CANADIAN TIRE CORP. $67 – Toronto symbol CTC.A

CANADIAN TIRE CORP. $67 (Toronto symbol CTC.A; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 81.5 million; Market cap: $5.5 billion; Price-to-sales ratio: 0.5; Dividend yield: 1.8%; TSINetwork Rating: Above Average; www.canadiantire.ca) gets 90% of its revenue and 80% of its earnings from its various retail stores.

These outlets include 488 Canadian Tire stores, which specialize in automotive, household and sporting goods. The company owns these stores, but franchisees operate most of them. Canadian Tire also operates 289 gas stations and 87 PartSource auto parts stores.

The company has added a number of new product lines by purchasing other retailers. For example, in 2001 it bought the Mark’s Work Wearhouse chain of casual clothing stores. The company now has 385 Mark’s stores and carries a variety of Mark’s products in its main Canadian Tire stores.

Canadian Tire is now increasing its share of the fast-growing sporting goods market through The Forzani Group Ltd., which it bought in August 2011. Forzani has 534 stores in Canada, including SportChek and Athlete’s World.

The company paid $739.9 million for Forzani. It feels it can save $25 million this year by combining the two chains’ purchasing and advertising departments. These savings should rise to $35 million a year by 2014. The purchase will also help the company negotiate lower rents at malls that have both a Canadian Tire and a Forzani store.

The remaining 10% of Canadian Tire’s revenue and 20% of its profits come from its financial services division, which mainly manages the company’s credit card business. One in five Canadians has a Canadian Tire Options MasterCard, and over 4 million of these cards are now in circulation. To cut its risk, the company sells its credit card loans to an outside firm.

The finance division also includes Canadian Tire Bank, which offers no-fee savings accounts, GICs and insurance.

Sales up strongly since the recession

Sales rose 6.0%, from $8.6 billion in 2007 to $9.1 billion in 2008. Sales fell 4.8%, to $8.7 billion, in 2009, but rebounded to $9.2 billion in 2010, and went on to $10.4 billion in 2011.

Earnings fell from $5.05 a share (or a total of $411.7 million) in 2007 to $4.10 a share (or $335.0 million) in 2009. However, earnings turned around in 2010 and jumped to $5.71 a share (or $467.0 million) in 2011.

Same-store sales rose 1.1% at the Canadian Tire stores in 2011, and 2.8% at Mark’s. Same-store sales have risen 2.6% at the Forzani stores since the company bought them.

A big reason behind Canadian Tire’s success is its new store formats, including its Smart Stores design, which makes it easier for the company to move faster-selling seasonal merchandise to hightraffic areas of the store. This gives store managers more flexibility to adjust to changes in local tastes, and maximize sales.

In 2011, Canadian Tire built two new stores using this format and converted 66 others. This year, it plans to build or convert at least 100 more stores.

Steadier sales on the way

Canadian Tire now aims to add more merchandise that would cut its reliance on weather-sensitive products like snow tires and winter boots. For example, the company recently began selling certain food items, such as milk, at 17 of its stores. Food helps encourage repeat visits, so it may expand this test to more stores.

The company is also benefiting from a plan to sell more automotive products and services. In 2011, it opened four of its new-style automotive stores, which feature drive-in reception areas and express oil-change bays.

As part of this plan, it also recently launched a new website that mainly sells tires. The site will send orders to a Canadian Tire store close to the customer, where a mechanic can install them.

Canadian Tire is one of the few retailers that sells tires over the Internet. That gives this new site an advantage over other tire sellers. As well, customers will probably shop at the company’s stores while waiting for their tires to be installed.

Canadian Tire’s sound balance sheet will let it keep investing in its operations and making acquisitions. Its long-term debt of $2.3 billion is a high, but still manageable, 42% of its market cap. It also holds cash of $522.2 million, or $6.41 a share.

Goodwill writedown seems unlikely

Buying Forzani pushed up goodwill and other intangible assets to $1.1 billion from $361.4 million in 2010. However, Forzani’s well-established stores and brands have a lot of enduring value. That cuts the likelihood of a future writedown.

The stock trades at just 10.8 times the $6.21 a share that Canadian Tire will probably earn in 2012. The company also recently raised its quarterly dividend by 9.1%, to $0.30 a share from $0.275. The new annual rate of $1.20 yields 1.8%.

Canadian Tire is a buy.

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