canadian tire

Thanks to Free Trade Agreement with the United States, many U.S. retail chains have expanded their operations in Canada. That includes Wal-Mart, the world’s biggest retailer. Wal-Mart’s sophisticated inventory control systems and leverage with suppliers let it sell products for less than most of its competitors. Faced with this threat, many Canadian retailers have copied some of Wal-Mart’s tactics. This has helped them hang on to their market share, and the improved efficiencies have increased their profits. Here are three top Canadian retailers that have overhauled their businesses in the past few years. Sobeys and Canadian Tire are now enjoying the benefits of new equipment and better stores. Loblaw’s restructuring is taking longer than we anticipated, but its recent moves should also pay off....

CANADIAN TIRE CORP. $70 (Toronto symbol CTC.A; Conservative Growth Portfolio, Consumer Growth Portfolio; Shares outstanding: 81.7 million; Market cap: $5.7 billion; SI Rating: Above average) and its associated dealers operate 465 stores that specialize in automotive equipment, home improvement and sporting goods. The group also operates 260 gas stations, 60 auto parts stores and 330 Mark’s Work Wearhouse casual clothing stores. Canadian Tire saw the threat from Wal-Mart in the mid-1990s, and began to replace its older stores with bigger ones. It also developed a new store format it calls “Concept 20/20", which tends to generate higher customer traffic and sales than its regular stores. About 20% of Canadian Tire’s stores now use this format. Like Loblaw and Sobeys, Canadian Tire has also overhauled its distribution networks and computerized its inventory control systems. Ongoing savings from these investments will help Canadian Tire stay competitive....

Our standing advice on income trusts is to limit them to one-sixth of your portfolio or less. In addition, we mainly recommend trusts that come out of trust conversions aimed at improving shareholder value. We stay out of most new issues, trusts included. In our view, all too many new trust issues were callous attempts at cashing in on investor demand for anything with a high yield. These simple restrictions limited our readers’losses when the new trust rules came out. We think the damage is done, so we recommend the same trusts as before. Note that two of our trust buys are exempt as REITs from the new tax rules....

CANADIAN TIRE CORP. $69 (Toronto symbol CTC.A; Conservative Growth Portfolio, Consumer sector; SI Rating: Above average) is one of Canada’s best-known retailers. It operates 462 stores that specialize in automotive, sporting and home improvement goods. It also operates 259 gas stations, 59 PartsSource auto parts stores and 334 Mark’s Work Wearhouse casual clothing stores.

New stores fueled sales gains

In the mid-1990s, Canadian Tire began replacing its older stores with bigger, better-lit new stores designed to improve shopper traffic and satisfaction. In the first year, sales at these new stores are typically 70% higher compared to the old stores. These new stores also help Canadian Tire compete as big American retailers like Home Depot and Lowe’s expand their Canadian operations. Thanks to the success of this plan, sales grew from $5.4 billion in 2001 to $7.8 billion in 2005, or 9.6% compounded annually. Income rose at a compounded annual rate of 15.6%, from $2.23 a share (total $176.7 million) in 2001 to $3.98 a share ($330.1 million) in 2005....

ANDRES WINES LTD. $34 (Toronto symbol ADW.A; Income Portfolio, Consumer sector; SI Rating: Above average) has gained roughly 10% since it said it would split its stock on a 3-for-1 basis in October 2006. That should greatly improve the stock’s liquidity. Andres also plans to change its name to Andrew Peller Limited. Thanks to strong demand for premium wines, which generate higher profits than its regular brands, Andres increased its dividend for the first time since 1997, from $0.644 a share (pre-split) to $0.759. It now yields 2.2%. Andres Wines is a buy....

In evaluating investments, many investors focus on what we’d call ‘investment outputs’, such as earnings, dividends, cash flow, return on equity, sales growth and so on. These are all important, of course, but you shouldn’t focus on them to the exclusion of what you might call ‘investment inputs’, such as the factors we use in assigning our Successful Investor quality ratings. Investment inputs are harder to work with than investment outputs, since it takes a judgment call to determine their risk or value. To give you a better idea of what we mean, here’s a list of a dozen investment inputs that we look at before recommending an income trust:...

CANADIAN TIRE CORP., LTD. $64 (Toronto symbol CTR.NV; SI Rating: Above average) is a good example of a Canadian retailer that has successfully dealt with the Wal-Mart threat. It closed older stores, and upgraded its checkout and inventory systems. Thanks to its new stores, which feature wider aisles, better signage and faster checkouts, Canadian Tire earned $1.30 a share before unusual items in the fourth quarter of 2005, up 17.6% from $1.10 a year earlier. It also raised its quarterly dividend 13.8%, from $0.145 a share to $0.165 a share. The new annual rate of $0.66 yields 1.0%. The company also plans to change its stock trading symbol, from CTR.NV to CTC.A, on May 8, 2006. Canadian Tire is a buy.

RIOCAN REAL ESTATE INVESTMENT TRUST $23.07 (Toronto symbol REI.UN; SI Rating: Average) is Canada’s largest REIT. RioCan has total assets of $4.2 billion consisting of ownership interests in a portfolio of 201 retail properties across Canada, including 14 under development. These properties contain over 50 million square feet of gross leasable area. RioCan is Canada’s largest owner of neighbourhood shopping centres. These are enclosed malls in smaller urban centres. But where it’s showing the strongest growth is as the largest owner of ‘New Format’ malls. These are in the suburbs of larger cities, and are made up largely of ‘Big Box’ stores with lots of parking and room for new building. RioCan’s revenue in the three months ended September 30, 2005 was $149.8 million, up 8.6% from $138 million a year earlier. Cash flow per unit fell 3.3%, to $0.29 from $0.30. RioCan’s annual distribution of $1.29 gives it a current yield of 5.6%....

RIOCAN REAL ESTATE INVESTMENT TRUST $23 (Toronto symbol REI.UN; SI Rating: Average) owns or invests in over 200 retail properties in Canada, mainly large, outdoor suburban malls. Ontario and Quebec account for roughly 80% of its revenue. In the three months ended September 30, 2005, RioCan earned $0.22 a unit (total $41.8 million) from continuing operations, up 4.8% from $0.21 a unit ($39.1 million) a year earlier. Cash flow rose 2.6%, to $56.1 million from $54.7 million. But cash flow per unit fell to $0.29 from $0.30 due to more units outstanding. Revenue grew 8.6%, to $149.8 million from $138.0 million. In the past few years, RioCan has steadily sold older or smaller properties so it can focus on properties with greater earning potential, such as “Big Box"-style stores. Thanks to this strategy, the trust has leased nearly 97% of its available space. National chains like Loblaw, Wal-Mart and Canadian Tire accounted for 81.5% of RioCan’s rental revenue at September 30, 2005, up from 80.7% at the end of 2004....

We advise you to use caution when investing in income trusts, and to limit your trust investments to no more than one-sixth of your total portfolio. Many income trusts, particularly those that have been assembled and sold to the public as new issues in the past few years, come with hidden risks that can eventually hurt their profits and force them to cut their distributions. When that happens, unit prices plummet. In choosing income trusts to recommend, we look beyond high current yields and weigh the quality of a trust’s assets. In trusts as in stocks, it’s crucial to make sure you are investing in an attractive business with healthy long-term prospects and the ability to survive the inevitable setbacks that periodically come to every business....