Canadian Tire releases second quarter earnings - retail sales up 4.0%; gross operating revenue up 5.9%
Thu Aug 7, 11:18 AMEarnings impacted by the relaunch of the Options MasterCard and by an
inventory adjustment at Mark's
------------------------------------------
Year-over-
Consolidated 2008 2007(2) year
Highlights(1): 2nd quarter 2nd quarter change
-------------------------------------------------------------------------
Retail sales $2.95 billion $2.84 billion 4.0%
Gross operating revenue $2.45 billion $2.31 billion 5.9%
Earnings before income taxes $144.7 million $188.5 million (23.2)%
Adjusted earnings before income
taxes (excludes non-operating
gains and losses)(3) $140.3 million $169.1 million (17.0)%
Net earnings $97.7 million $122.5 million (20.3)%
Adjusted net earnings (excludes
non-operating gains and
losses)(3) $94.7 million $109.8 million (13.8)%
Basic earnings per share $1.20 $1.50 (20.3)%
Adjusted basic earnings per share
(excludes non-operating gains
and losses)(3) $1.16 $1.35 (13.9)%
(1) All dollar figures in this table are rounded.
(2) The 2007 earnings figures have been restated for the implementation,
on a retrospective basis, of the CICA HB 3031- Inventories. Please
refer to Note 2 in the Notes to Consolidated Financial Statements.
(3) Non-GAAP measure. Please refer to Section 14.0 of Management's
Discussion and Analysis.
TORONTO, Aug. 7 /CNW/ - Canadian Tire Corporation, Limited (CTC.a, CTC) released its second quarter earnings today. Despite a period of unseasonable weather and challenging economic conditions, the Company reported a 5.9% increase in gross operating revenue due to a higher volume of shipments to Dealers, increased sales at Petroleum and receivables growth at Canadian Tire Financial Services (Financial Services). Adjusted net earnings were $94.7 million, 13.8% below the second quarter of 2007.
"Retail sales, while positive during the quarter, were impacted by the unseasonable spring weather and continuing economic headwinds. The $15.1 million reduction in adjusted net earnings compared to last year reflects the impact of a planned investment of $6.4 million after tax to relaunch the Options MasterCard and a book to physical adjustment of $8.1 million after tax in Mark's inventory," said Tom Gauld, president and CEO, Canadian Tire. "Earnings are expected to improve in the second half of the year as investments in the credit card relaunch and various productivity initiatives begin to positively impact results."
Business Overview
CANADIAN TIRE RETAIL (CTR)
($ in millions) Q2 2008 Q2 2007(1) Change YTD 2008 YTD 2007(1) Change
-------------------------------------------------------------------------
Retail sales(2) $2,174.5 $2,141.9 1.5% $3,393.3 $3,384.4 0.3%
Same store
sales(3) (year-
over-year %
change) (0.5)% 1.7% (1.8)% 1.5%
Gross operating
revenue $1,562.1 $1,514.9 3.1% $2,633.4 $2,585.8 1.8%
Net shipments
(year-over-year
% change) 3.2% (0.5)% 1.8% 3.9%
Earnings before
income taxes $85.0 $88.5 (4.1)% $128.6 $126.5 1.7%
-------------------------------------------------------------------------
Less adjustment for:
Gain on disposals
of property and
equipment(4) 0.1 3.7 4.0 3.7
Former CEO
retirement
obligations 0.5 (6.7) 0.9 (6.7)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(5) $84.4 $91.5 (7.9)% $123.7 $129.5 (4.5)%
-------------------------------------------------------------------------
(1) 2007 figures have been restated for the implementation, on a
retrospective basis, of the CICA HB 3031 - Inventories. Please refer
to Note 2 in the Notes to Consolidated Financial Statements.
(2) Includes sales from Canadian Tire stores, PartSource stores, sales
from CTR's online web store and the labour portion of CTR's auto
service sales.
(3) Same store sales include sales from stores that have been open for
more than 53 weeks.
(4) Includes fair market value adjustments and impairments on property
and equipment.
(5) Non-GAAP measure. Please refer to section 14.0 in Management's
Discussion and Analysis.
Retail sales across all product categories were generally impacted by the economy, however seasonal businesses in the leisure category were particularly soft due to the cold wet weather in May and June. CTR's total retail sales increased 1.5% over the same quarter in 2007 reflecting an average increase of 3.7% in the home and automotive businesses (approximately 60% of CTR sales) and a decrease of 2.1% in leisure sales (approximately 40% of CTR sales). Overall same store sales, which were down 0.5%, followed a similar pattern. With the arrival of more seasonal weather in July, sales performance strengthened, with overall retail sales up 5.1% and same stores sales up 3.1% for the month.
CTR's second quarter adjusted earnings before taxes were $84.4 million, down 7.9% compared to a year ago. Pre-tax earnings were impacted by slightly lower margins and continuing net investments of $5.9 million in long-term growth and productivity initiatives such as Automotive Infrastructure and technology renewal.
CTR opened 27 new stores in the quarter including one incremental store, five replacement stores and 21 retrofitted or expanded stores.
PartSource experienced another quarter of year-over-year sales increases driven by the continued expansion of the network and strong growth in the commercial customer segment. In addition, PartSource shipments to Dealers continue to improve as components of the Automotive Infrastructure project are rolled out. During the quarter, PartSource converted three acquired stores and opened one new store, bringing its total store network to 75.
CANADIAN TIRE PETROLEUM (Petroleum)
($ in millions) Q2 2008 Q2 2007 Change YTD 2008 YTD 2007 Change
-------------------------------------------------------------------------
Sales volume
(millions of
litres) 429.6 437.4 (1.8)% 843.4 852.7 (1.1)%
Retail sales $541.9 $471.9 14.8% $990.9 $857.3 15.6%
Gross operating
revenue $514.8 $445.6 15.5% $937.6 $808.4 16.0%
Earnings before
income taxes $8.0 $6.4 27.2% $13.0 $8.9 47.1%
-------------------------------------------------------------------------
Less adjustment for:
Loss on disposals
of property and
equipment(1) 0.0 (1.1) (0.2) (1.3)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(2) $8.0 $7.5 9.8% $13.2 $10.2 30.6%
-------------------------------------------------------------------------
(1) Includes asset impairment losses.
(2) Non-GAAP measure. Please refer to section 14.0 in Management's
Discussion and Analysis.
The 1.8% decrease in gasoline sales volumes reflected consumer response to higher fuel prices.
Petroleum's gross operating revenue totaled $514.8 million during the quarter, a 15.5% increase over the $445.6 million in the comparable 2007 period reflecting an increase in pump prices during the period and a 5.0% growth in convenience store sales.
Petroleum recorded adjusted pre-tax earnings of $8.0 million, compared to the $7.5 million recorded in the comparable 2007 period. The increase in earnings was due to healthy margins during the quarter and effective expense management.
Petroleum opened one new gas bar and refurbished one existing gas bar during the quarter.
MARK'S WORK WEARHOUSE (Mark's)
($ in millions) Q2 2008 Q2 2007(1) Change YTD 2008 YTD 2007(1)Change
-------------------------------------------------------------------------
Total retail sales $233.1 $221.3 5.3% $405.6 $399.7 1.5%
Same store sales(2)
(% increase over
prior year) 0.9% 6.9% (2.8)% 10.6%
Gross operating
revenue(3) $200.6 $187.2 7.2% $348.1 $339.3 2.6%
-------------------------------------------------------------------------
Earnings before
income taxes $7.9 $25.0 (68.4)% $4.5 $24.8 (81.9)%
-------------------------------------------------------------------------
Less adjustment for:
Loss on disposal
of property and
equipment (0.1) (0.3) (0.1) (0.6)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(4) $8.0 $25.3 (68.5)% $4.6 $25.4 (82.0)%
-------------------------------------------------------------------------
(1) The 2007 earnings results have been restated for restatement, on a
retrospective basis, of CICA HB 3031 - inventories. Please refer to
Note 2 in the Notes to the Consolidated Financial Statements.
(2) Mark's same store sales exclude new stores, stores not open for the
full period in each year and store closures.
(3) Gross operating revenue includes retail sales at corporate stores
only.
(4) Non-GAAP measure. Please refer to section 14.0 of Management's
Discussion and Analysis.
Despite unfavourable weather conditions and the slowing economy, Mark's retail sales increased 5.3% during the quarter and same store sales showed modest growth reflecting strong sales in its industrial product categories.
Mark's second quarter adjusted pre-tax earnings were $8.0 million, down from $25.3 million in 2007. Earnings were impacted a higher than expected $12.0 million pre-tax book to physical inventory adjustment and higher operating expenses to support continued network expansion.
During the quarter, Mark's opened four new stores and relocated two existing stores, four of which are co-located within a CTR store.
CANADIAN TIRE FINANCIAL SERVICES (Financial Services)
($ in millions) Q2 2008 Q2 2007 Change YTD 2008 YTD 2007 Change
-------------------------------------------------------------------------
Total managed
portfolio end of
period $3,926.7 $3,704.3 6.0%
Gross operating
revenue $201.5 $192.3 4.8% $410.2 $368.4 11.4%
Earnings before
income taxes $43.8 $68.6 (36.2)% $97.4 $114.0 (14.6)%
-------------------------------------------------------------------------
Less adjustment for:
Gain on disposal/
redemption of
shares 0.0 18.4 0.0 18.4
Net effect of
securitization
activities(1) 3.9 5.5 16.8 2.5
Loss on disposals
of property and
equipment 0.0 (0.1) 0.0 (0.2)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(2) $39.9 $44.8 (10.9)% $80.6 $93.3 (13.6)%
-------------------------------------------------------------------------
(1) Includes initial gain/loss on the sale of loans receivable,
amortization of servicing liability, change in securitization reserve
and gain/loss on reinvestment.
(2) Non-GAAP measure. Please refer to section 14.0 in Management's
Discussion and Analysis.
In the second quarter, Financial Services' total managed portfolio of loans receivable grew by 6.0% over the comparable 2007 period, driven by a 5.6% increase in the credit card portfolio.
Financial Services' gross operating revenue was $201.5 million in the quarter, a 4.8% increase over the $192.3 million recorded in the prior year.
Adjusted pre-tax earnings for the quarter were $39.9 million, or $4.9 million below the same quarter last year. Excluding the $9.7 million pre-tax cost of relaunching the Options MasterCard, adjusted pre-tax earnings were 10.8% higher than the second quarter of 2007.
The relaunch activity included the reissue of 2.6 million cards with new PayPass functionality enabling customers to quickly execute small ticket transactions without a signature. The relaunch is expected to increase sales by approximately 2.0% thereby returning the investment in 12 to 18 months.
Financial Services' net write-off rate for the credit card portfolio on a rolling 12-month basis was 5.96% compared to 5.79% in the 2007 period. Aging of the credit card portfolio, while above last year's level, is equivalent to the same period in 2006.
Financial Services continued its investment in the retail banking pilot and at quarter-end had more than $180 million in deposits and approximately $67 million in mortgages. Customer response continues to meet expectations.
SECOND HALF 2008 FORECAST
The Company has updated its earnings guidance for 2008 and expects that earnings per share for 2008 will now be in the range of $4.75 to $5.05 per share, excluding non-operating items. This is below management's initial 2008 guidance of $5.15 to $5.40 per share, excluding non-operating items. The principal reasons for this change in forecast are; the book to physical inventory adjustment at Mark's; lower second quarter earnings at CTR and Mark's; and the higher on-hand CTR inventory at the end of the second quarter leading to increased carrying and clearance costs for the balance of the year.
Earnings for the second half of 2008 are forecasted to be ahead of 2007. This growth is not based on an assumption of significant economic recovery in the balance of the year. The forecast does however reflect healthy earnings growth in excess of 20% from Financial Services, due to benefits from the launch of the PayPass functionality and lower loan loss provisioning and operating costs.
Total capital commitments for 2008 remain approximately $588 million on a gross basis. The sale/ leaseback of the CTR Carling store in Ottawa was completed for proceeds of $40 million in July and additional sale/leasebacks of CTR stores are anticipated before the end of the year.
OUTLOOK
During 2008 and 2009, the Corporation is investing in a number of initiatives to drive growth, improve productivity and enhance financial flexibility. Growth in the three retail divisions will be generated through continued network expansion at Mark's and PartSource and the introduction of two new store concepts at CTR.
The new CTR small market store, which is designed primarily for expansions into new underserved markets will incorporate a Mark's store and, where appropriate, a Petroleum site. The first four stores will be opened this year.
With the Concept 20/20 program substantially complete, the new Smart store represents the next wave of renewal for CTR stores. The first two sites will be opened in 2008, with 25 more expected to follow in 2009. Remerchandising or retrofitting an existing store to a Smart store will not require physical expansion of the existing store, thereby substantially reducing the capital cost compared to the average Concept 20/20 project.
The lower costs associated with the Smart store program, as well as the completion of the Eastern Canada Distribution Centre in early 2009 will result in a reduction in the Corporation's gross capital expenses from approximately $600 million in 2008 to approximately $400 million in each of 2009 and 2010.
This lower capital demand, combined with the additional planned sale/leaseback activity for select CTR sites and the new Eastern Canada Distribution Centre over the next twelve months, will improve cash flow and financial flexibility in 2009 and beyond.
CTC now has approximately $1.25 billion of committed bank lines in support of CTC and Glacier Trust financing activities further improving the Corporation's financial flexibility.
In 2010, repayment of $150 million of 20 year debentures with 12.1% interest, which are not expected to be replaced, will also have a substantial positive impact on interest costs and earnings.
Finally, investments in productivity initiatives such as technology renewal and Automotive Infrastructure, as well as increasing benefits from the amended Dealer contract are expected to positively impact CTR productivity levels and earnings in 2010 and beyond.
FORWARD-LOOKING STATEMENTS
This disclosure contains statements that are forward-looking. Actual results or events may differ materially from those forecasted in this disclosure because of the risks and uncertainties associated with Canadian Tire's business and the general economic environment. Risks and uncertainties are disclosed in other public filings by the Company, such as Management's Discussion and Analysis ("the MD&A") and the 2007 Financial Report and include, but are not limited to: changes in interest, currency exchange and tax rates; the ability of Canadian Tire to attract and retain quality employees, Associate Dealers, Petroleum agents and PartSource and Mark's Work Wearhouse store operators and franchisees; and the willingness of customers to purchase the Company's merchandise, financial products and services.
Risk factors associated with the assumptions that underlie Canadian Tire's forecasted performance in 2008 that have the potential to affect the operating performance and results of the Company's divisions are outlined in Section 11.2 of the MD&A.
The Company has developed its 2008 forecast on the assumption that there will not be a material deviation in the risks described in the MD&A compared to the current operating environment. The Company cannot provide any assurance that forecasted financial or operational performance will actually be achieved, or if it is, that it will result in an increase in the price of Canadian Tire shares.
REVIEW BY BOARD OF DIRECTORS
The Canadian Tire Board of Directors, on the recommendation of its Audit Committee, has approved the contents of this disclosure.
CONFERENCE CALL
Canadian Tire will conduct a conference call to discuss information included in this news release and related matters at 4:30 p.m. EDT on Thursday, August 7, 2008. The conference call will be available simultaneously and in its entirety to all interested investors and the news media through a webcast at http://investor.relations.canadiantire.ca, and will be available through replay at this website for 12 months.
Canadian Tire Corporation, Limited (TSX: CTC.a, CTC), operates more than 1,170 general merchandise and apparel retail stores and gas stations in an inter-related network of businesses engaged in retail, financial services and petroleum. Canadian Tire Retail, Canada's most shopped general merchandise retailer, with 473 stores operated by dealers across Canada offers a unique mix of products and services through three specialty categories in which the organization is the market leader - Automotive, Sports and Leisure, and Home Products. www.canadiantire.ca offers Canadians the opportunity to shop online. PartSource is an automotive parts specialty chain with 75 stores designed to meet the needs of purchasers of automotive parts - professional automotive installers and serious do-it-yourselfers. Canadian Tire Petroleum is one of the country's largest and most productive independent retailers of gasoline, operating 267 gas bars, 260 convenience stores and kiosks, and 74 car washes. Mark's Work Wearhouse is one of the country's leading apparel retailers operating 364 stores in Canada. Under the Clothes that Work(TM) marketing strategy, Mark's sells apparel and footwear in work, work-related, casual and active-wear categories, as well as health-care and business-to-business apparel. www.marks.com offers Canadians the opportunity to shop for Mark's products online. Canadian Tire Financial Services has issued over 5 million Canadian Tire MasterCards and also markets related financial products and services for retail and petroleum customers. Canadians can also access Financial Services online at www.ctfs.com. Over 57,000 Canadians work across Canadian Tire's organization from coast-to-coast in the enterprise's retail, financial services, and petroleum businesses.
Management's discussion and analysis (MD&A)
-------------------------------------------------------------------------
Introduction
This Management's Discussion and Analysis (MD&A) provides management's perspective on our Company, our performance and our strategy for the future.
We, us, our, Company and Canadian Tire
In this document, the terms "we", "us", "our", "Company" and "Canadian Tire" refer to Canadian Tire Corporation, Limited and its business units and subsidiaries.
Review and approval by the Board of Directors
The Board of Directors, on the recommendation of its Audit Committee, approved the contents of this MD&A on August 7, 2008.
Quarterly and annual comparisons in this MD&A
Unless otherwise indicated, all comparisons of results for the second quarter (13 weeks ended June 28, 2008) are against results for the second quarter of 2007 (13 weeks ended June 30, 2007).
Restated figures
Certain of the prior period's figures have been reclassified or restated to conform to the current year's presentation or to be in accordance with the adoption of the Canadian Institute of Chartered Accountants (CICA) new accounting standards. Please refer to notes 2 and 16 in the Notes to the Consolidated Financial Statements for further information.
Accounting estimates and assumptions
The preparation of consolidated financial statements that conform with Canadian generally accepted accounting principles (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting period. We calculate our estimates using detailed financial models that are based on historical experience, current trends and other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. In our judgment, none of the estimates highlighted in note 1 in the Notes to the Consolidated Financial Statements for the quarter ended June 28, 2008 requires us to make assumptions about matters that are highly uncertain. For these reasons, none of the estimates is considered a "critical accounting estimate" as defined in Form 51-102F1 published by the Ontario Securities Commission.
Forward-looking statements
This MD&A contains statements that are forward-looking. Actual results or events may differ materially from those forecasted in this disclosure because of the risks and uncertainties associated with Canadian Tire's business and the general economic environment. In addition to the principal risks identified and discussed in detail in MD&A sections 9.0 to 9.3 of the 2007 Financial Report, there are other external factors that could affect our results. These include, but are not limited to: changes in interest rates, currency exchange rates and tax rates; the ability of Canadian Tire to attract and retain quality employees, Dealers, Canadian Tire Petroleum(TM) (Petroleum) agents and PartSource(R) and Mark's Work Wearhouse(R) (Mark's) store operators and franchisees; and the willingness of customers to shop at our stores or acquire our financial products and services. Please also refer to section 11.2 of this MD&A which identifies some of the operational risks that can affect our businesses.
The Company is revising its earnings forecast for 2008, please see section 3.1 for further details.
We cannot provide any assurance that forecasted financial or operational performance will actually be achieved, or if it is, that it will result in an increase in the price of Canadian Tire shares.
1.0 Our Company
1.1 Overview of the business
Canadian Tire has been in business for over 85 years, offering everyday products and services to Canadians through its growing network of interrelated businesses. Canadian Tire, our Dealers, franchisees and Petroleum agents operate more than 1,170 general merchandise and apparel retail stores and gas bars. The Canadian Tire Financial Services(R) (Financial Services) division of the Company also markets a variety of financial services to Canadians, primarily its proprietary Options(R) MasterCard(R), personal loans, lines of credit, insurance and warranty products, and a retail banking pilot offering products to customers in certain test markets.
Canadian Tire's model of interrelated businesses provides market differentiation and competitive advantage. Canadian Tire's businesses benefit from the Company's key capabilities in merchandising, marketing and advertising, supply chain and real estate, which enable us to achieve a greater level of efficiency. Canadian Tire's primary loyalty program, Canadian Tire 'Money'(R) - shared by Canadian Tire Retail (CTR), Financial Services and Petroleum - is an example of how interrelationships between the businesses create a strong competitive advantage for the Company.
The success of the loyalty program has proven - through high customer acceptance and redemption - to be a key element of Canadian Tire's total customer value proposition and is designed to drive higher total sales across CTR, Financial Services and Petroleum. For example, a customer who fills up with gas at Petroleum's gas bars and uses Canadian Tire credit cards spends considerably more at Canadian Tire stores, on average, than a customer who only shops at Canadian Tire stores.
Mark's has derived meaningful cost and operating synergies from Canadian Tire's strengths in real estate and supply chain since its acquisition by the Company in 2002. The Company co-locates Mark's and Canadian Tire stores in certain locations and, where appropriate, has been extending its national marketing and advertising channels to boost customer traffic and loyalty to Mark's and increase its brand penetration.
1.2 Operational synergies
All of our businesses benefit from strategic and operational synergies including real estate management, supply chain, merchandising, marketing and advertising. Meaningful cost savings are also derived through Canadian Tire's collective buying power and economies of scale, and we are continually enhancing our customer value proposition by creating promotions and reward programs to increase customer loyalty.
Canadian Tire's four main businesses are described below.
CTR is Canada's most shopped general merchandise retailer with a network of 473 Canadian Tire stores that are operated by Dealers, who are independent business owners. Dealers buy merchandise from the Company and sell it to consumers in Canadian Tire stores. CTR also includes our online shopping channel and PartSource. PartSource is a chain of 75 specialty automotive hard parts stores that cater to serious "do-it-yourselfers" and professional installers of automotive parts. The PartSource network consists of 35 franchise stores and 40 corporate stores.
Mark's is one of Canada's leading clothing and footwear retailers, operating 364 stores nationwide, including 317 corporate and 47 franchise stores that offer men's wear, women's wear and industrial wear. Mark's operates under the banner "Mark's", and in Quebec, "L'Equipeur(R)". Mark's also conducts a business-to-business operation under the "Imagewear by Mark's Work Wearhouse(R)" brand.
Petroleum is Canada's largest independent retailer of gasoline with a network of 267 gas bars, 260 convenience stores and kiosks, 74 car washes, 13 Pit Stops and 87 propane stations. The majority of Petroleum's sites are co- located with Canadian Tire stores as a strategy to attract customers to Canadian Tire stores. Substantially all of Petroleum's sites are operated by agents.
Financial Services markets a range of Canadian Tire-branded credit cards, including the Canadian Tire Options MasterCard, Commercial Link(R) MasterCard(R) and Gas Advantage(R) MasterCard(R). Financial Services also markets personal loans, lines of credit, insurance and warranty products and an emergency roadside assistance service called Canadian Tire Roadside Assistance(R). Canadian Tire Bank(R), a wholly-owned subsidiary, is a federally regulated bank that manages and finances Canadian Tire's consumer MasterCard and retail credit card portfolios, as well as the personal loan and line of credit portfolios. Canadian Tire Bank also offers high interest savings accounts, guaranteed investment certificates and residential mortgages in three pilot markets as well as the Canadian Tire One-and-Only(TM) account which offers customers the opportunity to pay down their loan balances faster by consolidating their chequing, savings, loans and mortgage loan balances into one account.
1.3 Store network at a glance
June June
28, 30,
Number of stores and retail square footage 2008 2007
-------------------------------------------------------------------------
Consolidated store count
CTR retail stores(1) 473 466
PartSource stores 75 67
Mark's retail stores(1) 364 341
Petroleum gas bar locations 267 264
-------------------------------------------------------------------------
Total stores 1,179 1,138
Consolidated retail square footage
CTR retail square footage (in millions) 18.4 17.0
PartSource retail square footage (in millions) 0.2 0.2
Mark's retail square footage (in millions) 3.1 2.8
-------------------------------------------------------------------------
Total retail square footage(2) 21.7 20.0
-------------------------------------------------------------------------
(1) Store count numbers reflect individual selling locations; therefore,
CTR and Mark's store count numbers each include stores that are co-
located on the same property.
(2) The average retail square footage for Petroleum's convenience stores
was 400 square feet per store in 2007 and has not been included in
the total above.
2.0 Our Strategic Plan
2.1 Rolling Five-Year Strategic Plan to 2012 (2012 Plan)
The 2012 Plan outlines our strategy to build a Bigger and Better Canadian Tire through a continued focus on growth and productivity from a consolidated perspective. The key initiatives of the 2012 Plan include network expansion across all of our retail businesses (CTR, PartSource and Mark's), store concept renewals and the continued testing of our retail banking products. Other initiatives to improve productivity include upgrading our automotive supply chain, renewing our technology infrastructure and streamlining our organizational design.
Specific objectives related to these programs are included in section 3.3 of this MD&A and section 3.0 of the MD&A section contained in the 2007 Financial Report.
2.2 Financial aspirations
The 2012 Plan includes financial aspirations for the Company for the five- year period ending in 2012. These aspirations are not to be construed as guidance or forecasts for any individual year within the 2012 Plan, but rather as long-term, rolling targets that we aspire to achieve over the life of the 2012 Plan, based on the successful execution of our various initiatives.
Financial aspirations 2012 Plan
-------------------------------------------------------------------------
Same store sales
(simple average of annual percentage growth, CTR stores only) 3% to 4%
Gross operating revenue (compound annual growth rate) 6% to 8%
Retail sales (compound annual growth rate) 6%+
Adjusted earnings per share(1) (compound annual growth rate) 10%+
After-tax return on invested capital (annual simple average) 10%+
-------------------------------------------------------------------------
(1) Excludes gains and losses on real estate and the net effect of
securitization activities, gain on disposal/ redemption of investment
and former CEO retirement obligation.
3.0 Our performance in 2008
3.1 Consolidated financial results
($ in millions
except per share
amounts) Q2 2008 Q2 2007(1) Change 2008 YTD 2007 YTD(1)Change
-------------------------------------------------------------------------
Retail sales(2) $2,949.5 $2,835.1 4.0% $4,789.8 $4,641.4 3.2%
Gross operating
revenue 2,450.7 2,314.1 5.9% 4,276.0 4,051.8 5.5%
EBITDA(3) 217.0 252.5 (14.1)% 391.5 396.9 (1.4)%
Earnings before
income taxes 144.7 188.5 (23.2)% 243.5 274.2 (11.2)%
Effective tax rate 32.5% 35.0% 32.5% 35.0%
Net earnings $ 97.7 $ 122.5 (20.3)% $ 164.4 $ 178.2 (7.8)%
Basic earnings per
share $ 1.20 $ 1.50 (20.3)% $ 2.02 $ 2.19 (7.8)%
Adjusted basic
earnings per
share(3) $ 1.16 $ 1.35 (13.9)% $ 1.84 $ 2.06 (10.7)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) 2007 figures have been restated for the implementation, on a
retrospective basis, of CICA HB 3031 - Inventories. See section 13.1
for additional information.
(2) Represents retail sales at CTR (which includes PartSource), Mark's
corporate and franchise stores and Petroleum's sites.
(3) See section 14.0 for non-GAAP measures.
Highlights of top-line performance by business
(year-over-year percentage change) Q2 2008 Q2 2007
-------------------------------------------------------------------------
CTR retail sales(1) 1.5% 3.8%
CTR gross operating revenue 3.1% (0.1)%
CTR net shipments 3.2% (0.5)%
Mark's retail sales 5.3% 9.7%
Petroleum retail sales 14.8% 9.7%
Petroleum gasoline volume (litres) (1.8)% 4.6%
Financial Services' credit card sales 5.0% 16.1%
Financial Services' gross average receivables 6.8% 6.6%
-------------------------------------------------------------------------
(1) Includes sales from Canadian Tire stores, PartSource stores and CTR's
online web store and the labour portion of CTR's auto service sales.
Gross operating revenue
During the second quarter of 2008, consolidated gross operating revenue increased primarily due to higher shipment volume to Dealers, increased sales at Petroleum and receivables growth at Financial Services. Financial Services growth was driven by both increased transaction volume and higher account balances. Increased Petroleum revenues were a function of sustained higher retail gasoline prices as well as strong convenience store sales. Our retail businesses faced similar challenges as those that prevailed during the first quarter of the year due to the softening economic conditions affecting many retailers across Canada.
Net earnings
The second quarter year-over-year earnings decrease in CTR, Mark's and Financial Services was attributable to challenging economic conditions existing in Canada and unseasonably cool weather experienced in May and June of this year. This was partially offset by an increase in Petroleum earnings attributable to strengthening margins and strong convenience sales. The decrease in overall earnings also reflects a higher book to physical inventory adjustment at Mark's as compared with the prior year ($12.0 million pre-tax) and an investment to relaunch the Options MasterCard at Financial Services ($9.7 million pre-tax).
Sales at CTR stores did begin to show improvement in June, however, and with more seasonal weather, this momentum has continued into the third quarter.
Net earnings also decreased from the respective quarter in the prior year due to the impact of non-operating items, as noted below.
Impact of non-operating items
The following tables show our adjusted consolidated earnings on a pre-tax and after-tax basis.
Adjusted consolidated earnings before income taxes(1)
($ in millions) Q2 2008 Q2 2007(2) Change 2008 YTD 2007 YTD(2)Change
-------------------------------------------------------------------------
Earnings before
income taxes $ 144.7 $ 188.5 (23.2)% $ 243.5 $ 274.2 (11.2)%
Less pre-tax
adjustment for:
Gain on disposal
of shares - 18.4 - 18.4
Former CEO
retirement
obligation(3) 0.5 (6.7) 0.9 (6.7)
Net effect of
securitization
activities(4) 3.9 5.5 16.8 2.5
Gain (loss) on
disposals of
property and
equipment - 2.2 3.7 1.6
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(1) $ 140.3 $ 169.1 (17.0)% $ 222.1 $ 258.4 (14.0)%
-------------------------------------------------------------------------
(1) See section 14.0 on non-GAAP measures.
(2) 2007 figures have been restated for the implementation, on a
retrospective basis, of CICA HB 3031 - Inventories. See section
13.1 for additional information.
(3) See section 3.3.1 on CTR's performance.
(4) Includes initial gain/loss on the sale of loans receivable,
amortization of servicing liability, change in securitization reserve
and gain/loss on reinvestment.
Adjusted consolidated net earnings after tax(1)
($ in millions
except per share
amounts) Q2 2008 Q2 2007(2) Change YTD 2008 2007 YTD(2) Change
-------------------------------------------------------------------------
Net earnings $ 97.7 $ 122.5 (20.3)% $ 164.4 $ 178.2 (7.8)%
Less after-tax
adjustment for:
Gain on disposal
of shares - 12.0 - 12.0
Former CEO
retirement
obligation 0.3 (4.4) 0.6 (4.4)
Net effect of
securitization
activities(3) 2.7 3.6 11.4 1.6
Gain on disposals
of property and
equipment - 1.5 2.5 1.1
-------------------------------------------------------------------------
Adjusted net
earnings after
tax(1) $ 94.7 $ 109.8 (13.8)% $ 149.9 $ 167.9 (10.7)%
-------------------------------------------------------------------------
Basic earnings
per share $ 1.20 $ 1.50 (20.3)% $ 2.02 $ 2.19 (7.8)%
Adjusted basic
earnings per
share(1) $ 1.16 $ 1.35 (13.9)% $ 1.84 $ 2.06 (10.7)%
-------------------------------------------------------------------------
(1) See section 14.0 on non-GAAP measures.
(2) 2007 figures have been restated for the implementation, on a
retrospective basis, of CICA HB 3031 - Inventories. See section
13.1 for additional information.
(3) Includes initial gain/loss on the sale of loans receivable,
amortization of servicing liability, change in securitization reserve
and gain/loss on reinvestment.
Seasonal impact
The second quarter and fourth quarters of each year are typically when we experience stronger revenues and earnings in our retail businesses because of the seasonal nature of some merchandise at CTR and Mark's and the timing of marketing programs. The following table shows our financial performance by quarter for the last two years.
Consolidated quarterly results(1)
($ in millions except
per share amounts) Q2 2008 Q1 2008 Q4 2007 Q3 2007
-------------------------------------------------------------------------
Gross operating revenue $2,450.7 $1,825.3 $2,503.1 $2,047.2
Net earnings 97.7 66.7 131.3 102.1
Basic earnings per share 1.20 0.82 1.61 1.25
Diluted earnings per share 1.20 0.82 1.61 1.25
-------------------------------------------------------------------------
($ in millions except
per share amounts) Q2 2007 Q1 2007 Q4 2006 Q3 2006
-------------------------------------------------------------------------
Gross operating revenue $2,314.1 $1,737.7 $2,426.1 $2,023.3
Net earnings 122.5 55.7 108.3 95.4
Basic earnings per share 1.50 0.68 1.33 1.17
Diluted earnings per share 1.50 0.68 1.32 1.16
-------------------------------------------------------------------------
(1) 2007 quarterly results have been restated for the implementation, on
a retrospective basis, of CICA HB 3031 - Inventories. See section
13.1 for additional information. 2006 results have not been restated
as the information required to calculate the restatement on a
quarterly basis is not readily available.
Earnings guidance
The Company is revising its earnings guidance for 2008 and expects that earnings per share for 2008 will now be in the range of $4.75 to $5.05 per share, excluding non-operating items. This is below Management's initial guidance of $5.15 to $5.40 per share, excluding non-operating items. The principal reasons for this change in forecast are: the book to physical inventory adjustment at Mark's; lower second quarter earnings at CTR and Mark's; and the higher on-hand CTR inventory at the end of the second quarter leading to increased carrying and clearance costs for the balance of the year.
3.2 Business unit Q2 2008 performance overview
-------------------------------------------------------------------------
Canadian Tire Retail Mark's Work Wearhouse
-------------------------------------------------------------------------
Q2 2008 Performance highlights Q2 2008 Performance highlights
- continued development of store - opened four corporate stores
network, now with a total of and relocated two stores, four
473 stores including 222 of which are co-located with
Concept 20/20 stores; a CTR store;
- continued development of new - store network increased to 364
store concepts; and locations and increased total
- replaced three and expanded retail space by approximately
two traditional stores to the 10 percent over the second
Concept 20/20 store format. quarter of 2007;
- continued focus on Clothes That
PartSource Q2 2008 performance Work campaign, with the
highlights relaunch of two Clothes That
Work technologies and the
- converted three stores acquired introduction of two new
in Q1 2008 to PartSource Clothes That Work items during
banner; the quarter.
- network growth to 75 stores
including four hub stores; and
- approximately eight percent
increase in retail square
footage.
-------------------------------------------------------------------------
Canadian Tire Financial Services Petroleum
-------------------------------------------------------------------------
Q2 2008 Performance highlights Q2 2008 Performance highlights
- continued testing of the retail - growth of network to 267 gas
banking initiative; bars and 260 convenience
- invested $9.7 million in the stores;
Canadian Tire Options MasterCard - refurbishment of one gas bar
relaunch; and as part of the initiative to
- continued increases in gross improve the overall customer
average receivables for the experience at Petroleum's
total managed portfolio. sites; and
- improvement in earnings over
the prior year, reflecting
higher gasoline prices and
margins during the quarter
as well as effective expense
management.
-------------------------------------------------------------------------
The following sections outlining the Company's business segment performance highlight the respective segments' achievements to date against key initiatives identified in the 2012 Strategic Plan. The initiatives have been divided into those contributing to building a "Bigger" Canadian Tire and those designed to create a "Better" Canadian Tire.
In this context, "Bigger" is intended to convey the objective of achieving increased sales and market share primarily through network growth, new store concepts and new products. "Better" is intended to convey the objective of improved productivity, service levels and rates of return.
3.3 Business segment performance
3.3.1 Canadian Tire Retail
3.3.1.1 Q2 2008 Strategic Plan performance
The following outlines CTR's performance for the second quarter of 2008 in the context of our 2012 Strategic Plan.
-------------------------------------------------------------------------
Initiatives to build a "BIGGER" Canadian Tire
-------------------------------------------------------------------------
New store concept program
Concept 20/20 has been the cornerstone of CTR's growth agenda since 2003.
Based on the results from the Concept 20/20 stores opened to date, CTR is
developing the next new store concepts which are designed to build on the
successes of the Concept 20/20 store with a greater focus on improving
sales and productivity. Plans for 2008 include opening two of the new
concept "smart" stores that will have the same focus of improving sales
and productivity, as well as providing a more exciting customer
experience, and four new stores with the further goal of expanding our
presence in smaller markets.
-------------------------------------------------------------------------
2008 Key initiatives 2008 Performance
-------------------------------------------------------------------------
CTR's strategy for the continued Second quarter
rollout of new concept stores
including our existing Concept CTR opened 27 new stores in the
20/20 stores, new small market quarter including five replacement
concept and new "smart" concept stores, 21 retrofit or expansion
stores is an important aspect of projects and one store that is new
the 2012 Plan. to the network. Four of the stores
opened in the quarter incorporate a
full-size Mark's store inside. In
addition, one traditional store was
closed during the quarter.
The store network now totals 473
stores, 37 of which include a Mark's
component.
-------------------------------------------------------------------------
Customers for Life
Canadian Tire is committed to building customer loyalty through fostering
a positive, consistent and memorable customer experience. During 2007,
Canadian Tire began working on a new strategic model for the organization
that will lead to a stronger focus on customer service and improvements
in generating Customers for Life.
-------------------------------------------------------------------------
2008 Key initiatives 2008 Performance
-------------------------------------------------------------------------
CTR is committed to generating Second quarter
consistent and coherent customer
service measures, tracking and The Customer Satisfaction Index
performance. (CSI) was successfully developed,
piloted and rolled out in 2007.
The collecting of data for 2008
continued as planned completing
approximately half of the data
gathering for the year. The
Dealer relations team has also
continued working with the
Canadian Tire Dealers Association
to address issues that will
improve the overall process and
survey results.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
PartSource network expansion
PartSource will continue its expansion into new markets through a
combination of new stores and small-scale acquisitions. PartSource's
strategy to buy small local businesses and convert them to the PartSource
banner has proven successful, with high rates of customer retention after
conversion.
-------------------------------------------------------------------------
2008 Key initiatives 2008 Performance
-------------------------------------------------------------------------
Key initiatives for PartSource Second quarter
include building CTR as a new
commercial account for emergency During the quarter, PartSource made
shipments, updating the significant progress on building
organizational structure, testing the CTR commercial account and is
new operating systems and launching now used by 148 Canadian Tire
a new auto parts catalogue. stores for emergency auto parts.
Progress on this initiative will
continue building throughout the
year.
PartSource opened one new
corporate store and converted
three acquired stores to the
PartSource brand during the
quarter. This brings the network
total to 75 stores,
including four hub stores.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Initiatives to build a "BETTER" Canadian Tire
-------------------------------------------------------------------------
Automotive Infrastructure initiative
CTR has made revitalizing its cornerstone automotive business a key
priority over the 2012 Plan period and began to roll out Phase One of
this project in 2007 through opening two PartSource hub stores. Regional
hub stores are larger than traditional PartSource stores and are designed
to provide a broader assortment of automotive parts to service both
Canadian Tire and PartSource customers on an as needed basis. This
investment over the next five to seven years will be directed at
increasing auto parts sales and generating a high rate of return for the
project, and will benefit the Company and our Dealers.
-------------------------------------------------------------------------
2008 Key initiatives 2008 Performance
-------------------------------------------------------------------------
The Automotive Infrastructure Second quarter
initiative will be an important
factor in CTR's future growth and Progress on Phase One of the
will involve significant investment Automotive Infrastructure
in fixed assets and working capital initiative continued in the
and a redesign of key technology second quarter as follows:
solutions.
Emergency supply implementation:
- Opened fourth PartSource hub
store in Kitchener, Ontario;
and
- 363 Canadian Tire stores
have signed up with their
local Uni Select
representative.
Corporate assortment expansion:
- Enabled activation of
seven digit product numbers
within corporate systems;
and
- Continued modifications and
integration testing of
warehouse management system
in the Vaughan facility.
Enabling technologies:
- Continued progress on
business process, system
analysis and design work;
and
- Signed interim agreements
with software vendors to
secure licenses and
professional services for
analysis and design work.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CTR Change program
During 2007, CTR began to implement its multi-year productivity effort
with projects designed to overhaul and upgrade internal processes and IT
systems. As the benefits of these projects begin to unfold, we will be
able to make faster and better decisions and improve our agility and
speed to market.
-------------------------------------------------------------------------
2008 Key initiatives 2008 Performance
-------------------------------------------------------------------------
CTR will implement productivity/ Second quarter
control initiatives in the areas
of pricing and product hierarchy Progress made on the CTR change
to streamline and strengthen program in the second quarter
operations and improve included:
organizational structures and
efficiencies. - implemented new pricing
system across merchandising
division;
- implemented Master Data
Management infrastructure
for CTR's core data;
- finalized scope for new
promotional planning system;
began work on design; and
- began work on vendor
management capability.
-------------------------------------------------------------------------
3.3.1.2 Key performance indicators
The following are key measures of CTR's sales productivity:
- total same store sales growth;
- average retail sales per store;
- average sales per square foot of retail space; and
- average transaction value
CTR total retail and same store sales
(year-over-year percentage change) Q2 2008 Q2 2007 2008 YTD 2007 YTD
-------------------------------------------------------------------------
Total retail sales(1) 1.5% 3.8% 0.3% 3.5%
Same store sales(2) (0.5)% 1.7% (1.8)% 1.5%
-------------------------------------------------------------------------
(1) Includes sales from Canadian Tire and PartSource stores, sales from
CTR's online web store and the labour portion of CTR's auto service
sales.
(2) Includes sales from Canadian Tire and PartSource stores, but excludes
sales from CTR's online web store and the labour portion of CTR's
auto service sales.
-------------------------------------------------------------------------
CTR's retail sales
Retail sales represent total merchandise sold at retail prices and the
labour portion of automotive sales to consumers across CTR's network of
stores, including CTR's online web store and PartSource.
-------------------------------------------------------------------------
CTR same store sales by store format
(year-over-year percentage change) Q2 2008 Q2 2007 2008 YTD 2007 YTD
-------------------------------------------------------------------------
Same store sales(1)
Concept 20/20 stores 0.1% 4.4% (0.9)% 5.0%
New-format stores (1.2)% (0.3)% (2.8)% (0.8)%
Traditional stores (1.1)% (0.8)% (2.6)% (0.9)%
-------------------------------------------------------------------------
(1) Excludes sales from PartSource stores, CTR's online web store and the
labour portion of CTR's auto service sales.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CTR's same store sales
Same store sales include sales from all stores that have been open for
more than 53 weeks.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As our store network continues to evolve, we will be introducing new store
formats into our store class categories. In this 2008 second quarter MD&A, we
continue to report three separate classes of stores, defined as follows:
-------------------------------------------------------------------------
Concept 20/20 store New-format store Traditional store
format format format
(mid 2003 to 2008) (1994 to mid 2003) (1994 and prior)
Average retail Average retail Average retail
square footage: square footage: square footage:
54,000 31,000 16,000
-------------------------------------------------------------------------
Larger format launched Large format, including Smaller than either the
in September 2003, "Class Of" and "Next new-format or Concept
ranging in size from Generation" stores, 20/20 stores on
24,000 to 89,000 ranging in size from average. Traditional
square feet (excluding 16,000 to 66,000 stores are
the Mark's component of square feet, most of characterized by varied
Mark's-inside-a-CTR which were opened sizes and layouts.
store). between 1994 and mid Traditional stores make
Concept 20/20 stores 2003. New-format stores up approximately seven
make up approximately make up approximately percent of the retail
65 percent of the 28 percent of the square footage in the
retail square footage retail square footage network.
of the network. in the network. This
See section 3.3.1.1, Q2 format immediately
2008 Strategic Plan preceded the Concept
performance for more 20/20 format.
information on the
Concept 20/20 rollout.
-------------------------------------------------------------------------
Concept 20/20 stores represented approximately 65 percent of CTR's retail
square footage and 56 percent of total retail sales in the second quarter of
2008.
CTR store count
Q2 2008 2007 2006 2005 2004
-------------------------------------------------------------------------
Concept 20/20 stores(1) 222 192 126 53 25
New-format stores(2) 168 189 237 292 302
Traditional stores 83 92 105 117 130
-------------------------------------------------------------------------
Total new-format,
traditional and Concept
20/20 stores 473 473 468 462 457
PartSource stores 75 71 63 57 47
-------------------------------------------------------------------------
(1) Concept 20/20 store total in 2008 count includes six Concept 20/20
Mark's-inside-a-CTR concept stores which have been opened in pilot
phase and 28 CTR-Mark's combination Concept 20/20 stores.
(2) New-format store total in 2008 includes three CTR-Mark's combination
stores.
CTR continues to expand and retrofit its' store network with a focus on
converting older format stores to the new formats. The Concept 20/20 store
format will be completed by the end of 2008 and new formats consistent with
the goals of the 2012 Plan will be piloted in 2008 and rolled out in
subsequent years.
Average retail sales per Canadian Tire store(1),(2)
For the 12 months For the 12 months
($ in millions) ended June 28, 2008 ended June 30, 2007
-------------------------------------------------------------------------
Concept 20/20 stores $ 19.2 $ 19.8
New-format stores 13.5 13.8
Traditional stores 7.8 8.1
-------------------------------------------------------------------------
(1) Retail sales are shown on a 52-week basis in each year and exclude
sales from PartSource stores, CTR's online web store and the labour
portion of CTR's auto service sales.
(2) Only includes stores that have been open for a minimum of two years
as at the end of the quarter.
Concept 20/20 stores experience higher customer traffic and increases in average transaction value compared to previous store formats as customers spend more time browsing in these stores.
Average sales per square foot of Canadian Tire retail space(1),(2),(3)
For the 12 For the 12
months ended, months ended,
June 28, 2008 June 30, 2007
-------------------------------------------------------------------------
Retail square footage(1),(3)
(millions of square feet) 18.4 17.0
Concept 20/20 stores(2),(3) $ 365 $ 377
New-format stores(2),(3) 435 446
Traditional stores(2),(3) 494 510
-------------------------------------------------------------------------
(1) Retail square footage is based on the total retail square footage
including stores that have not been open for a minimum of two years
as at the end of the quarter.
(2) Retail sales are shown on a 52-week basis in each year for those
stores that have been open for a minimum of two years as at the end
of the current quarter. Sales from PartSource stores, CTR's online
web store and the labour portion of CTR's auto service sales are
excluded.
(3) Retail space does not include warehouse, garden centre and auto
service areas.
The two tables above show a year-over-year decrease in retail sales per store and retail sales per square foot. The decrease is partially due to the significant number of new-format and Concept 20/20 stores that are excluded from the calculation as they have not been open, in that format, for a period of two years. Once the stores have been open for two years, they are included once again in the average sales metrics.
Average sales per square foot of retail space in the larger store formats are lower than in traditional stores because additional space is designed to display more merchandise, accommodate wider aisles, include more appealing product displays and provide a more compelling shopping experience overall. The larger Concept 20/20 stores and new-format stores do however, on average, generate more total sales and have a lower operating cost for Dealers per retail square foot.
CTR retail sales
Second quarter
CTR's second quarter retail sales increased 1.5 percent over the same quarter of 2007. The increase was a result of increased home category sales, including tools, and promotional strategies utilized during the quarter. Retail sales were also positively affected by additional shopping days in the second quarter of 2008 relative to the prior year as the Easter weekend fell in the first quarter of this year. Retail sales were negatively impacted by unfavourable spring weather conditions resulting in a decline in sales of seasonal and weather related categories. Sales trends in June and July have, however, improved on the strength of the new summer 2008 seasonal programs, a more competitive pricing strategy and the arrival of warmer weather throughout Canada.
PartSource experienced another quarter of year-over-year sales increases driven by both the continued expansion of the network and growth in the commercial customer segment. In addition, PartSource shipments to Dealers continue to increase as components of the Automotive Infrastructure initiative project are rolled out.
3.3.1.3 CTR's financial results
($ in millions) Q2 2008 Q2 2007(1) Change 2008 YTD 2007 YTD(1) Change
-------------------------------------------------------------------------
Retail sales $2,174.5 $2,141.9 1.5% $3,393.3 $3,384.4 0.3%
Net shipments
(year-over-year
% change) 3.2% (0.5)% 1.8% 3.9%
Gross operating
revenue $1,562.1 $1,514.9 3.1% $2,633.4 $2,585.8 1.8%
EBITDA(2) 143.1 139.9 2.3% 245.2 228.2 7.5%
-------------------------------------------------------------------------
Earnings before
income taxes 85.0 88.5 (4.1)% 128.6 126.5 1.7%
Less adjustment for:
Gain on disposals
of property and
equipment 0.1 3.7 4.0 3.7
Former CEO
retirement
obligation 0.5 (6.7) 0.9 (6.7)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(2) $ 84.4 $ 91.5 (7.9)% $ 123.7 $ 129.5 (4.5)%
-------------------------------------------------------------------------
(1) 2007 earnings figures have been restated for the implementation, on a
retrospective basis, of CICA HB 3031 - Inventories. Please refer to
section 13.1 for additional information.
(2) See section 14.0 on non-GAAP measures.
CTR's net shipments
-------------------------------------------------------------------------
CTR's net shipments are the total value of merchandise shipped to
Canadian Tire and PartSource stores, and through our online web store,
less discounts and net of returns. Shipments to stores are recorded at
the wholesale price that we charge to our Dealers and PartSource
franchisees.
-------------------------------------------------------------------------
Explanation of CTR's financial results
Second quarter
For the quarter, gross operating revenue increased compared to the second quarter of 2007, primarily as a result of higher net shipments.
Despite increased revenues, adjusted pre-tax earnings in CTR decreased 7.9 percent in the second quarter principally due to a decline in product margins. Margins were affected by aggressive promotional activity and product mix. Second quarter earnings also included an incremental $5.9 million of pre- tax net expenses in long-term productivity and growth initiatives, including the Automotive Infrastructure initiative and Information Technology Renewal, which will provide long-term benefits.
3.3.1.4 Business risks
CTR is exposed to a number of risks in the normal course of its business that have the potential to affect its operating performance. The following are some of the business risks specific to CTR's retail and other operations. Please also refer to section 9.0 of our 2007 Financial Report for a discussion of some other industry-wide and Company-wide risks affecting the business.
Supply chain disruption risk
An increasing portion of CTR's product assortment is being sourced from foreign suppliers, lengthening the supply chain and extending the time between order and delivery to CTR's warehouses. Accordingly, CTR is exposed to potential supply chain disruptions due to foreign supplier failures, geopolitical risk, labour disruption or insufficient capacity at ports, and risks of delays or loss of inventory in transit. The Company mitigates this risk through effective supplier selection and procurement practices, strong relationships with transportation companies, port and other shipping authorities, supplemented by marine insurance coverage. CTR has demonstrated its ability to mitigate this risk in the past.
Seasonality risk
CTR derives a significant amount of its revenues from the sale of seasonal merchandise and, accordingly, bears a degree of risk from unseasonable weather patterns. CTR mitigates this risk, to the extent possible, through the breadth of our product mix as well as effective procurement and inventory management practices.
Environmental risk
Environmental risk within CTR is primarily associated with the handling and recycling of certain materials, such as tires, paint, oil and lawn chemicals, sold in Canadian Tire and PartSource stores. The Company has established and follows comprehensive environmental policies and practices to avoid a negative impact on the environment, protect CTR's reputation and comply with environmental laws.
3.3.2 Mark's Work Wearhouse
3.3.2.1 Q2 2008 Strategic Plan performance
The following outlines Mark's performance for the second quarter of 2008 in the context of our 2012 Strategic Plan.
-------------------------------------------------------------------------
Initiatives to build a "BIGGER" Canadian Tire
-------------------------------------------------------------------------
Network expansion
A critical aspect of Mark's growth plan revolves around its objective of
capturing an increasingly significant share of overall apparel sales in
each geographic market in which Mark's competes. To increase Mark's
market presence, the Company plans to continue with its aggressive goal
of expanding the network of Mark's stores.
-------------------------------------------------------------------------
2008 Key initiatives Q2 2008 Performance
-------------------------------------------------------------------------
Mark's will continue network Second quarter
development through opening new
stores, relocating or expanding - opened four new stores,
existing stores and renovating three of which are
older stores to the newest Mark's co-located inside a CTR
format. store;
- expanded one corporate
store; and
- relocated two corporate
stores, one of which is
co-located inside a
CTR store.
Mark's total retail square
footage at the end of the
quarter was 3.1 million square
feet.
-------------------------------------------------------------------------
New store concepts
In addition to adding incremental stores to the total network, Mark's is
in the process of developing new store concepts that will be rolled out
over the Plan period.
-------------------------------------------------------------------------
2008 Key initiatives Q2 2008 Performance
-------------------------------------------------------------------------
Mark's will continue to expand the Second quarter
store network by developing new and
innovative ways to bring Clothes Mark's relocated one new
That Work to consumers across the Mark's-inside-a-CTR store
country, resulting in an increased (included in total above).
physical presence across the
geographic regions of Canada.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Initiatives to build a "BETTER" Canadian Tire
-------------------------------------------------------------------------
Category expansion
Mark's has set aggressive growth goals for the 2012 Plan period which
will be supported by its plans for category expansion in its three major
product lines. Although growth was modest in 2007 and the first half of
2008, women's wear is still expected to be the fastest growing segment of
the business over the plan period as it is the least developed of the
Mark's main category lines. Improvements in the product assortment in the
women's wear category are expected to bring continued growth during the
Plan period.
-------------------------------------------------------------------------
2008 Key initiatives Q2 2008 Performance
-------------------------------------------------------------------------
In 2008, Mark's will continue to Second quarter - corporate sales
expand its product assortment in
the three main categories of - sales of industrial wear
apparel and footwear with a focus increased by 14.4 percent;
on the Clothes That Work campaign. - sales of women's wear
increased by 4.5 percent;
and
- sales of men's wear
increased by 2.2 percent.
Mark's continued to focus on
the Clothes That Work campaign
with the relaunch of two Clothes
That Work technologies and the
introduction of two new Clothes
That Work items, including one
new women's wear item.
-------------------------------------------------------------------------
3.3.2.2 Key performance indicators
The following are key performance indicators for Mark's:
- retail and same store sales growth;
- average sales per corporate store; and
- average sales per square foot of retail space
Mark's retail and same store sales growth
(year-over-year
percentage change) Q2 2008 Q2 2007 2008 YTD 2007 YTD
-------------------------------------------------------------------------
Total retail sales 5.3% 9.7% 1.5% 13.0%
Same store sales(1) 0.9% 6.9% (2.8)% 10.6%
-------------------------------------------------------------------------
(1) Mark's same store sales excludes new stores, stores not open for the
full period in each year and store closures.
-------------------------------------------------------------------------
Mark's retail sales
Mark's retail sales represent total merchandise sales to consumers and
business-to-business customers, net of returns, across Mark's entire
network of stores, fulfillment centres and Mark's online web store
recorded at retail prices.
-------------------------------------------------------------------------
Second quarter
Mark's retail sales during the second quarter of 2008 were impacted by the continued softening of retail and economic conditions experienced across many parts of Canada. Despite these factors, retail sales increased 5.3 percent due to expansion in the store network. Same store sales growth increased a modest 0.9 percent compared to the second quarter of 2007, which had experienced strong same store sales results at that time, due to more favourable weather and economic conditions compared to those that prevailed in the second quarter of 2008. Men's industrial footwear and men's workwear demonstrated the largest dollar sales increases in corporate store sales in the second quarter.
Average corporate store sales(1)
For the For the For the
12 months 12 months 12 months
ended, ended, ended,
June 28, June 30, July 1,
2008 2007 2006
-------------------------------------------------------------------------
Average retail sales per store
($ thousands)(2) $ 2,735 $ 2,867 $ 2,526
Average sales per square foot ($)(3) 323 347 322
-------------------------------------------------------------------------
(1) Calculated on a rolling 12-month basis.
(2) Average retail sales per corporate store include corporate stores
that have been open for 12 months or more.
(3) Average sales per square foot is based on sales from corporate
stores. We have prorated square footage for corporate stores that
have been open for less than 12 months.
Mark's continues to focus on productivity at its stores. Due to the
softening retail environment in Canada during the second quarter of 2008,
there was a decrease in average sales per store and average sales per square
foot, but this followed strong 13.5 percent and 7.8 percent year-over-year
increases in those respective measures in the second quarter of 2007 over the
second quarter of 2006 due to the factors noted above.
3.3.2.3 Mark's financial results
($ in millions) Q2 2008 Q2 2007(1) Change 2008 YTD 2007 YTD(1) Change
-------------------------------------------------------------------------
Retail sales(2) $ 233.1 $ 221.3 5.3% $ 405.6 $ 399.7 1.5%
Gross operating
revenue(3) 200.6 187.2 7.2% 348.1 339.3 2.6%
EBITDA(4) 14.7 30.2 (51.5)% 17.7 34.7 (49.3)%
-------------------------------------------------------------------------
Earnings before
income taxes 7.9 25.0 (68.4)% 4.5 24.8 (81.9)%
Less adjustment for:
Loss on disposals
of property and
equipment (0.1) (0.3) (0.1) (0.6)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(4) $ 8.0 $ 25.3 (68.5)% $ 4.6 $ 25.4 (82.0)%
-------------------------------------------------------------------------
(1) Mark's 2007 results have been restated for the implementation, on a
retrospective basis, of CICA HB 3031 - inventories. Please refer to
section 13.1 for additional information.
(2) Includes retail sales from corporate and franchise stores.
(3) Gross operating revenue includes retail sales at corporate stores
only.
(4) See section 14.0 on non-GAAP measures.
Explanation of Mark's financial results
Second quarter
Mark's pre-tax earnings decreased in the second quarter of 2008 primarily as a result of the decrease in gross margin attributable to a larger than anticipated book to physical inventory adjustment during the annual store inventory count ($12.0 million higher than the previous year). Operating expenses increased by 18.5 percent over the second quarter of 2007, largely attributable to higher personnel, advertising, occupancy and infrastructure investments to support the growth in the store network.
3.3.2.4 Business risks
Mark's is exposed to a number of risks in the normal course of its business that have the potential to affect its operating performance. The following are some of the business risks specific to Mark's. Please also refer to section 9.0 of our 2007 Financial Report for a discussion of some other industry and Company-wide risks affecting the business.
Seasonality risk
Mark's business remains very seasonal, with the fourth quarter typically producing the largest share of annual sales and earnings due to the general increase in consumer spending for winter clothing and Christmas related purchases. In 2007, for example, the fourth quarter produced about 40 percent of total annual retail sales and prior to the adoption of CICA HB 3031 - Inventories, approximately 54 percent of annual pre-tax earnings. With the adoption of CICA HB 3031 - Inventories, an even higher percentage of Mark's annual pre-tax earnings are expected to occur in the fourth quarter. Detailed sales reporting and merchandise planning modules assist Mark's in mitigating the risks and uncertainties associated with unseasonable weather and consumer behaviour during the important Christmas selling season, but cannot remove risks completely because inventory orders, especially for a significant portion of merchandise purchased off-shore, must be placed well ahead of the season.
Market obsolescence risk
All clothing retailers are exposed, to varying degrees, to the vagaries of consumers' fashion preferences. Mark's mitigates this risk through its brand positioning, consumer preference monitoring, demand forecasting and merchandise selection efforts. Mark's specifically targets consumers of durable everyday wear and is less exposed to changing fashions than apparel retailers offering high-fashion apparel and accessories.
3.3.3 Canadian Tire Petroleum
3.3.3.1 Q2 2008 Strategic Plan performance
Petroleum plays a strategic role in increasing customer loyalty and driving traffic and transactions for CTR and Financial Services. Petroleum increases Canadian Tire's total value proposition by offering Canadian Tire 'Money' loyalty rewards on gas purchases paid for in cash or by Canadian Tire's Options MasterCard. Petroleum also supports other cross-marketing promotions and joint product launches, such as Canadian Tire's Gas Advantage MasterCard, which has gained wide popularity since its introduction in Ontario in mid-2006. Customers who have a Canadian Tire MasterCard and purchase gas at Petroleum are Canadian Tire's most loyal and profitable customers.
The following outlines Petroleum's performance for the second quarter of 2008 in the context of our 2012 Strategic Plan.
-------------------------------------------------------------------------
Initiatives to build a "BIGGER" Canadian Tire
-------------------------------------------------------------------------
Network renewal and new store concept
Petroleum's business is an integral part of the Canadian Tire
organization as customers that use Petroleum's gas bars drive sales and
traffic to our other business units. Over the 2012 Plan period, Petroleum
will continue to develop its real estate plan, focusing on introducing
new store concepts into its existing network of locations, while
continuing to focus on renewing its current sites.
-------------------------------------------------------------------------
2008 Key initiatives Q2 2008 Performance
-------------------------------------------------------------------------
In 2008, Petroleum will continue to Second quarter
strengthen the existing network by
opening new sites and refurbishing - opened one new gas bar; and
or rebuilding existing sites. - refurbished one gas bar.
At the end of the quarter, Petroleum
had 267 gas bars, including 42
re-branded sites.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Initiatives to build a "BETTER" Canadian Tire
-------------------------------------------------------------------------
Enhancing interrelatedness
Petroleum's business is integrated with CTR and Financial Services
through Canadian Tire 'Money' and various cross- marketing programs
designed to build customer loyalty. Petroleum is also in the process of
enhancing its interrelatedness strategy to further extend its marketing
leverage across the Company.
-------------------------------------------------------------------------
2008 Key initiatives Q2 2008 Performance
-------------------------------------------------------------------------
In 2008, Petroleum will Second quarter
aggressively seek out additional
cross-marketing opportunities to - issued multiplier coupons that
further leverage its increase the Canadian Tire
interrelatedness strategy to drive 'Money' offered on gas
customer traffic, transactions, purchases paid for in cash or
customer loyalty and earnings across by Canadian Tire Options
the enterprise. MasterCard;
- offered discount coupons on
Canadian Tire merchandise with
the purchase of gas; and
- sold car wash vouchers at CTR
stores.
-------------------------------------------------------------------------
3.3.3.2 Key performance indicators
Gasoline sales volume is a top-line performance indicator for Petroleum,
as measured by the number of gasoline litres sold. Fluctuations in the
wholesale and retail price of gasoline may result in fluctuations in
Petroleum's margin and profitability.
Gasoline sales volume
Q2 2008 Q2 2007 Change 2008 YTD 2007 YTD Change
-------------------------------------------------------------------------
Sales volume
(millions of
litres) 429.6 437.4 (1.8)% 843.4 852.7 (1.1)%
-------------------------------------------------------------------------
Petroleum has continued to grow its market share over the past couple of years in a mature market where gas prices are at historically high levels, largely due to our loyalty program, customer service experience at our gas bars and an increased combined penetration rate on our Canadian Tire Options MasterCard and the Gas Advantage MasterCard. Gasoline sales volumes during the quarter were down slightly due to lower same site sales, partially offset by increases in new site openings. On a same site basis, our gasoline volume decreased by 2.6 percent in the quarter, which was principally due to a year- over-year increase in average retail gas prices of approximately 18 percent and a softening economic environment.
Petroleum's convenience and car wash sales
(year-over-year percentage change) Q2 2008 Q2 2007 2008 YTD 2007 YTD
-------------------------------------------------------------------------
Total retail sales
Convenience store sales 5.0% 18.0% 8.0% 17.5%
Car wash sales (8.6)% 20.8% (17.2)% 20.8%
-------------------------------------------------------------------------
Same store sales
Convenience 3.5% 13.2% 6.4% 12.9%
Car wash (8.5)% 17.7% (17.4)% 17.4%
-------------------------------------------------------------------------
Convenience store sales in the second quarter of 2008 increased as a
result of new site openings and increases in tobacco and lottery sales. The
decline in car wash sales is largely attributable to the impact of high
gasoline prices and softening economic conditions experienced in the second
quarter of 2008 compared to the previous year.
3.3.3.3 Petroleum's financial results
($ in millions) Q2 2008 Q2 2007 Change 2008 YTD 2007 YTD Change
-------------------------------------------------------------------------
Retail sales $ 541.9 $ 471.9 14.8% $ 990.9 $ 857.3 15.6%
Gross operating
revenue 514.8 445.6 15.5% 937.6 808.4 16.0%
EBITDA(1) 12.1 10.5 16.2% 21.1 17.0 24.7%
-------------------------------------------------------------------------
Earnings before
income taxes 8.0 6.4 27.2% 13.0 8.9 47.1%
Less adjustment for:
Loss on disposals
of property and
equipment - (1.1) (0.2) (1.3)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(1) $ 8.0 $ 7.5 9.8% $ 13.2 $ 10.2 30.6%
-------------------------------------------------------------------------
(1) See section 14.0 on non-GAAP measures.
-------------------------------------------------------------------------
Petroleum's retail sales
Retail sales include the sales of gasoline at Petroleum's entire network
of petroleum sites recorded at retail pump prices, including re-branded
sites, and excluding goods and services taxes and provincial sales taxes,
where applicable. Retail sales also include sales of products sold at our
convenience stores, car wash sites, propane and Pit Stop sites, all of
which we record at retail selling prices.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gasoline pricing
Petroleum maintains long-term wholesale agreements with major refiners to
source competitively priced gasoline across Canada. This fuel is then
sold through Petroleum retail locations at market prices.
-------------------------------------------------------------------------
Explanation of Petroleum's financial results
Second quarter
Higher and more stable gasoline margins and an increase in convenience store sales, partially offset by lower gasoline volumes, contributed to Petroleum's revenue growth in the second quarter. Average retail gasoline prices during the second quarter of 2008 increased by approximately 18 percent over the second quarter of 2007, driving the increased revenue.
Increased gasoline margins were the major factor that contributed to Petroleum's positive earnings performance during the quarter combined with effective expense management. Petroleum incurred $0.6 million in environmental expenses in the second quarter related to clean-up costs associated with certain site closures compared to $1.8 million incurred in the second quarter of 2007.
3.3.3.4 Business risks
Petroleum is exposed to a number of risks in the normal course of its business that have the potential to affect its operating performance. The following are some of the business risks specific to Petroleum's operations. Please also refer to section 9.0 of our 2007 Financial Report for a discussion of some other industry-wide and Company-wide risks.
Commodity price and disruption risk
The operating performance of petroleum retailers can be affected by fluctuations in the commodity cost of oil. The wholesale price of gasoline is subject to global oil price supply and demand conditions, which are increasingly a function of rising demand from fast-developing countries such as India and China, political instability in the Middle East, potential supply chain disruptions from natural and human-caused disasters, as well as commodity speculation. To mitigate this risk to profitability, Petroleum tightly controls its operating costs and enters into long-term gasoline purchase arrangements with integrated gasoline wholesalers.
Environmental risk
Environmental risk within Petroleum is primarily associated with the handling of gasoline, oil and propane. Environmental contamination, if not prevented or remediated, could result in fines and sanctions and damage our reputation. Petroleum mitigates its environmental risks through a comprehensive regulatory compliance program, which involves environmental investigations, as required, and the remediation of any contaminated sites in a timely manner. Petroleum also carries environmental insurance coverage.
3.3.4 Canadian Tire Financial Services
3.3.4.1 Q2 2008 Strategic Plan performance
The following outlines Financial Services' performance for the second quarter of 2008 in the context of our 2012 Strategic Plan.
-------------------------------------------------------------------------
Initiatives to build a "BIGGER" Canadian Tire
-------------------------------------------------------------------------
Total managed portfolio of loans receivable (credit card, personal and
line of credit loans)
Financial Services plans to grow its portfolio through increases in
average balances, new account acquisition, the introduction of new credit
cards and continued testing of the personal loan portfolio.
-------------------------------------------------------------------------
2008 Key initiatives Q2 2008 Performance
-------------------------------------------------------------------------
For 2008, Financial Services has Second quarter
targeted increasing gross average
credit card receivables and the Gross average loans receivable
number of accounts carrying a were $3.8 billion in the second
balance and growing its total quarter. The growth reflects a
managed portfolio as key 6.5 percent increase in the
initiatives. average account balance and a
0.3 percent increase in the
In addition, Financial Services number of accounts carrying a
is planning a major relaunch of balance.
the Canadian Tire Options
MasterCard in 2008. During the quarter Financial
Services continued the rollout
of new cards for the relaunch
of the Canadian Tire Options
MasterCard.
-------------------------------------------------------------------------
Retail banking
Financial Services began offering retail banking products in two pilot
markets in October 2006, including high interest savings accounts,
guaranteed investment certificates and residential mortgages. In 2007,
the pilot was expanded to include a third market in Ontario along with
the launch of the Canadian Tire One-and-Only account. The retail banking
business leverages the trust and credibility Canadian Tire has earned
over the last 40 years providing financial services to millions of
customers.
-------------------------------------------------------------------------
2008 Key initiatives Q2 2008 Performance
-------------------------------------------------------------------------
Financial Services' retail banking Second quarter
plans include increasing the
ending mortgage portfolio balance Financial Services had accumulated
and deposit balances. over $180 million in deposits and
approximately $67 million in
Financial Services will incur mortgages as at the end of the
approximately $28 million in net second quarter of 2008.
expenses associated with the
marketing and operations of the Financial Services incurred
retail banking initiative in 2008. $6.6 million in net expenses
associated with the marketing and
operation of the retail banking
initiative during the second
quarter of 2008.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Initiatives to build a "BETTER" Canadian Tire
-------------------------------------------------------------------------
Insurance and other ancillary products
Financial Services plans to enhance its insurance and warranty product
offering to credit card customers. Revenues from insurance and warranty
products have increased significantly in the last five years through
direct marketing to Canadian Tire's growing base of customers.
-------------------------------------------------------------------------
2008 Key initiatives Q2 2008 Performance
-------------------------------------------------------------------------
Financial Services plans to Revenues from insurance and
increase revenues from insurance warranty products increased
and warranty products during 2008. 6.6 percent in the second quarter
on a comparable basis
year-over-year.
-------------------------------------------------------------------------
3.3.4.2 Key performance indicators
The following are key indicators of Financial Services' performance:
- size of the total managed portfolio
- profitability of the portfolio
- quality of the portfolio
Financial Services' total managed portfolio of loans receivable
($ in millions,
except where
noted) Q2 2008 Q2 2007 Change 2008 YTD 2007 YTD Change
-------------------------------------------------------------------------
Average number of
accounts with a
balance
(thousands) 1,861 1,855 0.3% 1,855 1,850 0.3%
Average account
balance ($) $ 2,066 $ 1,940 6.5% $ 2,069 $ 1,924 7.5%
Gross average
receivables (GAR) 3,844.9 3,599.6 6.8% 3,838.3 3,558.8 7.9%
Total managed
portfolio (end of
period) 3,926.7 3,704.3 6.0%
Net managed
portfolio
(end of period) 3,830.2 3,618.5 5.9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net managed portfolio
Financial Services' net managed portfolio is the total value, after
allowances, of loans receivable including credit card, personal, line of
credit and mortgage loans.
-------------------------------------------------------------------------
Financial Services' gross average receivables were up in the second quarter, due primarily to marketing programs designed to increase average balances and increases in our retail banking accounts. The continued success of the Gas Advantage MasterCard in Ontario contributed to the increase in total portfolio growth, offset by a decline in personal loan accounts. During the quarter, Financial Services announced that it will be expanding the Gas Advantage MasterCard offering to other provinces in Canada, beginning on July 1, 2008.
In May 2008, Financial Services re-purchased the securitized portfolio of personal loan receivables of $43.7 million. The portfolio balance has been included in our Consolidated Balance Sheet.
Financial Services' future growth will be driven by increases in average account balances, modest increases in new accounts and the introduction of new credit card and insurance products. Management regards new retail banking products as another high-potential channel for growth in the longer term.
Approximately 2.6 million cards were issued as part of the Options MasterCard relaunch resulting in an investment of $9.7 million this quarter. The relaunch is expected to increase sales by approximately 2.0 percent and return the net investment in 12 to 18 months.
Gross average receivables
-------------------------------------------------------------------------
GAR is the monthly average of Financial Services' loans receivable
averaged over a specified period of time.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Securitization of loans receivable
Securitization is the process by which interests in financial assets are
sold to a third party. Financial Services routinely securitizes credit
card loans receivable by selling an interest in those assets to trusts
involved in the business of handling receivables portfolios. In the case
of credit card loans, co-ownership interests are sold to Glacier Credit
Card Trust(R) (GCCT). Financial Services records these securitization
transactions as a sale, and as a result, these assets are not included on
the Company's Consolidated Balance Sheet, but are included in our total
managed portfolio of loans receivable. Financial Services has
traditionally securitized between 70 percent and 80 percent of loans
receivable on an ongoing basis.
-------------------------------------------------------------------------
Financial Services' portfolio of credit card loans receivable
($ in millions,
except where
noted) Q2 2008 Q2 2007 Change 2008 YTD 2007 YTD Change
-------------------------------------------------------------------------
Average number of
accounts with a
balance
(thousands) 1,823 1,816 0.4% 1,816 1,810 0.3%
Average account
balance ($) $ 1,994 $ 1,872 6.5% $ 1,999 $ 1,850 8.0%
Gross average
receivables 3,636.0 3,400.4 6.9% 3,630.7 3,349.5 8.4%
Total managed
portfolio (end
of period) 3,710.7 3,514.0 5.6%
-------------------------------------------------------------------------
Gross average credit card loans receivable grew 6.9 percent to
$3.6 billion at the end of the quarter primarily due to a 6.5 percent increase
in the average account balance during the quarter compared to the previous
year. The increase in average account balances is largely a result of
marketing programs designed to increase average balances.
Financial Services' profitability
Financial Services' profitability measures are tracked as a percentage of
GAR, shown in the table below.
Profitability of total managed portfolio(1)
Q2 2008 Q2 2007 Q2 2006
-------------------------------------------------------------------------
Total revenue as a % of GAR(2) 24.41% 24.88% 25.10%
Gross margin as a % of GAR(2) 12.47% 13.13% 13.17%
Operating expenses as a % of GAR(3) 7.89% 7.77% 8.10%
Return on average total managed
portfolio(2),(3),(4) 4.58% 5.36% 5.07%
-------------------------------------------------------------------------
(1) Figures are calculated on a rolling 12-month basis and comprise the
total managed portfolio of loans receivable.
(2) Excludes the net effect of securitization activities and gain on
disposal/redemption of investment.
(3) Excludes the impact of the modification to the stock option
agreements in the fourth quarter of 2006.
(4) Return is calculated as earnings before taxes as a percentage of GAR.
The decline in the return on the total managed portfolio is principally
due to the expenses incurred for the Options MasterCard relaunch.
-------------------------------------------------------------------------
Gross margin
Gross margin is Financial Services' total revenue less direct expenses
associated with credit card, personal, line of credit and mortgage loans
and insurance and warranty products. The most significant direct expenses
are the provision for credit losses associated with the credit card,
personal loan and line of credit portfolios, the loyalty program and
interest expense.
-------------------------------------------------------------------------
Financial Services' MasterCard accounts provide increased earnings potential through cross-selling of balance-based insurance products and other financial services being offered by Financial Services. As Financial Services introduces lower rate credit cards and other loans receivable, the reduction in revenue and gross margin as a percentage of gross average receivables will be offset by continued growth in loans receivable, higher sales of insurance and warranty products and ongoing improvements in the operating expense ratio.
As part of the strategic planning process, management set a long-term goal of managing Financial Services' pre-tax return on the average total managed portfolio in the target range of 4.5 to 5.0 percent. As shown in the table above, Financial Services has met or exceeded this target in the second quarters of 2006, 2007 and 2008.
Portfolio quality
Q2 2008 Q2 2007 Q2 2006
-------------------------------------------------------------------------
Net write-off rate (rolling 12-month basis) 5.98% 5.89% 5.95%
Account balances less than 30 days overdue at
end of period 96.43% 96.57% 96.39%
Allowance rate 2.46% 2.32% 2.47%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net write-offs
Net write-offs represent account balances that have been written off, net
of collections of amounts previously written off. Net write-off rate is
the net write-offs expressed as a percentage of gross average receivables
in a given period.
-------------------------------------------------------------------------
Financial Services' net write-off rate was 5.98 percent in the second quarter of 2008, an increase of nine basis points over the same period of the previous year. Financial Services' net-write-off rate for the credit card portfolio on a rolling 12-month basis was 5.96 percent compared to 5.79 percent in the 2007 period. Despite more challenging economic conditions, Financial Services continues to manage the write-off rate within the previously stated target range of 5.0 to 6.0 percent.
-------------------------------------------------------------------------
Allowance
The allowance is determined using historical loss experience of account
balances based on the aging and arrears status, with certain adjustments
for other relevant circumstances influencing the recoverability of the
loans.
-------------------------------------------------------------------------
Periodic fluctuations in write-offs, aging and allowances occur as a result of a variety of economic influences such as job growth or losses, personal debt levels and personal bankruptcy rates, as well as changes caused by adjustments to collection strategies. The increase in the allowance rate compared to the second quarter of 2007 is due to a modest deterioration in the credit card portfolio aging, challenging economic conditions and the impact of changes in collection practices in 2007. Aging of the credit card portfolio, while above last year's level, is equivalent to the level of aging in the same period in 2006.
3.3.4.3 Financial Services' financial results
($ in millions) Q2 2008 Q2 2007 Change 2008 YTD 2007 YTD Change
-------------------------------------------------------------------------
Gross operating
revenue $ 201.5 $ 192.3 4.8% $ 410.2 $ 368.4 11.4%
EBITDA(1) 47.1 71.9 (34.6)% 107.5 117.0 (8.1)%
-------------------------------------------------------------------------
Earnings before
income taxes 43.8 68.6 (36.2%) 97.4 114.0 (14.6%)
Less adjustment for:
Gain on sale of
investment - 18.4 - 18.4
Loss on disposals
of property and
equipment - (0.1) - (0.2)
Net effect of
securitization
activities(1) 3.9 5.5 16.8 2.5
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(2) $ 39.9 $ 44.8 (10.9%) $ 80.6 $ 93.3 (13.6%)
-------------------------------------------------------------------------
(1) Includes initial gain/loss on the sale of loans receivable,
amortization of servicing liability, change in securitization reserve
and gain/loss on re-investment.
(2) See section 14.0 on non-GAAP measures.
Explanation of Financial Services' financial results
Second quarter
Financial Services' gross operating revenue increased over the second quarter of 2007 largely as a result of higher credit sales and an increase in interest bearing balances which resulted in an increase in credit interest earned. This was partially offset by a smaller gain from the net effect of securitization activities.
Earnings for the quarter were impacted by the investment of $9.7 million in the Options MasterCard relaunch. Now substantially complete, the relaunch has been well-received by customers and activity on PayPass(TM) enabled cards has exceeded initial expectations. Adjusting for the above-mentioned investment, adjusted earnings were up 10.8 percent year-over-year.
3.3.4.4 Business risks
Financial Services is exposed to a number of risks in the normal course of its business that have the potential to affect its operating performance. The following are some of the business risks specific to Financial Services' operations. Please also refer to section 9.0 of our 2007 Financial Report for a discussion of some other industry-wide and Company-wide risks affecting the business.
Consumer credit risk
Financial Services grants credit to its customers through Canadian Tire MasterCards, retail credit cards, personal loans, line of credit loans and residential mortgages. With the granting of credit, Financial Services assumes certain risks such as the failure to accurately predict the creditworthiness of its customers or their ability to repay debt. Financial Services minimizes credit risks to maintain and improve the quality of its consumer lending portfolio by:
- employing sophisticated credit-scoring models to constantly monitor
the creditworthiness of customers;
- using the latest technology to make informed credit decisions for
each customer account;
- adopting technology to improve the effectiveness of the collection
process; and
- monitoring the macro-economic environment, especially with respect to
consumer debt levels, interest rates, employment levels and income
levels.
Securitization funding risk
Securitization is an important source of funding for Canadian Tire, involving the sale of credit card loans to GCCT. Securitization enables Financial Services to diversify funding sources, and manage risks and capital requirements. Financial Services' securitization program relies on the marketability of the asset-backed commercial paper (ABCP) and notes issued by GCCT as described in section 5.2.4. A decline in the marketability of the commercial paper and notes would require the Company to find new sources of funding. Developments in the last half of 2007 in the international credit markets had an impact on some companies' securitization programs; see sections 5.2.4 and 5.2.5 below.
Interest rate risk
The Company's sensitivity to movements in interest rates is substantially limited to its cash and short-term investments. A one percent change in interest rates would not materially affect its earnings, cash flow or financial position.
Most of Financial Services' revenue is not interest rate sensitive as it is generated primarily from Canadian Tire MasterCards, which carry a fixed interest rate appropriate to customer segments with common credit ratings. The securitization program as described in section 5.2.5 of this MD&A reduces Financial Services' funding requirements. Canadian Tire constantly monitors the potential impact of interest rate fluctuations on its fixed versus floating rate exposure and manages its overall balance to reduce the magnitude of this exposure.
As the success of Financial Services is dependent upon its ability to access capital markets at favourable rates, and given the rapid growth of the total managed portfolio, maintaining the quality of the total managed portfolio and securitized loans receivable is a key priority of Financial Services. For additional information on Canadian Tire's liquidity and capital market activity, please refer to section 5.2 below.
Regulatory ris