Q4 2016 Canadian Tire Corporation Ltd Earnings Call
Feb 16, 2017 AM EST
CTC.A.TO - Canadian Tire Corporation Ltd
Q4 2016 Canadian Tire Corporation Ltd Earnings Call
Feb 16, 2017 / 06:00PM GMT
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Corporate Participants
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* Stephen Wetmore
Canadian Tire Corporation, Limited - President & CEO
* Dean McCann
Canadian Tire Corporation, Limited - EVP & CFO
* Allan MacDonald
Canadian Tire Corporation, Limited - President, Canadian Tire Retail
* Rick White
Canadian Tire Corporation, Limited - President, Mark's
* Greg Craig
Canadian Tire Corporation, Limited - President, Canadian Tire Financial Services
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Conference Call Participants
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* Kenric Tyghe
Raymond James & Associates, Inc. - Analyst
* Mark Petrie
CIBC World Markets - Analyst
* Irene Nattel
RBC Capital Markets - Analyst
* Patricia Baker
Scotiabank - Analyst
* Derek Dley
Canaccord Genuity - Analyst
* Jim Durran
Barclays Capital - Analyst
* Brian Morrison
TD Securities - Analyst
* Peter Sklar
BMO Capital Markets - Analyst
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Presentation
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Operator [1]
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Good afternoon. My name is Donna and I will be your conference operator today. At this time I would like to welcome everyone to the Canadian Tire Corporation, Limited fourth-quarter and 2016 year-end results conference call.
(Operator Instructions)
Earlier today Canadian Tire Corporation, Limited released their financial results for the fourth quarter of 2016 as well as the full-year. A copy of the earnings disclosure is available on their website and includes cautionary language about forward-looking statements, risks and uncertainties which also apply to the discussion during today's conference call.
I would like to turn the call over to Stephen Wetmore, President and Chief Executive Officer. Stephen?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President & CEO [2]
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Thank you, operator, and good afternoon everyone. Our fourth quarter of 2016 was another very good quarter for our Company. While I'd love to take credit for the performance, it is without a doubt the product of years of effort by the team here in the room with me as well as being a clear demonstration of the fundamental strengths that they have been building.
I think our team would also agree that we still have a long ways to go. There is tremendous upside in the opportunities ahead and the fourth quarter demonstrated our ability to achieve them.
As Dean will highlight in more detail, 2016 overall was a strong year for the Company and our fourth quarter posted some impressive top-line and margin performance. More margin could have dropped to the bottom line, but we made some investments for the future which affected our operating expense ratio in the fourth quarter. However, overall it was a very good year, both from a balance sheet and P&L point of view, and our earnings per share was in line with our expectations.
Our Canadian Tire Retail operation is by far the largest Retail business unit and CTR again delivered impressive top-line and margin growth in the fourth quarter. I don't think CTR's same-store sales growth was a record, but it came very close.
A great selection of products coupled with some sophisticated data analytics to optimize pricing and promo and product purchases are the primary factors supporting their growth this quarter.
CTR had an excellent performance across the business, but just let me highlight two areas as examples. At Canadian Tire Retail this quarter, private brands represented roughly one-third of total sales across all categories. We have certainly earned the branding of being Canada's Christmas store, and 88% of our Christmas offering is made up of private brands we own or that are exclusive to Canadian Tire.
The categories and assortments were extremely well-received by both our Dealers and customers and demonstrated the benefits of product design and control.
Our automotive business is another example of how our product innovation is driving performance. Renewed assortments in terms of quality, breadth and depth and new products from our Simoniz and MotoMaster brands have positively affected both top line and margins.
Some of the best data analytics and execution is coming out of our automotive group, and we are very optimistic about their future performance. As you know, whenever we have a quarter that doesn't meet our or your expectations then I blame it on the weather. And when we have a good quarter then it's just because we are good retailers.
So first out of the gate to try and lessen the effect of non-seasonal weather on their businesses has been Canadian Tire Retail. They have more levers to pull than our footwear and apparel banners. However, their business is extremely complex and can be thrown out of balance quite easily, but great progress is being made.
I won't cite examples but Allan MacDonald can address these for you during our Q&A session if you would like.
Our Mark's business had a strong quarter and ended the year in a very solid position as you can see from their impressive same-store sales numbers. Rick and his team have done a tremendous job of building alternate channels for growth by bringing in great products, particularly in their denim and casual footwear categories, to help offset the industrial business which has been affected by the Alberta economy. As you would expect, winter weather did provide an uplift in the sales of outerwear and casual footwear and weather-related products accounted for approximately 50% of the sales growth achieved during the quarter.
Our FGL Sports business continued to deliver solid top-line results despite warmer temperatures in October and November which dampened sales of winter-related products such as skis and snowboards. We continue to build on opportunities across this business to curate assortments that are less weather sensitive. We saw strong growth in athletic apparel and footwear, license products as well as wearable technology which helped to drive the top line.
That said, when winter weather did arrive in December we saw strong sales at Sport Chek across all key categories as customers chose us as their destination for outdoor winter sports and activity.
Our Financial Services business continued to execute against their strategy as we had planned this quarter. And we were able to see the benefits of how we have embedded its performance into the operations of our CTR Retail business through the lift in sales transacted on our options MasterCard and with the increase in sales that utilized in-store financing.
I should also mention that our in-store financing offers were extremely well-received by our customers this quarter with tires and outdoor shelters seeing sales uplift which we believe were largely incremental sales. Our focus for 2017 is to put more effort into the in-store promotion of our financing offers, continue with our customer analytics and also offer Mark's and FGL Sports customers similar financing plans.
With Greg Craig now leading Financial Services his previous retail experience will be a significant asset as we continue to evolve the business to be more retail focused. We will continue to invest in integrating its operations with our other Retail banners this year and on driving customer accounts and GAAR growth in the credit card portfolio.
As far as major initiatives and projects are concerned our e-commerce strategy is unfolding as planned and is being rolled out at a pace based on the needs of our Retail banners, our customers and our assortments. We are making the right investments in technology, people, content and performance. Our consumer analytics teams are growing in strength and our senior management are rapidly learning to use our data to make more insightful decisions.
Our website traffic continues to grow with over 300 million visits in 2016 across all our banners, representing some of the top sites in the country. These visits are obviously giving us great insights as well as shaping the evolution of our digital experiences.
With much of the underlying technology in place we made great strides in enhancing the online shopping experience for our customers in 2016. We added to our online presence by launching transactional sites (inaudible) and Atmosphere so that customers across all our Retail banners now have the ability to shop through an e-commerce channel.
We delivered a home at Mark's and FGL including Sport Chek, Atmosphere and PHL and offered as a test same-day delivery in the GTA for Sport Chek. This has now been operationalized.
We have an effective buy online, pick up in store at CTR which is working well for us, especially with our ability to show customers real-time inventory availability across our stores. Customers like the convenience of knowing that the products will be available to pick up when they want.
We continue to enhance our online experience and our online experience during the busy holiday season was well-received by our customers. Providing our customers with the right level of experience is what we are focused on, be it in-store or online, and we will continue to deliver on our customer expectations. We are where we need to be and are well-positioned to meet our customers' demands.
Mark's point-of-sale system is fully operational and FGL is in the process of rolling out their new POS system across the network. And our distribution center in Bolton, Ontario is on time and on budget and will commence operations during the summer of this year.
As far as 2017 is concerned, our agenda is full to say the least. But I believe everyone in the room with us here today sees the same growth potential, and we are laying the right foundation.
We need to do more groundwork. But hopefully over the coming months we can shed some more light on some of our initiatives, and as this is year three of our three-year strategy then we owe you an update later in the year.
With that I will hand off to Dean. Dean?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [3]
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Thanks, Stephen. It was a very strong quarter for us. Diluted earnings per share was CAD3.46 in the quarter, up 15.1% over the fourth-quarter 2015.
On a full-year basis, diluted EPS was CAD9.22, up 7.1% versus the prior year. However, 2015 as you know included a CAD0.33 gain related to the sale of a surplus property which is not part of our normal operations.
Factoring that into the year-over-year results, full-year diluted EPS would have been up 11.4% over last year, above our aspiration and stronger than we had planned.
Key themes of the past few quarters continued in Q4. And the continued solid performance can be attributed to the underlying strength of our Retail businesses, in particular in CTR. The Retail gross margin excluding petroleum was up 55 basis points, primarily driven by CTR.
Strong revenue growth as Dealers bought into CTR's Q4 merchandising programs coupled with operational efficiency initiatives and improved Dealer earnings were the primary drivers of Q4 margin performance. And this performance was particularly impactful given the impact on our cost of the weaker Canadian dollar.
Our Retail segment OpEx ratio, excluding depreciation and petroleum, was higher by 42 basis points in the quarter compared to the prior year and higher by 16 basis points for the full year. I am comfortable with the good progress we have made on improving our overall business productivity. Higher costs for variable compensation, the result of a strong Q4 performance; higher marketing costs that clearly drove sales; and investment spending to support operational excellence initiatives that drove improved gross margin performance were all planned investments directly linked to our improved results this year.
Our full-year EBITDA ratio captures the benefits of our efforts to improve our productivity as well as the cost and investments being made to drive our growth. It was essentially flat compared to the prior year, excluding the effect of the real estate gain of CAD29.5 million in 2015 impacted by the OpEx factors referenced earlier and planned investments we made in the Financial Services business to get that business growing again. As we look ahead our consolidated EBITDA ratio continues to be a key metric that we are focused on.
Financial service business posted solid results with a GAAR of 4.2% in the quarter and up 1.5% on a full-year basis, reflecting the investments made to drive new customer accounts and GAAR throughout the year. And while Financial Services had a strong fourth quarter, on a full-year basis as expected year-over-year income before taxes was down. This reflected the additional investments I just mentioned as well as higher variable compensation expense.
We continue to see a great deal of runway for the Financial Services business as it transitions to a more retail-focused organization. As a result, we will continue to invest in those initiatives to drive this business forward in 2017 and beyond and expect to see a heightened level of investment through 2017.
Inventories are healthy across all Retail businesses and down 3% year over year, reflecting a good sell-through of winter inventory due to the strong sales of winter-related products in December across all Retail banners. Dealer in-store inventory is also in very good shape across all categories.
We made good progress on ROIC. It was 8.34% for the quarter, up 25 basis points over Q4 of last year and up 19 basis points from Q3 2016. As you know, our aspiration for ROIC is 9%, and while progress has been slowed by challenging conditions like foreign exchange costs in Alberta, the Alberta economy, continuing to focus on our underlying Retail earnings as well as being selective in our capital expenditures is the path to an improved ROIC.
Our operating capital expenditures came in at roughly CAD455 million below our recent guidance of CAD475 million to CAD500 million. But that was only because of some store improvement CapEx that was forecast to take place in our Retail segment was actually funded in our REIT segment. We continue to be on track with our three-year average operating capital expenditure guidance as well as the expected spending range we provided last quarter for 2017.
For distribution capacity capital expenditures we came in at CAD122 million for the year which was within the revised range we provided less quarter. We ended 2016 with a very strong balance sheet and continue to maintain our balanced approach to capital allocation.
Over the course of 2016 we repurchased CAD440 million of class A nonvoting shares, completing our announced buyback program of CAD550 million of class A nonvoting shares from November 2015 to the end of 2016. We also increased our dividend to CAD2.60 and announced our intention to repurchase another CAD550 million of class A nonvoting shares by the end of 2017.
As I look ahead to 2017 there are a few things I suggest you keep in mind. As Stephen indicated we have a number of initiatives underway that require investments for future growth. We remain committed to our ongoing efforts to make our operations more productive and efficient, and we will continue to invest in these initiatives that ensure our competitiveness in the future including product branding capabilities, data analytics and e-commerce.
I'd also remind you that our Bolton DC is nearing completion and will be up and running in the third quarter of this year. As such, there will be additional costs as the Brampton DC continues to operate in parallel while we bring the new DC online as well as incremental depreciation costs. These costs will impact us in the back half of the year.
Finally, we have once again released our year in review digital summary that highlights our accomplishments for the year. The videos provide viewers with messages from our senior leaders and employees on what drove our business results over the past year. It went live this morning and can be accessed at, all one word, yearinreview. CanadianTireCorporation.ca.
And with that I will turn the call back over to the operator for the Q&A session. Operator?
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Questions and Answers
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Operator [1]
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(Operator Instructions) Kenric Tyghe, Raymond James.
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Kenric Tyghe, Raymond James & Associates, Inc. - Analyst [2]
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Thank you and good afternoon. With respect to the weather proofing of the business, certainly given the atypical weather we saw in the quarter I wonder if you could speak to what was different in October, November, what did you see different in your business and how is it the business performed as well as it did through October, November, pre- the December lift or benefit of the weather normalizing for the quarter? If you could maybe provide some color around that, please.
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Stephen Wetmore, Canadian Tire Corporation, Limited - President & CEO [3]
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Yes, thanks, it's Stephen. Let me comment on October, November for CTC and then maybe I will hand off to Allan MacDonald because it's more applicable to his business than the other two. I think it was an up-and-down situation in terms of October, November because we saw October turning a bit in some parts of the country and certainly some parts of the West.
So we saw an uplift in apparel and footwear during that period of time and then warm weather struck in the month of November, coming back in early December. I think at that point in time in terms of outerwear both Mark's and Sport Chek saw a tremendous uplift during the month of December. As far as Sport Chek was concerned it affected some of the hard goods, which Duncan can always give you more briefing on in terms of detail, but it affected them a little bit in the hard goods but had tremendous benefit for Mark's during the month of December.
And I can probably say this, it's not as easy for Allan MacDonald to say this, but when through the month of October and then lack of traditional seasonal weather or wintry weather in the month of November, in some ways they were acting pretty smug because they had such a great run rate at that point in time and wanted to try to show the world that they had weather proofed the business. But in my job I was really glad that winter came because they also got a boost on top of it.
But let me hand off to Allan and he can probably tell you where we stood entering the month of December and what weather impact was on his business at that point.
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire Retail [4]
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Thanks, Stephen. Smug is probably not the word I'd use, but we did feel pretty good about where we were at the end of November.
You know, as we've talked about often, we've been on a power to turn weather from something we are dependent upon to something that's opportunistic for us, which is a nice way to say reduce our reliance on weather categories. And a lot of the investments we've made over the past three and four years have really come into their own and we've seen maturing of products like canvas and categories that aren't as weather dependent like the Christmas and the seasonal changeover-type categories that performed really, really well for Canadian Tire going into Q4.
That coupled with a lot of work we've been doing on our promo effectiveness on introducing a broader range of assortments and things like on the marketing side like the WOW Guide have all paid dividends. So sitting at the end of November we were actually very, very pleased with the balance of growth we were getting from our promo, from our reg sales across our various categories.
I can't think of a category that I would point out as a disappointment or a poor performer. And then when the weather hit roundabout the second week of December we got an extra kiss from that. So all in all it was very, great pleased with the foundational strength of the business.
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Kenric Tyghe, Raymond James & Associates, Inc. - Analyst [5]
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Thank you, that's great. And if I could very quickly by way of a follow-up, just with respect to Mark's at a high level would it be a fair characterization to say that we have finally cycled the worst?
Can we put a pin in Mark's here just looking anecdotally at what's happening in the energy patch and the like? While industrious business is perhaps still challenging it certainly appears that you are doing a lot of the right things outside of industrials given the comp number you put up this quarter and have for a couple of quarters?
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Rick White, Canadian Tire Corporation, Limited - President, Mark's [6]
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Thank you, Kenric. It's Rick White here. I don't know if we could put a pin in it.
I think it would be safe to say that if we took a look at Q4 half of our business pop was related to winter goods such as winter boots, accessories and outerwear and the other half was related to new strategic drivers of the business or alternative channels such as men's casual, men's and women's denim and men's and women's casual footwear. So I think what we could say is we are still not out of the woods when it comes to the negative impact of low oil prices on our business because it certainly has a negative impact not just on industrial, it has a negative impact on traffic.
But the good news is while we can't totally replace the lost oil business, we've certainly continued to learn how to work around it and we find different ways to replace it. So we are part of the way there, but I caution that we are not all of the way there, if that's a good enough answer for you.
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Kenric Tyghe, Raymond James & Associates, Inc. - Analyst [7]
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That's great. Thanks very much. I will leave it there.
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Operator [8]
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Mark Petrie, CIBC.
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Mark Petrie, CIBC World Markets - Analyst [9]
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Good afternoon. Over the last year in some of your newer and renovated stores, looks like you made a bigger push to leverage customer data just in terms of store design and assortment. And I wonder if you could comment on that strategy, how far along you are in that process and what type of results that's been generating in those stores?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President & CEO [10]
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Is there a banner in particular that you are focused on or is it just across the board?
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Mark Petrie, CIBC World Markets - Analyst [11]
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Yes, sorry, focused on the Canadian Tire banner.
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire Retail [12]
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Hey, Mark, it's Allan. Well, it's interesting, we've been putting a lot of energy in terms of evaluating where we've made investments historically and the return we are getting on them. And, of course, real estate is one of the biggest ones.
The historic view of the Canadian Tire format is one that works across the country in a lot of different communities. And we are starting to look at that with a more critical eye to see if there is opportunities for us to improve the productivity of our stores by augmenting the assortment or the way that we are merchandising based on the demographics, the location, the community, you name it. And we are starting to get some insights.
I would say we are at the point where we have more questions than answers which is really, really encouraging. This is something that started probably four years ago when we opened the showroom store here in Central Toronto. We've been looking at across the board how we can bring to life more of the strengths of Canadian Tire.
Things like the role that automotive plays in various communities we are challenging. And I think that shows a lot of promise for us in terms of the value it generates.
So we are challenging our assortment. And customer data across the piece, the investment we made in the loyalty program, the investment we made again several years ago in the automotive infrastructure systems has given us a leg up to help us really understand how our customers are shopping us and what's really resonating with them and then start to augment our assortments accordingly.
So you should see it when you walk in the store, hopefully not just from a merchandising standpoint but also the types of assortment we are bringing to market. You should also see it, for example, in the WOW Guide. So short answer, yes, we are looking at that and we are going to continue to challenge it.
In terms of where we are in the journey, I don't see this as something that ever ends. I think it is always going to be a dynamic part of the business and something we should always be paying attention to.
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Mark Petrie, CIBC World Markets - Analyst [13]
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Okay, thanks. And then just related to that and, I guess, some earlier comments related to choosing to make investments to strengthen the business and for future growth, particularly as it relates to OpEx, do you think it's a realistic expectation for 2017 that you could grow OpEx slower than revenue growth?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [14]
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I will take that, Mark. Stephen looked at me like yes, you better. Certainly there is an absolute focus around here on controlling our OpEx growth.
That said, we are not in sacrifice on the opportunities to invest in the things that we think are important. So things like product and the branding initiatives that CTR is doing, as an example, are places that we want to put money.
That said, from an operational efficiency point of view we are looking at everything in terms of opportunities to take cost out. And it's that classic case of the old versus the new and trying to take a dollar out of the old as we reinvest it back into the new.
But certainly from the perspective of the answer to your question, yes, definitely we want to grow OpEx at a lower pace than we are growing revenue without question and get the operating leverage that comes with that. That's why I reference with respect to the EBITDA ratio. That's a metric that internally we are really focused on having that grow as a percentage of revenue over time.
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Mark Petrie, CIBC World Markets - Analyst [15]
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Okay, thank you.
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Operator [16]
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Irene Nattel, RBC Capital Markets.
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Irene Nattel, RBC Capital Markets - Analyst [17]
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Thanks and good afternoon everyone. Just continuing on that line of thinking, it is a couple of years now where we've seen some nice growth in gross margin.
Wondering how much more is left there in that process? You've been doing a lot of work on how you source and the approach you take to sourcing, where are we there and is it reasonable to expect, all things being equal putting aside currency impact, ongoing improvement in gross margin?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President & CEO [18]
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Hi, Irene, it's Stephen. You are right, we have seen a very nice lift in our margin work and all it primarily attributable to the great work that has been done in pricing, in promo and in purchasing, primarily through Canadian Tire Retail. Obviously, it's the biggest impact and that work continues.
I am extremely, extremely impressed at the fact that they have been able to take on primarily the foreign exchange impact, the negative impact from foreign exchange and come out the winner. So the work will continue. I think in some cases you may see it fluctuate by quarters perhaps, depending on the products that are offered in those quarters and the margins that are available with those products.
I think they have had a very positive impact in their business by the introduction of some of our own brands and being able to control them and have the ability to place them properly and price them properly. So great work, as well, on our weekly promotions.
So across the board like excellent work. Do I expect them? Look, these are great margins and you have to go with the flow.
I think they have insight that they never had before. So I believe they have very, very good control of their margins. But margins drive you so far and then they tail off.
There is no doubt about that. I expect that we are going to stay unbelievably focused with it, but there's a limit to the margins that you want to take and operate the business, let's put it that way. So this type of margin performance keeps me fairly happy.
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Irene Nattel, RBC Capital Markets - Analyst [19]
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That's great. Thank you.
Just thinking about the success you've had with private brands and the role that plays both in differentiating your offering and in driving margins, can you just provide us with a little bit of color as to what brands you may be a little bit more focused on this year, where you see opportunities perhaps to add more brands?
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire Retail [20]
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Hi, Irene, it's Allan here. You know, we think of the brands quite often in terms of our customers and the various categories that we are in and how we are performing. So when you look at categories like home decor that we were very strong in but our brands weren't performing as much as we would like, we knew that was an area of opportunity.
And then there is some opportunistic ones that come your way. When Woods became available and camping was a category that had been fairly stagnant for us we thought this would be a way to invigorate it. So that was a great success.
So we are going to continue to come at it from the standpoint of where are our brand-led categories where our owned brand penetration isn't perhaps maxed out where there might be an opportunity, where there are categories that we are not performing as well as we think we could and perhaps an owned brand or a different brand strategy could remedy that, and then where are categories perhaps we are looking to expand into that are natural extensions where an owned brand might be an asset? So that's one way to say we are going to continue to be deliberate in terms of strengthening the business in a way that really resonates with our customers and then also being opportunistic as opportunities present themselves.
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Irene Nattel, RBC Capital Markets - Analyst [21]
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Would you care to share with us categories in which you think you are underperforming?
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Allan MacDonald, Canadian Tire Corporation, Limited - President, Canadian Tire Retail [22]
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I would love to give you more detail on that. But I'm afraid I'm going to have to hold fire for this point because we're not quite at the stage where we can share it with you yet.
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [23]
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Then a no, Irene.
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Irene Nattel, RBC Capital Markets - Analyst [24]
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Okay, thanks, guys.
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Operator [25]
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Patricia Baker, Scotiabank.
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Patricia Baker, Scotiabank - Analyst [26]
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Thank you, good afternoon everyone. Actually I'm not going to ask Allan any questions on Canadian Tire Retail, so I'm sure he's going to be surprised by that.
I've actually got a broader question on Forzani and the whole sporting goods, that segment of Retail in general. Just looking at if we just look at the performance there and there's nothing to sneeze at that 5.1%, that's a tremendous performance that most retailers would love to have, but if we just look at the trend over the course of the last several years we have seen that since the beginning of 2016, the two-year stack at Forzani Group has come down. For the first time that I can recall we've actually seen Sport Chek marginally underperform the overall banner.
I don't know how much that had to do with weather or anything else. But just generally when we look at that business I think it would be fair to say that you've got a tremendous position being the leader in Canada, pretty much the only national player in this arena, have tremendous success with a lot of innovation products, new stores. But it's probably the part of your business that's most vulnerable to online competition.
And just looking at what's happened south of the border, the pressure that we are seeing on a number of the vendors, etc., and just the dynamic generally around this segment of Retail I would say not just in North America but around the world, are you starting to think strategically differently about that part of the business? If we go back to when you acquired Forzani, I'm sorry, this is such a long question, the initial thing was to fix it, you guys did a great job fixing it, then it was getting the real estate right and rolling out the new format stores. So how are you thinking about that business strategically now, either Steve or Duncan, or this is a question you want to leave to your Analyst Day?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President & CEO [27]
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I think you almost answered it for me Patricia. So keep going. If you look at where we've come from, obviously, the strategy was acquire the asset, build the Sport Chek brand as we have done with great results, expand the network significantly and that was all of the five-year plan and we are at the other side of that five-year plan now and the footprint we have across the country is what we hoped it would be when we talked about that five or six years ago.
There is a lot of optimism and opportunity right now to get more out of the assets that we already have. We have a great store network. We have a great brand.
The categories that we play in, we are still seeing the kind of growth that we would want. To the weather point, we are taking a page out of the CTR playbook from what they started a few years ago where it's great to be the store that Canadians want to come to whenever it's wet -- whenever it's cold or snowing, but we can't be completely reliant on winter weather for two of our four quarters a year. And I think there's some other categories you are going to see us expand and grow that already have some momentum in them.
So I think you are going to still continue to see growth. You will see renovations and relocations in stores where it makes sense, but certainly there's a lot of focus here for the next couple of years on getting a lot more from the assets that we already have.
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Patricia Baker, Scotiabank - Analyst [28]
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Just refresh for me, and I know I should know it but I don't, in terms of the new model stores, how many of these new Sport Cheks have you got open currently, what is the plan for 2017 and then can you explain that 20 bps difference between the comp at Forzani and Sport Chek?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President & CEO [29]
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There are six flagships that we would call flagships that are open now and there's a few other stores that we would call hero stores, which is our polite way of saying we didn't spend as much money to build them. But they still have a lot of the exceptional vendor shops inside of them and a lot of the digital presence that you see inside of the flags.
Those are great brand standards for us. We're getting a lot better at getting the output of those stores that we want as well as we adjust our payroll and adjust how we run those stores. And I will tell you that the conversations we have with vendors as the vendors walk through those flagship stores it directly affects the line extensions that we get from them, and the kind of products that they want to sell through our network because it's the kind of retail experience that vendors want to associate their brands with.
So there's a couple of stores that are in process right now for what we'd call that hero-type renovation. I don't think you're going to see another flagship in our immediate future. There is a lot we can still get out of the ones that we have, and the vendors are certainly very happy with the footprint we have there.
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Patricia Baker, Scotiabank - Analyst [30]
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Thank you for that. I will get back in the queue.
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Operator [31]
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Derek Dley, Canaccord Genuity.
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Derek Dley, Canaccord Genuity - Analyst [32]
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Hi, thanks guys. Just switching gears a little bit to CTFS, we've had three quarters here now in a row of GAAR growth, obviously, we saw a nice acceleration here in Q4. Given the investments that you guys have had in that business in the past, should we expect you to continue to invest in growing GAAR and look at the business on a similar trajectory to what we saw this quarter?
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Greg Craig, Canadian Tire Corporation, Limited - President, Canadian Tire Financial Services [33]
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Hi, Derek, it's Greg here. Yes, I think, let me just separate that into two pieces around what we've experienced to date and then talk a little bit about as you look forward and our hopefully continuing investment in the business.
It has been a great year for 2016 for CTFS. We have been really pleased with where we've come from. If you take a look at where we started the year, look at as Allan talked about the WOW Guide, look at our presence in flyers, we even had two TV commercials which we've never had before, they are really focused on getting customers to understand our value proposition.
And what we found is that once you understand the value proposition that the sales and the receivables and the active accounts tend to follow. So really pleased by what we've seen all through the year.
And for me, here's how I would characterize it, we are pleased with what we have but we are really excited about what the future can hold. If I look at building out further with Retail, building out further with Mark's, building out further with FGL, I think there's still lots of runway left for this business to continue to grow. We are just going to get deeper into the Retail integration with all the banners that we've already started with CTR.
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Derek Dley, Canaccord Genuity - Analyst [34]
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Okay, great. Thank you.
Just on your capital allocation priorities, I mean we've seen the CapEx number come down about CAD200 million since, let's call it, the midway point of 2016. And you guys intend to buy another 550, million, but outside of that, is there any other capital allocation initiative that you guys are evaluating?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President & CEO [35]
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Nothing of -- we have to, obviously, we had to finish the distribution center. And as far as major store builds and things like that, we are going along more of a traditional sense from that point of view.
Allan MacDonald has put a few additional stores in his network for refurb than normal in the coming year. But that's minor in terms of total CapEx.
The technology is, obviously, the major, our major thrust. And picking and doing them sequentially, as Eugene Roman and his team feel that they can handle it and within the strategies that we have for each of our business units is absolutely critical.
So we are, we've finished our point-of-sale investments in for our Western companies and the distributor order management system, yes, but they are not huge in terms of investment. And so it's strengthening, it's making us better as far as our focus is concerned on technology investments. We out two years and three years we probably are looking at supply chain investments and things like that, but not in the, as far as technology is concerned, but not in the 2017, early 2018 period at all.
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Derek Dley, Canaccord Genuity - Analyst [36]
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Okay, great. Thank you very much.
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Operator [37]
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Jim Durran, Barclays.
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Jim Durran, Barclays Capital - Analyst [38]
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Good afternoon. Just going back to productivity, obviously some very significant contributions over the past two years.
As we look out over the next two years I know we are going to trip into the new time frame for the new strategic plan, but do you see the size of opportunity as great on a net basis? Obviously, there's some investment spending required to capture it, but do you see the size of the benefit being as significant as it has been over the past two years?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President & CEO [39]
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Hi, Jim, it's Stephen. Over the short term we are on track the over the next two- or three-year horizon. These investments that we are making are as much skillset investments as they are one-off investments.
It wasn't like, yes, we have done better in negotiating some contracts, and I won't say that that isn't part of our theme here, but that is a small part of the theme. I think in understanding and having the toolsets to be able to negotiate better pricing from our vendors, for example, is extremely important to us. A lot of that skillset across the board will roll out to our other banners, as well.
Pricing and promote optimization work is just straight skillsets. That's what I mean by great retelling. I don't know how else to describe it.
That skillset stays with you. And Allan and Greg Hicks and team have spent a fair amount of time and effort and some cash in order to increase that skillset and get the tools.
Some of it, too, has come from pure data analytics. Both the merchandising team and our IT team has done a tremendous amount of work in making sure that that data is accessible, that the data has the right tools for accessibility and that our merchants understand how to access it. All those skillsets stay with us.
So some of it, the latter what I just mentioned, is also now rolling out to other banners. So the benefits of those we'll see over time.
And I think there was, I forget who asked the question in terms of consumer data assisting with our store merchandising and layout. That is one of the next big themes I think that the guys are doing a cute amount of work on. Because that data tells us a tremendous amount about our physical stores along with our e-store, if you will.
I think overall it is going to stick with us. And owned brands will also play a very significant role going forward in terms of we've called productivity and operational efficiency a big basket here. One of the reasons we wanted to move off calling it productivity is that the traditional interpretation of productivity, in a way, was trying to get more out of the same -- trying to get more output out of the same input.
A lot of this is just straight skillset. So long answer, but yes is the short answer.
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Jim Durran, Barclays Capital - Analyst [40]
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Great, I appreciate that. Thank you.
On the FX side, can you give us some idea as to what your FX outlook is for the new year? Like is there a point in time where FX will no longer be a drain based on how you have been accumulating your US dollars?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [41]
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Jim, it's Dean. So you know, it is still a big factor, but as I've used my metaphor before we are heading for a glide path here that brings us more in line with what, if you would, typical spot would be today. And we are getting ever closer to that, but the team throughout 2016 has had to deal with very significant year-over-year difference in effective rate.
That will continue to moderate as we go into 2017. So if I had to characterize it, it will be less significant in 2017 than it was in 2016 for sure as old hedges roll off and the new hedges that we have been putting on over time come into play.
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Jim Durran, Barclays Capital - Analyst [42]
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Okay. Last question, just e-comm, is e-commerce now at a point in some of the businesses where it's having a meaningful impact on comp store sales?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President & CEO [43]
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No. No, not at this stage at all.
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Jim Durran, Barclays Capital - Analyst [44]
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How far off do you feel that that time frame is?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President & CEO [45]
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Well, I guess the definition of meaningful is well in terms of comp. So our e-comm is growing rapidly. It's just smaller base --
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [46]
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We can wow you with some big percentage increase numbers.
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Stephen Wetmore, Canadian Tire Corporation, Limited - President & CEO [47]
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Yes, they are fairly impressive. I think in some of the -- it is always going to be difficult keying into our Retail because of the variety of the assortment that they have to understand the comp effect.
Certainly I think Patricia's comments about Sport Chek and the future of the sports industry, bang on, it's a complicated thing. And that's why Duncan and team are flat out to make sure that the customer is getting exactly what they want in that business.
So that one probably would have, you will see an effect sooner maybe than other categories in our businesses. But it will be a while before it's a significant effect, that's for sure. I think in the USA they include it in same-store sales, don't they?
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Jim Durran, Barclays Capital - Analyst [48]
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Typically, yes.
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Stephen Wetmore, Canadian Tire Corporation, Limited - President & CEO [49]
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Well, if it benefits us then we are going to do the same.
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Jim Durran, Barclays Capital - Analyst [50]
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I appreciate your honesty. Thanks very much.
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Operator [51]
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Brian Morrison, TD Securities.
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Brian Morrison, TD Securities - Analyst [52]
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Hi, thank you. Dean, just a follow-up to Jim's question. Can you just remind us how far in advance on average you put in place your hedging strategy?
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [53]
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Good try, Brian, but I never actually answer that question usually. But we go out, we do go out probably a little longer than most retailers is what my understanding is. But I don't really layout how far we go out.
But if you think about it as we are moving towards that glide path of getting closer to what current spot is, it's taken us quite a while to get there. Maybe that's as far as I will go.
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Brian Morrison, TD Securities - Analyst [54]
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Okay, then I have a question on the balance sheet and perhaps I could direct it towards Stephen, please. Looking forward I don't imagine the capital structure is likely to change at CT REIT or Financial Services, and you've just ended the year with a little net cash within Retail.
And I don't see how this is likely to change much next year even after your active NCIB based on your positive operational commentary and you've got CapEx coming down. So without a material transaction that is often alluded to, it's not your style, what are some of the other potential alternatives you banter about with your advantageous financial position?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President & CEO [55]
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Well, I know you might say it's not my style as far as the acquisition, it's not my style until we find something that's good. But the owned brands I suspect we are doing a lot of work, and when the opportunity arises we are going to take it in terms of if there is something to acquire or license in at a fee and those sort of things we definitely will. We keep a little bit of research should we ever have to invest in some of our productivity initiatives, but that's not going to have any significant effect on anything.
So I'm not overly concerned at all of the moment with the quantum of cash that we are carrying along. It does vary during the year substantially depending on how we use our working capital. It ends the year usually fairly strong like this.
But I fully intend to push as hard as we can to bolster our business as much as we can if we find the right opportunities to acquire some smaller brands and things like that. That would be in line of sight, and I don't want to get next year where we've gone from CAD250 million at the end of, say, 2015 to CAD600 million at the end of 2016, I don't really want to get to CAD900 million at the end of 2017. So I am very conscious of it.
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Brian Morrison, TD Securities - Analyst [56]
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Okay, thanks very much.
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Operator [57]
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Peter Sklar, BMO Capital Markets.
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Peter Sklar, BMO Capital Markets - Analyst [58]
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On your SG&A line or operating expenses, that line, as you know, grew quite considerably year over year. I take it that one of the growing expenses is loyalty as you reward consumers who sign up for your financial services, and another growing cost in there I sense from your commentary today is the cost of data analytics as you continue to deploy data analytics.
So I just want to get a sense, like, are those costs significant and are you going to continue to grow those costs as initiatives of Canadian Tire or are we plateauing out? So if you could just talk a little bit about that, please.
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Stephen Wetmore, Canadian Tire Corporation, Limited - President & CEO [59]
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Well, data analytics, firstly, loyalty, yes, partly, no doubt about that, but it's not, I mean that's just good spend. As far as I'm concerned it's not something that I think you should be materially focused on particularly.
Data analytics was really that part of the investments have occurred from Eugene's point of view in terms of getting us what we need. Certainly setting us up with unbelievable facilities in Winnipeg has been a big part of this in the security that surrounds it has been a huge part of it, the accessibility has been huge part of the investment. So that's sitting there.
You are always going to make some to make it keep it up to date. We have the tools. So what we've been spending, which is why you see in a little ways through OpEx is some of the skillset work, but those are -- weren't that substantial really for me to highlight to you, to tell you the truth.
So those are the analytics is -- it's more skillset based than it is spending a lot of money on it. Digital marketing efforts and things like that we have to keep a close eye on to make sure that they return the investment. That's a different type of investment.
It's more expensive than traditional advertising and you are going to be careful. But I guess that's related to data. But no, I wouldn't concentrate on those two things really as driving substantial SG&A going forward.
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Peter Sklar, BMO Capital Markets - Analyst [60]
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So Steve, if you look at your SG&A line, it grew about 10% year over year. So there's something happening there. What should we be focusing on?
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Stephen Wetmore, Canadian Tire Corporation, Limited - President & CEO [61]
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Well, part of it was our variable comp at the end of the year. So that's kind of a one-off. It's our incentive plan, to be blunt about it, for our management team which goes very deep into the organization.
That was there. And we incurred and spent some money to teach some of our folks the skills necessary in some of the other areas of operational efficiencies that I had mentioned earlier. So we got some outside help.
Yes, with some data to help some of the teams to analyze the data but skillset investment primarily. That's what was driving our SG&A, especially in the fourth quarter. I think I missed one, though.
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [62]
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Peter, it's Dean. Three lines, so as Stephen rightly highlighted the outside help, if you will, around operational efficiency is one of the buckets that in fourth quarter was a heavy spend with respect to that because we got momentum with the program, took it on the road so to speak.
The marketing investment around loyalty because of, quite frankly, because we got great take-up and great cooperation between Retail and CTR and CTFS, particularly around ISF. And that drove some incremental loyalty costs with the take-up of that program and benefited both businesses. And then so those are the other two buckets on top of Stephen mentioned the variable comp which extends right down through the organization.
So obviously with the top lines that Mark's particularly and as well as FGL, that's right down into the store level personnel guys that we were ticking along through the year and then they had just a fantastic result in the fourth quarter. So we had some catch-up to do with respect to recording those expenses.
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Peter Sklar, BMO Capital Markets - Analyst [63]
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Okay and Dean, the other question I wanted to ask, it seems from listening to management speak today that the Financial Services side of the business has and will become more and more integrated with the Retail side of the business. And Canadian Tire has some very powerful executives, retail executives.
So who is going to be the policeman to ensure that credit standards and other standards are not compromised in any way to drive the Retail business? Is that you or as the two businesses become integrated that's something I would think you would want to be watchful of.
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Dean McCann, Canadian Tire Corporation, Limited - EVP & CFO [64]
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Jump ball here.
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Greg Craig, Canadian Tire Corporation, Limited - President, Canadian Tire Financial Services [65]
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Peter, it's Greg here. Let me start. As you know, we are a federally regulated entity.
We have our own Board, a bank board as well. And we are very cognizant and aware of that exact fact.
I will talk about ISF, maybe, as an example. ISF does a lot of great things for CTR and we also test that in Mark's in the fourth quarter, but ISF also is a great source of new accounts for the bank. So we are very aware of -- and, frankly, ISF surprisingly is the people that are taking up ISF are lower risk super-prime customers.
So that really isn't changing any of the risk profile. If you think about, it you have to have CAD200 of a transaction in the Canadian Tire cash lane.
But we are very aware of the fact of that we are a federally regulated institution and we have a Board. And I don't think I want to walk in and tell Stephen that the write-off rates changed anytime soon. So very aware of that fact and we're watching it extremely closely.
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Stephen Wetmore, Canadian Tire Corporation, Limited - President & CEO [66]
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Certainly Canadian Tire Retail where we are trying to blend it in is for them to take more accountability to assist Greg and customer acquisition, for example. So much of the customer acquisition is done in-store and a lot of it, etc., within Canadian Tire Retail and within petroleum.
Given the foreign excess of 200 million visits online just within the Canadian Tire Retail environment if the marketing teams can sit down and figure out how can that benefit Canadian Tire Financial Services both in terms of just good marketing, good exposure when you get on the website, great offers as they pop up against certain product sales, etc., etc., that's where the power of Canadian Tire Retail and its reach can help Greg in his business. And so that's more, that's what I meant.
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Peter Sklar, BMO Capital Markets - Analyst [67]
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I understand what you are saying, Steve.
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Operator [68]
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Ladies and gentlemen, this concludes today's call. A webcast of the conference 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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