of a burning platform for driving a lot of the types of great initiatives that the guys have been pursuing.
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Jim Durran, Barclays Capital - Analyst [29]
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Great. Thanks, Dean. Appreciate it.
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Operator [30]
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Mark Petrie, CIBC.
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Mark Petrie, CIBC World Markets - Analyst [31]
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I actually just wanted to ask about FGL. I am wondering if you can just give a bit of perspective on the network today -- maybe the performance and, also, the opportunity for future growth from here across flagship stores, hero stores, and then in your other format?
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Duncan Fulton, Canadian Tire Corporation, Limited - President, FGL Sports [32]
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You bet. Thanks, Mark. It's Duncan.
Obviously, in the last five years there has been a big focus on expanding the network. And we have put up, give or take, 2 million square foot of additional store space. So I think we have actually excellent coverage across the country right now.
We have some different formats in play. Obviously, you have the flagship stores that you all know about in play. We have taken lessons from those flagship stores and renovated a few other stores that we've called hero stores that have more space, an elevated assortment, more digital in them. We've done straight renovations to existing stores without the digital pieces, and -- to expand space for assortments there.
So as a starting point, I would say because of the work that's been done for five years, I think we have excellent network coverage. So the focus going forward -- there's still a handful of doors that we need to fill in here and there.
I think if you back out the flagship stores and the hero doors, you still have a substantial number of general fleet doors that we see opportunity to be able to renovate and expand in certain cases. Especially in some key markets, it's going to give a better shopping experience for the kind of customer that we want.
So there's still certainly interest to do more. But I don't think you're going to see the same level of the new door opening as you did before, but I think you'll continue to see network improvement door by door.
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Mark Petrie, CIBC World Markets - Analyst [33]
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And then I guess related to that, how does the cost and the same-store sales boost -- I mean, obviously not looking for -- looking, but you won't give specifics -- but broadly speaking, the cost and same-store sales boost vary between a hero store and just a regular renovation.
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Duncan Fulton, Canadian Tire Corporation, Limited - President, FGL Sports [34]
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We're testing -- it's funny; we were talking about that this morning. We are testing that now.
You have to look at the capital that is required to do a general fleet renovation, where you are just giving it some more space and better fixtures in order to put better assortments in there, versus a more substantive capital investment to do a hero store with a number of digital elements, versus a significant investment to do a flagship. There is commensurate sales increases that go with some of those sizes of stores as well.
And there's no doubt that the sales that our flagship stores generate are significant compared to the rest of the fleet. So we are actually -- we are taking the time now to see, certainly, between a general fleet renovation versus a hero store renovation, and what's a better return for us and a better customer experience at the same time.
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Mark Petrie, CIBC World Markets - Analyst [35]
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Okay, thank you very much.
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Operator [36]
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Derek Dley, Canaccord Genuity.
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Derek Dley, Canaccord Genuity - Analyst [37]
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Just a question on your guys' capital programs, though. You reduced the CapEx kind of on a run rate by about CAD200 million. Was there -- is there any in particular that you guys are -- outside of the real estate that you are looking to defer? Should we expect some of this to come back? And what sort of metrics do you guys look at when evaluating a capital expenditure or a capital project?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President and CEO [38]
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Hi, it's Stephen. The big reduction in CapEx, just so -- just in case I haven't made it clear -- was really what we wanted to reserve in case we had real opportunities for productivity. The investment of productivity capital, though, 9 times out of 10 has an extremely good payback. So even if it does occur -- in fact, I want it to occur, because it -- you get an extremely good payback.
So that's really the largest reduction in our CapEx, both 2016 and the view that we've given you for 2017. You will vary from year to year in terms of what your real estate opportunities are. Obviously, we had some this year with targets, when we estimated how much we could pick up at those stores.
And truly, at the beginning -- you know, you are estimating now for what will occur in 14 and 15 months ahead. So some of them are accurate; some of them are slightly off.
Real estate tends to even itself out over time. It's just us trying to do it on a year-by-year basis sometimes fluctuates a bit.
It also depends on where your network is. I think, really, some of the things that Duncan is talking to you about is where is the best place for him to put his capital in terms of re-merch or new stores and things like that.
So I don't -- there is really no deferment. I wouldn't say that there is one thing that I've gone through that we have put the deferred label next to it. And we have not canceled any of our technology investments. We are full steam ahead. And many of them -- as you well know, you start them this year, they take sometimes 2 to 3 years to complete. So it is full steam ahead.
We certainly didn't want you -- or to surprise anybody by us coming along and saying, we're investing a whole bunch of money in operational efficiency or productivity initiatives without giving you a heads up that we were looking at it. And we continue to look at it. So it's best that we incorporate a bit in, and you and us doing our cash flows and free cash have that balance set aside.
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Derek Dley, Canaccord Genuity - Analyst [39]
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Okay, great. That's helpful.
And just one more quick one, if I can: just on the (inaudible) it seems like the -- sort of the mix between the promotional pricing that you guys had in place last quarter and top line was a little bit more balanced. Was there anything different that you did there, like, from a gross margin perspective? Or were you guys looking to retain some more margin this quarter and obviously still grow the top line?
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Duncan Fulton, Canadian Tire Corporation, Limited - President, FGL Sports [40]
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Certainly one of the objectives for the last few quarters and looking into next year is to try to get continued margin rate improvement as we go along in the business. As you look category by category, we have historically done things, I think, to maintain traffic; but there's no point in discounting hockey at the exact moment that people need to go buy hockey.
You have to use the tools at the right time of the year. So we will certainly be more mindful category by category, where it makes sense, to do promotions, to maintain the traffic and the momentum that you would want. But we're also not a brand that is known as being a heavily promoted shop, either. So it's -- you were right in saying that we would be more mindful as we've gone at it, and I think you're going to continue to see that go into 2017.
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Derek Dley, Canaccord Genuity - Analyst [41]
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Great, thank you very much.
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Operator [42]
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Vishal Shreedhar, National Bank.
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Vishal Shreedhar, National Bank Financial - Analyst [43]
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Just on the occupancy costs -- they were down about CAD25 million quarter-over-quarter. Is that due to the property tax refund?
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Dean McCann, Canadian Tire Corporation, Limited - EVP and CFO [44]
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Yes, Vishal. It's Dean. Yes.
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Vishal Shreedhar, National Bank Financial - Analyst [45]
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Okay, great. And you had mentioned at the beginning of your remarks there were a few items in the SG&A line that canceled one another out. I was just hoping you could give us maybe more color on that, maybe to magnitudes?
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Dean McCann, Canadian Tire Corporation, Limited - EVP and CFO [46]
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Yes, so the reality is there were really three big items, Vishal. The first was the property tax that you just mentioned. The second was some severance costs incurred -- what was the third?
No, severance and -- oh, and marketing. The Olympics! How could I forget that one?
And it's sort of an uptick in, as we told you, at the end of Q2 with respect to marketing, and -- associated with the Olympics and the World Cup of Hockey. So really, you bag the three of those up, and they effectively offset. And that is what I mentioned earlier about not normalizing results.
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Vishal Shreedhar, National Bank Financial - Analyst [47]
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Was that marketing expense that you highlighted which canceled the other -- which helped to cancel the other two items out -- is that just the incremental marketing expense associated with those events, or is that incremental year-over-year?
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Dean McCann, Canadian Tire Corporation, Limited - EVP and CFO [48]
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Incremental year-over-year, but associated with those events primarily. It's not a perfect math, Vishal. It's never going to be perfect math, because some of that would have been probably spent on the guys continuing to drive the brand. But you can get a double whammy for it. If you are promoting the Olympics, you're promoting the businesses. But essentially, yes.
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Vishal Shreedhar, National Bank Financial - Analyst [49]
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Okay, that's it for me. Thanks.
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Operator [50]
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Patricia Baker, Scotiabank.
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Patricia Baker, Scotiabank - Analyst [51]
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I just want to come back to the CapEx. And I do appreciate the commentary that both you, Stephen, and Dean made in the introductory remarks and then the follow-up.
But I think it's important that we really get some good clarity here, because CAD150 million change is quite a big one. So Stephen, I think you just indicated that the biggest reduction comes from the elimination of certain productivity initiatives that you might have reserved for, and that the real estate opportunities -- doing fewer real estate opportunities would involve less of a reduction then the productivity initiatives? Am I right?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President and CEO [52]
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Yes. Yes, and don't forget, we did some extra this year, Patricia, in terms of the target stores. And we had estimated we would actually do a few more of those in our original estimates for 2016. So they didn't come to fruition -- along with the reserve that we had for productivity, those really make up by far and away the lion's share.
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Patricia Baker, Scotiabank - Analyst [53]
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Okay. You're probably not willing to tell us, of the CAD150 million, how that would break out?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President and CEO [54]
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Two-thirds and one-third.
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Patricia Baker, Scotiabank - Analyst [55]
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Okay, perfect. Thank you. And then if -- sorry, go ahead.
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Stephen Wetmore, Canadian Tire Corporation, Limited - President and CEO [56]
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No, but I didn't say which two-thirds or one-third. (laughter)
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Patricia Baker, Scotiabank - Analyst [57]
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Well, you already said -- I'm not that stupid. You already said one of them was larger than the other.
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Stephen Wetmore, Canadian Tire Corporation, Limited - President and CEO [58]
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All right, all right, okay.
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Patricia Baker, Scotiabank - Analyst [59]
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That's simple math I can do. (laughter)
Okay. Dean, you also mentioned that DC CapEx would be CAD150 million to CAD170 million -- would be lower than original. And that's a -- why is that?
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Dean McCann, Canadian Tire Corporation, Limited - EVP and CFO [60]
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It's simply, Patricia, just some spillover into 2017 as they complete the DC. We just didn't get the timing perfect. So if the --.
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Patricia Baker, Scotiabank - Analyst [61]
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Oh, okay. So the DC is still going to cost the same; it's just deferrals? Okay.
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Dean McCann, Canadian Tire Corporation, Limited - EVP and CFO [62]
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DC is still going to cost the same. It's completely on track and on budget. But it's just -- you know, some of the stuff will to spill into finalizing material handling and tidying up parking lots. Who knows? It's not a change in the overall cost.
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Patricia Baker, Scotiabank - Analyst [63]
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So, then, let's go to the CapEx for 2017 and, I guess, the CapEx for the 2016 and what you are spending. Is the biggest chunk of change in your CapEx on your infrastructure on your IP? Digital?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President and CEO [64]
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Yes. Yes, for sure.
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Patricia Baker, Scotiabank - Analyst [65]
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Okay. And that's for both 2016 and 2017?
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Dean McCann, Canadian Tire Corporation, Limited - EVP and CFO [66]
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Well, 2017 had a lot of real estate. And if you put Bolton into it, I don't know. It may well -- 2016, I mean, would have -- it depends, I guess, what you capture there. But it would be close between the two of them, I think.
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Stephen Wetmore, Canadian Tire Corporation, Limited - President and CEO [67]
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And one way to do it, Patricia -- the IT spend year-over-year is essentially the same. It might be down a little bit because we did Mark's POS this year. We don't have that next year.
But essentially we are relatively flat with respect to the investment in IT, which is where the investments in -- you know, backend for supporting e-comm, and digital, and all those kinds of things. So that's still a focus.
And year-over-year, if you're just looking at it ex-, if you will, the reserve we had for productivity and for additional target stores, we have come down a bit, because we don't have the big bump with respect to the 12 target locations that we did do. So if you stand back and look at it, it's actually maybe not much of a difference from what we have actually spent in 2016 versus 2017.
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Patricia Baker, Scotiabank - Analyst [68]
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No, I just want to make sure that you are spending against what will potentially be growth and better positioning for you in the long-term. If we come back to the productivity, though, did you have specific initiatives that address that one-third of that CAD150 million? I guess CAD50 million? Were there specific things attached to that?
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Dean McCann, Canadian Tire Corporation, Limited - EVP and CFO [69]
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The answer is no. So this is my fault. We wanted to have a reserve, right? And Patricia, we are going into this -- we've been learning as we go through productivity. And Stephen's -- frankly, the team -- we would love to find the initiatives that are capital intensive.
That's not to say we haven't spent some capital on productivity initiatives; we have. It just has been much more modest, I think, than any of us thought. And the types of initiatives that have been generating the great results that the teams have been doing are more about arms and legs, and advice, and help outside -- and, frankly, the teams themselves, through data and analysis, going at things in a much different way and changing process.
But to date, there has been a lot of technology or hardcore capital investment required. I hope, as Stephen hopes, and all of us hope, as we go forward that we will be able to identify those kinds of things, because the paybacks on them are terrific. And the only, if you will -- if I had it to do over again, I would have done it the way we are proposing to do it for 2017, and say, okay, you know what? If we have -- we will reserve some -- internally a bucket for those types of initiatives. So I've got the cash and the financial flexibility to do it but not put it in my sort of pure operating capital guidance and share it with you as those opportunities come along, and tell you the story along with them.
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Patricia Baker, Scotiabank - Analyst [70]
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Fair enough. Is there any specific plan for the extra CAD150 million in cash?
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Dean McCann, Canadian Tire Corporation, Limited - EVP and CFO [71]
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So as you saw, we took our dividend up more than we typically do, number one. We also -- if you actually look fiscally at what we're doing in buyback -- if you look at, for 2016, what in the calendar year would have been repurchased, it's going to be in the order of magnitude of just over CAD400 million, like CAD440 million. For 2017 it will be CAD550 million. So --.
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Patricia Baker, Scotiabank - Analyst [72]
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Okay, fair.
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Dean McCann, Canadian Tire Corporation, Limited - EVP and CFO [73]
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It's just because of the way we announced it last year, from the period of this time last year right through the end of 2016. At this point, we are going to complete the CAD550 million program that we announced a year ago, and then we're going to add a CAD550 million program that will be completed by the end of 2017. So net-net, it's actually an increase in fiscal 2017 of CAD110 million.
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Patricia Baker, Scotiabank - Analyst [74]
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Thank you. Appreciate that. And all the best to Mary.
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Stephen Wetmore, Canadian Tire Corporation, Limited - President and CEO [75]
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Operator, I think that should conclude our session for today. I would also like to thank everybody for joining us and for the excellent questions. And I will hand it back to you, operator.
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Operator [76]
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Thank you. This will conclude today's 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 are follow-up questions regarding today's call or the materials provided. You may now disconnect.
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