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Canadian Tire Corp. Ltd. $69 – Toronto symbol CTR.NV

CANADIAN TIRE CORP., LTD. $69 (Toronto symbol CTR.NV; SI Rating: Above average) is best known for its 459 Canadian Tire retail stores, which carry a unique mix of automotive, home improvement and sporting goods. The company also sells its goods over the Internet.

Other operations include Canada’s largest independent chain of gasoline stations, consisting of 253 gas bars, 242 convenience stores and kiosks and 65 car washes, plus the Mark’s Work Wearhouse chain of 335 casual clothing stores.

In 1994, Canadian Tire began replacing its traditional stores with “New-Format” stores, which are bigger and better lit. The company later refined this design into the “Concept 20/20” store, whose more flexible layout lets stores carry more fast-selling merchandise. Concept 20/20 stores also feature other innovations, such as a central customer service counter and improved signage.

Thanks to this plan, Canadian Tire’s sales grew from $5.2 billion in 2000 to $7.2 billion in 2004. Earnings also jumped, from $1.85 a share (total $145.1 million) in 2000 to $3.53 a share ($291.5 million) in 2004.

New system cuts shortages

The company is also working to make sure that customers find what they need when they shop at a Canadian Tire store. Through an initiative it calls “CustomerLink”, Canadian Tire spent nearly $300 million expanding certain distribution centres, and installing new computerized inventory control equipment. These investments should cut Canadian Tire’s annual distribution costs by 1%.

Independent dealers operate all of Canadian Tire’s retail stores. That helps keep Canadian Tire’s costs down, and gives head office and regional managers more time to focus on company-wide strategies and problems.

Canadian Tire is also successfully applying its store upgrade expertise to its other operations. For example, it is currently testing a new layout for its gas stations, which feature larger convenience stores, coffee bars and some grocery items. It’s also building more gas stations next to its retail stores. These new outlets tend to generate higher sales per square foot than the older ones.

New card builds customer loyalty

Another way that Canadian Tire is holding onto customers in the face of growing U.S. competition is through its credit card division. Instead of issuing customers a card that they can only use at Canadian Tire, the company now gives them its own general purpose MasterCard. Called “Options”, this card also lets customers earn the company’s famous “Canadian Tire Money” that they can spend on other merchandise. In fact, Options is now Canada’s second-largest MasterCard franchise.

Thanks to the success of the Options card, the finance division now accounts for around 10% of the company’s total revenue, up from 7% under the old system. It also provides roughly a third of Canadian Tire’s profit. The company is now offering its customers other financial services, such as personal loans. It typically sells its credit card receivables to third parties to cut its credit risk.

Canadian Tire is also doing a good job expanding into niche segments of the Canadian retail market. Since it acquired Mark’s Work Wearhouse about three years ago, sales growth at Mark’s has exceeded the overall apparel market. That’s mainly due to an expansion of Mark’s private label offerings, which sell for less than national brands, and new lines of innovative clothing such as stain-resistant pants.

The company is also enjoying strong sales growth at its PartSource chain of 51 stores, which carry a more extensive range of auto parts and accessories than the regular Canadian Tire stores. Thanks to rising interest in professional and do-it-yourself automobile modifications, Canadian Tire now aims to triple the size of its PartSource chain over the next four years.

We also like Canadian Tire for its less-appreciated assets, such as its real estate holdings. Although dealers run the stores, Canadian Tire usually builds and owns them (it collects rent from store operators as part of the dealer agreement).

Real estate is a hidden asset

The company’s unencumbered real estate has a book value of over $2 billion. It is currently taking advantage of the rise in real estate prices to sell some of its surplus property.

It’s also forming partnerships with real estate developers to create new properties that can provide secure and growing rental income, plus long-term capital gains.

As of September 30, 2005, Canadian Tire’s long-term debt was just 0.5 times its shareholders’ equity, and it had cash of $293.4 million ($3.73 a share). Goodwill and other intangible assets accounted for just 4% of equity.

Value grew along with the stock price

The stock has more than tripled for us in the past five years, but still trades at an acceptable 18.3 times the $3.78 a share that it probably earned in 2005. Earnings should rise to $4.42 in 2006, and it trades at only 15.6 times that figure. It’s also attractively priced at just 75% of its sales of $92.09 a share. The $0.58 dividend yields 0.8%.

Canadian Tire is a buy.

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