CANADIAN TIRE CORP. $56 (Toronto symbol CTC.A; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 81.6 million; Market cap: $4.6 billion; Price-to-sales ratio: 0.5; Dividend yield: 1.5%; SI Rating: Above Average) sells automotive, household and sporting goods through 479 stores. These account for roughly 65% of its revenue, and 55% of its earnings. Canadian Tire owns 70% of its stores, but franchisees operate all of them.
The company also owns other retail chains, including 378 Mark’s Work Wearhouse casual-clothing stores, 273 gas stations (some of which have car washes and convenience stores), and 87 PartSource auto-parts stores.
Canadian Tire’s sales rose 18.2%, from $7.7 billion in 2005 to $9.1 billion in 2008. In 2009, sales fell 4.8%, to $8.7 billion. Same-store sales at the main retail division, which includes Canadian Tire and PartSource stores, fell 4.2%. Weak electronics sales offset higher sales of cleaning, kitchen and pet-care goods. As well, a lack of snow in Ontario and Quebec hurt sales of winter merchandise, such as snow shovels.
The company’s earnings jumped 26.9%, from $3.98 a share (or a total of $330.1 million) in 2005 to $5.05 a share (or $411.7 million) in 2007. However, earnings fell to $4.60 a share (or $375.4 million) in 2008, and to $4.10 a share (or $348.0 million) in 2009. If you exclude gains and losses on sales of securities by its finance division and other one-time items, the company would have earned $4.26 a share (or $348.0 million) in 2009.
New store formats expand sales
Canadian Tire continues to benefit from its two new store formats. The first, called “Smart Stores,” features layouts that make it easier for the company to move faster-selling seasonal merchandise to high-traffic areas of the store. Responding quickly to changes in local tastes and buying patterns helps Canadian Tire maximize its sales and profits.
In 2009, the company converted five stores to this format as part of a test. The test stores reported an average sales increase of 25%, and 14% more transactions. The company now has 36 Smart Stores, and plans to convert 60 more of its stores to Smart Stores in 2010.
Canadian Tire calls its second new store concept “Small Market.” These stores, about a quarter of the size of a Smart Store, are designed for rural communities. Like Smart Stores, they focus on high-volume items. Many also include a gas station and a Mark’s Work Wearhouse outlet. So far, Canadian Tire has opened nine Small Market stores. It plans to open four more by the end of this year.
The company is now testing a plan to sell food, such as milk, eggs, bread and frozen dinners, at 10 of its stores. It believes these items will encourage repeat visits. So far, the test has been successful. That may prompt Canadian Tire to carry food in more of its stores.
The company recently hired U.K.-based marketing firm dunnhumby to revamp its customer loyalty plans. These include its famous “Canadian Tire money” coupons. dunnhumby will analyze the roughly 1 million transactions that Canadian Tire handles every day. This data will help the company develop new reward plans that improve customer satisfaction and increase sales.
Finance division has plenty of liquidity
The financial-services division has been a growth area in the past few years. The division’s Canadian Tire-branded MasterCard credit cards account for 95% of its business. It also offers personal loans and savings accounts. (The company sold its residential mortgage operations in 2009). This division, which only accounted for 10% of Canadian Tire’s revenue, supplied 27% of its earnings in 2009.
To cut its risk, Canadian Tire sells its credit-card receivables to third parties. This also gives the company cash to expand its lending activities. The credit crisis hurt demand for new securities backed by credit-card loans. However, strong demand for Canadian Tire’s savings accounts and guaranteed investment certificates continues to give it enough cash to maintain this division’s liquidity. It now has $2.1 billion in deposits.
Canadian Tire is doing a good job of attracting credit-card customers: Receivables rose 4.1% in 2009. But fewer cardholders are paying their bills on time because of the slow economy. As a result, Canadian Tire wrote off 7.58% of its loans in 2009, up from 6.34% in 2008.
In response, the company has cut credit limits and raised the interest rates it charges borrowers. These moves should help lower write-offs to their traditional level of between 5% and 6% of loans.
Real estate is a hidden asset
In the late 1950s, Canadian Tire started buying land and leasing it to its franchisees. The company paid $2 billion for these properties, so they’re probably worth more today. It could unlock more value by selling some of its surplus real-estate holdings.
The stock trades at a low 12.5 times this year’s forecast earnings of $4.47 a share.
Canadian Tire is a buy.
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