CANADIAN TIRE CORP. $118(Toronto symbol CTC.A; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 78.1 million; Market cap: $9.2 billion; Price-to-sales ratio: 0.7; Dividend yield: 1.8%; TSINetwork Rating: Above Average; www.canadiantire.ca) began operating in 1922 and is now one of Canada’s leading retailers.
The company owns 493 Canadian Tire stores, which sell automotive, household and sporting goods. Franchisees run most of these outlets. Other operations include 300 gas stations and 91 PartSource auto parts stores.
Canadian Tire has acquired more-specialized retailers to help it compete with big U.S.-based chains like Wal-Mart and Home Depot. In 2002, it bought Mark’s Work Wearhouse, which sells casual and work clothing through 383 stores. It later shortened the name to Mark’s as it added more women’s clothing and other merchandise.
In August 2011, Canadian Tire paid $800.6 million for the Forzani Group. This business sells sporting goods and athletic clothing through 429 stores, mainly under the Sport Chek and Sports Experts banners.
The new stores and upgrades to its existing locations boosted Canadian Tire’s sales by 35.7%, from $8.7 billion in 2009 to $11.8 billion in 2013.
Earnings jumped 67.5%, from $335.0 million in 2009 to $561.2 million in 2013. The company recently finished buying back $200 million worth of its class A non-voting shares. As a result, earnings per share rose at a slightly faster pace of 68.5%, from $4.10 to $6.91. Canadian Tire now plans to repurchase an additional $400 million of shares by the end of 2015.
Going after younger shoppers
Canadian Tire recently announced a three-year growth plan that involves adding and upgrading stores and expanding its online businesses. It will spend $575 million a year on these initiatives from 2015 to 2017.
The company feels the plan will raise its annual sales by 3% at its Canadian Tire locations, 5% at Mark’s and 9% at the sporting goods stores. It also expects its earnings per share to rise 8% to 10% annually over the next three years.
In addition, Canadian Tire has updated its famous Canadian Tire money reward program, which it launched in 1958.
Shoppers who pay with cash will continue to get coupons, which resemble currency, when they buy goods and can use them for future purchases.
But if they pay with a credit or debit card, they can now collect “e-Canadian Tire money,” which can be transferred to other plan members. To support the program, the company has launched a mobile app for managing and redeeming rewards.
Loyalty plans are increasingly important for attracting customers and encouraging them to spend more. This program will also let Canadian Tire tailor offers to individual customers based on shopping trends and other data.
Meanwhile, Canadian Tire is unlocking value at its smaller operations. In October 2013, it transferred 70% of its land and buildings to a new real estate investment trust called CT REIT (Toronto symbol CRT.UN). It then sold units in the trust to the public.
The company now owns 82.3% of CT REIT, which is worth about $955 million, based on the REIT’s current market cap. Canadian Tire could sell more of its REIT units to raise cash for future growth initiatives.
Deal freed up cash, cut risk
More recently, Canadian Tire sold 20% of its credit card division to Bank of Nova Scotia (Toronto symbol BNS). This business is Canada’s eighth-largest credit card issuer, with 1.8 million clients and $4.4 billion of outstanding loans. Its cardholders spend $1.2 billion annually.
The company received $479.0 million for this 20% stake. It has an option to sell an additional 29% to the bank over the next 10 years.
The deal lets Canadian Tire retain control over a highly profitable part of its business—credit cards, insurance and other banking services supplied 16% of its gross profits in the September quarter—while cutting its exposure to possible loan losses and unfavourable interest rate changes.
The company’s sound balance sheet will let it keep expanding. As of September 27, 2014, its long-term debt totalled $2.4 billion, or a moderate 26% of its market cap. It also held cash and investments of $587.3 million, or $7.52 a share.
Low p/e for a market leader
Canadian Tire’s earnings will probably improve from a projected $7.70 a share in 2014 to $8.10 in 2015. The stock trades at a reasonable 14.6 times this year’s estimate.
The company’s rising earnings are also giving it more room to increase its dividend. It recently raised the quarterly payout by 5.0%, to $0.525 a share from $0.50. The new annual rate of $2.10 yields 1.8%.
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