Canadian Tire has offered our investors so much more than hammers and nails. The stock’s up over 931% since we first recommended it in The Successful Investor in April 1995.
A strong long-term growth plan that includes store, online business and private-label brand upgrades should help renew its momentum and provide a basis for further long-term gains.
The current 4.9% dividend yield is just as impressive as the share price gains when you consider just how inexpensive the shares are right now.
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They trade at just 9.9 times its 2024 forecast earnings.
CANADIAN TIRE CORP. (Toronto symbol CTC.A; www.canadiantire.ca) is a top pick for 2023.
Investors benefit from the company’s 502 Canadian Tire stores. They sell automotive parts and services, and household and sporting goods; franchisees run most of the locations. The company’s other operations also enrich its outlook. They include 161 stores operating under the PartSource (auto parts) and Party City (party supplies) banners.
Canadian Tire has several other major retail chains: Mark’s sells casual and work clothing through 379 stores; and the Sport Chek Group sells sporting goods and athletic wear through 370 outlets, including Sport Chek and Sports Experts.
Notably, the company’s Mark’s chain now plans to open four new stores under the Mark’s WorkPro banner in Edmonton, Toronto, Montreal and St. Catharines, Ontario. These new stores will focus on industrial customers, such as construction workers. Specialized stores like these will help Canadian Tire cope as consumers spend less on non-essential items due to rising interest rates and inflation.
Canadian Tire also provides a variety of banking services, including savings accounts, guaranteed investment certificates (GICs), insurance and credit cards.
In October 2014, the company sold 20% of its Canadian Tire Financial Services business to Bank of Nova Scotia (see below) for $476.8 million.
Canadian Tire has now re-acquired that 20% stake for $895 million. Meanwhile, the transaction will add to Canadian Tire’s 2024 earnings. As well, gaining full control over the financial services division will make it easier to integrate its Triangle customer loyalty program with its credit card business. That should encourage repeat visits and more spending per visit. (The Triangle plan currently has over 11 million active members, which includes 2.3 million credit card holders.)
Canadian Tire also announced that it is conducting a strategic review of the financial services division. That could lead to the sale of shares in this business, or even a spinoff. It expects to complete the review in 2024.
With the March 2024 payment, the company will raise your quarterly dividend by 1.4%. Shareholders will then receive $1.75 a share instead of $1.725. The new annual rate of $7.00 yields a high 4.9%. With this increase, the company has now raised that payment each year for the past 14 years. Including this latest increase, the company has now raised the dividend by an average of 11.0% annually over the last 5 years.
What’s more, Canadian Tire now plans to buy back $200.0 million of its class A shares in 2024. That’s on top of the $470.0 million it spent on buybacks under the previous plan.
Value Stocks: Revenue and earnings are enhanced by Canadian Tire’s e-commerce gains
Canadian Tire’s revenue rose 3.4%, from $14.06 billion in 2018 to $14.53 billion in 2019. In 2020, revenue growth slowed as the pandemic took hold, rising just 2.3% to $14.87 billion. Revenue then jumped 9.6% to $16.29 billion in 2021 as the economy re-opened. In 2022, revenue then climbed a further 9.3%, to $17.81 billion.
The company’s earnings rose 6.1%, from $870.4 million, or $11.95 a share, in 2018 to $923.3 million, or $13.04 a share, in 2019. In 2020, earnings fell 2.0% to $904.9 million, or $13.00 a share. The company incurred added costs as the pandemic shut stores. Earnings then jumped 42.6% to $1.29 billion, or $18.91 a share, in 2021 as the economy re-opened. In 2022, despite the higher revenue, earnings fell 3.1%, to $1.25 billion, or $18.75 a share. That was due in part to the company making strategic investments relating to its BetterConnected strategy. As well, it incurred higher supply-chain and other costs.
Canadian Tire’s revenue in the quarter ended September 30, 2023, rose 0.5%, to $4.25 billion from $4.23 billion a year earlier. That topped the consensus forecast of $4.18 billion.
Overall same-store sales declined 1.6%. At the main Canadian Tire chain, same-store sales fell 0.9%, as better sales of automotive products offset lower demand for seasonal and household goods.
Same-store sales also declined 7.4% at Sport Chek on lower sales of athletic clothing and footwear. However, same-store sales at Mark’s rose 0.2%. As well, e-commerce sales totalled $1.1 billion in the past 12 months. That’s equal to 6% of the company total retail sales over that same period.
If you factor out unusual items, Canadian Tire’s earnings in the quarter fell 15.9%, to $165.2 million from $196.5 million a year earlier. Due to fewer shares outstanding, per-share earnings declined at a slower pace of 11.4%, to $2.96 from $3.34. That missed the consensus estimate of $3.54.
Due to higher inflation and interest rates, which are prompting consumers to spend less on discretionary goods, Canadian Tire is now cutting 3% of its workforce. It expects to pay $20.0 million to $25.0 million in severance and other costs, but the plan should lower its annual expenses by $50.0 million.
Canadian Tire’s long-term outlook remains bright. It continues to make progress on its new long-term growth plan, including upgrading its stores, online businesses and private-label brands. Since the start of 2023, it has refreshed or upgraded more than 10% of its Canadian Tire stores. So far, those improvements are driving higher customer traffic and sales at those upgraded stores.
Due to the current uncertainty regarding consumer confidence and debt, the company has decided against offering a three-year performance projection. Still, it will likely shift its focus to essential goods in the second half of 2023. That will help improve its inventory costs and reduce the risk of writedowns.
Canadian Tire will probably earn $14.47 a share in 2024, and the stock trades at 9.8 times that estimate.
Recommendation in The Successful Investor: Canadian Tire Corp. is a buy.
We hope you benefited from this analysis of Canadian Tire. The company is just one of the top-performing stock picks of our Successful Investor newsletter.
Of course, not all our picks over the years have produced these kind of spectacular gains. Some, in fact, have led to losses. But all portfolios need superstar stocks like this to offset those inevitable losses.
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