CANADIAN TIRE CORP. $73 (Toronto symbol CTC.A; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 81.6 million; Market cap: $6.0 billion; SI Rating: Above average) is one of Canada’s leading retailers. Its 468 Canadian Tire stores sell a unique mix of automotive, household and sporting goods. The company also operates smaller retail chains Mark’s Work Wearhouse (casual clothing) and PartSource (auto parts), as well as 265 gas stations. In the mid-1990s, Canadian Tire began a major overhaul of its stores to make them more friendly to shoppers, including wider aisles and better signage and lighting. This helped it compete with big U.S. retailers such as Wal-Mart and Home Depot.
Revamped stores spurred big gains
Thanks to the success of this plan, sales rose 40.7%, from $5.9 billion in 2002 to $8.3 billion in 2006. Earnings grew 71.7%, from $2.51 a share (total $200.9 million) in 2002 to $4.31 a share ($354.6 million) in 2006. If you exclude unusual items, it would have earned $4.26 a share in 2006. Canadian Tire recently unveiled a new strategic plan that it hopes will increase profits by 10% a year to 2012. The new plan includes building 60 to 70 new outlets each year for the next five years. As well, the company plans to put more Mark’s merchandise in Canadian Tire stores. It also aims to triple the number of PartSource stores, and build 22 PartSource hub stores that will supply auto parts on a same-day basis to 80% of its regular Canadian Tire stores. Besides opening new stores, Canadian Tire will benefit from a new governing agreement that gives it a greater share of profits in stores operated by franchisees. This will add $15 million to $20 million to Canadian Tire’s pre-tax profits in 2008.
Financing profits rising strongly
Another area of growth is Canadian Tire’s finance division. This business accounts for roughly 10% of revenue, but nearly 30% of profits. In addition to credit cards, Canadian Tire’s finance division now offers traditional banking services, including chequing and deposit accounts and residential mortgages. The company cuts its credit risk by selling up to 80% of its loans to third parties. Like most financial service providers, Canadian Tire invests in short-term notes called asset-backed commercial paper (ABCP). Due to the liquidity problems in the ABCP market, it had to write down the value of these investments by $1.3 million. If the liquidity problems continue, the company may have to write down more of the $8.9 million in ABCP it still holds. Still, that’s less than 3% of its total annual earnings.
Attractive relative to sales, earnings
Canadian Tire got as high as $88 in July 2007, but has since moved down on fears that slowing housing market would hurt sales. It now trades at 15.0 times its likely 2007 earnings of $4.86 a share. It’s also cheap at 70% of its sales of $105 a share. The $0.74 dividend yields 1.0%. Canadian Tire is a buy.
