Canada Research Canadian Tire Corporation

Transcription

Canada Research
Published by Raymond James Ltd.
Canadian Tire Corporation
April 29, 2015
Company Report - Initiation of Coverage
CTC.A-TSX
Kenric S. Tyghe MBA | 416.777.7188 | [email protected]
Krisztina Katai (Associate) | 416.777.7060 | [email protected]
Consumer & Retail
Outperform 2
C$145.00 target price
Current Price ( Apr-24-15 )
Total Return to Target
52-Week Range
Suitability
Switching to Summer Tires and Expecting Better Traction
Recommendation
We are initiating coverage of Canadian Tire Corporation (CTC) with an Outperform
rating and $145.00 target price. Our Outperform rating is reflective of the underlying
momentum within both key segments and select banners. While continued share
gains in sport and better levering (though eCanadian Tire Money attached loyalty
analytics) of its iconic brands underpin the growth strategy, it is the changes in the
bench, ethos, and focus that support our positive bias. We are mindful of CTC’s
misses (against select performance targets through 2014), but we are of the opinion
that on the new mantra (and changes to the bench across key businesses), CTC
through 2017E will prove to be a far more agile and adept player. While we are not
expecting a series of home runs, we believe that as confidence builds on fewer
strikeouts (relative to performance targets), that CTC’s ticket price will move higher
(on further multiple expansion). The strategic partnerships with both Scotiabank and
the SCENE loyalty program are, in our opinion, right on the money in terms of CTC’s
brand positioning with a younger (target) demographic.
Analysis

As the Tim Hortons of Canadian Retail, there exists in We the North a tremendous
affinity for and loyalty to CTC, which we believe is (finally) being better leveraged.
In an always on world the dumb (but beloved) paper money in a smart money retail
loyalty landscape was particularly expensive (but has finally been addressed).

In increasingly competitive markets, playing to your strengths (brand, footprint,
home field advantage) is a better strategy than playing your competitors’ games.
In automotive, compete on service competitors can’t offer; in living, on national brands,
and in sport, on a this-is-our-game basis. We think CTC is increasingly on the money.

With the recent exit of a key competitor likely giving new entrants pause, it’s time
for CTC to swing for the fences, and reassert its iconic status (across all banners).
With a new dealer agreement and the requisite technology and talent in the game,
we believe that CTC is likely better positioned than at any point in the last decade.
C$131.54
12%
C$137.48 - C$100.01
Growth
Market Data
Market Capitalization (mln)
Current Net Debt (mln)
Enterprise Value (mln)
Shares Outstanding (mln, f.d.)
10 Day Avg Daily Volume (000s)
Dividend/Yield
Key Financial Metrics
2014A
P/E
16.6x
EV/EBITDA
9.0x
Our $145.00 target price is based on our SOTP calculation (see Exhibit 38), which applies a
10.0x multiple to our 2016E EBITDA, and the value of Canadian Tire Corporation’s interest in
CT REIT. Our target multiple is essentially in line with CTC’s trailing 12-month average of 9.9x,
and slightly above its 3-year average multiple of 8.6x. We believe the premium appropriately
reflects (i) CTC’s increased traction in the sporting goods market, (ii) improved brand and
competitive positioning, and (iii) loyalty initiatives and increasing data analytics competencies.
1Q
Mar
2Q
Jun
3Q
Sep
4Q
Dec
Full
Year
Revenue
(mln)
EBITDA
(mln)
2014A
US$0.88
US$2.26
US$2.17
US$2.65
US$7.94
US$12,463
US$1,376
2015E
0.91
2.34
2.24
2.80
8.28
12,746
1,422
2016E
0.97
2.48
2.36
3.11
8.92
13,315
1,507
Source: Raymond James Ltd., Thomson One
Please read domestic and foreign disclosure/risk information beginning on page 44 and Analyst Certification on page 43.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
2015E
2016E
15.9x
14.8x
8.7x
8.2x
Company Description
Canadian Tire Corporation (CTC), with approximately
1,700 retail and gasoline outlets (and Financial
Services and CT REIT segments), is one of Canada’s
largest and most iconic retailers.
Valuation
EPS
C$10,341
C$2,071
C$12,413
79.0
146
C$2.10/1.6%
Canada Research | Page 2 of 48
Table of Contents
Executive Summary ............................................................................................................................................. 4
Company Overview.............................................................................................................................................. 5
Investment Thesis ................................................................................................................................................ 7
The Macro Market Dynamics and Model Imperatives......................................................................................... 25
Corporate Structure, Financial Analysis, and Outlook ......................................................................................... 33
Valuation and Recommendation ......................................................................................................................... 35
Appendix A: Financial Statements ....................................................................................................................... 37
Appendix B: Management and Board of Directors .............................................................................................. 40
Risks ..................................................................................................................................................................... 41
Canadian Tire Tear Sheet
CANADIAN TIRE
TSX:CTC.A
OUTPERFORM 2
$131.54
$145.00
$137.48
11.8%
$10,341
$100.01
205
8
190
7
175
6
160
5
145
4
130
3
115
2
100
1
85
Jan-10
Financial Summary
Jan-12
CTC
Jan-13
Jan-14
S&P TSX
% Held
1.97%
1.91%
1.86%
1.82%
1.81%
1.55%
1.38%
1.33%
0.96%
0.93%
Canadian Tire Corp. Ltd.
$8.28
$2.10
$78.08
$8.92
$2.10
$86.27
0.9x
21.6x
2.2x
0.9x
18.8x
1.9x
0.8x
16.6x
1.8x
0.8x
15.9x
1.7x
0.8x
14.8x
1.5x
FCF Yield
Dividend Yield
4.6%
2.0%
4.8%
1.8%
0.5%
1.7%
2.7%
1.6%
4.1%
1.6%
EV/Sales
EV/Adj. EBITDA
EV/EBIT
1.3x
10.9x
17.9x
81.4
1.2x
10.0x
16.2x
80.7
1.2x
9.0x
14.4x
79.0
1.1x
8.7x
13.4x
77.0
1.1x
8.2x
12.7x
76.6
$11,786
$1,236
$890
$785
$569
$12,463
$1,376
$1,004
$895
$632
$12,746
$1,422
$1,075
$983
$644
$13,315
$1,507
$1,134
$1,047
$690
$901
$404
$497
$112
$270
$586
$539
$47
$141
-$84
$1,047
$770
$277
$163
-$16
$1,093
$665
$428
$162
-$34
$643
$13,630
$2,339
$8,180
$2,037
$662
$14,553
$2,132
$8,922
$2,071
$565
$14,946
$1,867
$8,932
$1,904
$946
$15,740
$1,867
$9,134
$1,523
1.4%
8.8%
4.4%
2.1%
7.0%
3.5%
2.6%
5.9%
3.6%
2.8%
7.3%
1.8%
0.9%
3.9%
4.0%
2.6%
6.8%
4.8%
4.3%
11.2%
4.5%
2.9%
9.2%
4.9%
3.0%
8.9%
4.4%
$385.0
N/M
$305.3
$389.0
$275.0
$315.3
$398.0
$284.8
$328.3
$408.3
$304.1
$342.7
$417.3
$313.8
$353.3
10.9%
3.9%
11.2%
4.3%
12.0%
4.7%
12.2%
4.8%
11.9%
4.9%
Retail Sales Growth
CTR
FGL Sports
Mark's
context of CTC's brand positioning with a younger (target) demographic.
Consensus
Rating
Outperform
Target Price
$141.15
SALES ($'mln)
$12,749
EBITDA ($'mln)
$1,411
EPS
$7.95
US Home Improvement Retailers
The Home Depot, Inc.
Lowe's Companies Inc.
Group Average
$7.94
$2.10
$71.31
Income Statement (C$ mln)
Sales
$11,427
EBITDA (Adj)
$1,139
EBIT
$803
Pre-Tax Profit
$677
Net Income (Adj)
$499
Cash Flow (C$ mln)
CFO
$702
CAPEX
$222
Free Cash Flow (FCF)
$479
Dividends
$98
Δ in Working Capital
-$429
Balance Sheet (C$ mln)
Cash and Equivalents
$1,016
Total Assets
$13,229
Long Term Debt
$2,336
Total Liabilities
$8,464
Net Debt
$2,068
Key Company Metrics
SSS Growth
CTR
0.6%
FGL Sports
4.8%
Mark's
3.8%
Investment Highlights
Canadian Tire Corporation, with approximately 1,700 retail and gasoline
locations, is one of Canada's largest and most iconic retailers. Our
constructive thesis is supported by the underlying momentum within key
segments and banners. While continued share gains in sport and better
levering of its iconic brands are supportive of continued growth, it is the
changes in the bench, ethos and focus that support our positive thesis. In
addition, the strategic partnerships with both Scotiabank and the SCENE
loyalty program are, in our opinion, right on the money, particularly in the
Company Name
$7.02
$1.75
$67.57
Price/Sales
P/E
Price/BV
Jan-15
Top 10 Institutional Holders
Shares (mln)
Beutel Goodman & Company Ltd.
1.53
Manulife Asset Management Limited
1.48
Albikin Management Inc
1.44
Ctc Dealer Holdings Ltd
1.41
Tire N Me Pty. Ltd
1.40
Canadian Tire Corporation, Ltd. Profit-Sharing Plan
1.20
BlackRock, Inc.
1.07
RBC Global Asset Management Inc.
1.03
Mackenzie Financial Corporation
0.74
TD Asset Management, Inc.
0.72
$6.10
$1.40
$58.50
Valuation Metrics
0
Jan-11
F2012A
F2013A
F2014A
F2015E
F2016E
12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/30/2016
EPS (Diluted)
DPS
BVPS
Volume (mln)
CTC & S&PTSX Rebased
Price
Target Price
52-week Range
Return to Target
Market Cap (mln)
Sales per sq. ft.
CTR
FGL Sports
Mark's
ROE
ROA
Price
Apr-24-15
Market
Cap.
(mln)
$131.54
$10,341
$113.70
$73.16
$147,623
$69,627
$163,097
$80,403
HD
LOW
24.1x
27.0x
25.6x
21.8x
22.1x
21.9x
19.0x
18.6x
18.8x
13.8x
13.0x
13.4x
12.7x
11.8x
12.2x
11.7x
10.8x
11.2x
$1,241
$1,743
$1,234
$2,098
TSX:RCH
TSX:RON
24.1x
29.3x
26.7x
21.5x
17.9x
19.7x
19.5x
16.6x
18.0x
16.2x
10.9x
13.6x
14.3x
8.1x
11.2x
13.1x
7.7x
10.4x
Canadian Home Improvement Retailers/Distributors
Richelieu Hardware Ltd.
$63.35
Rona Inc.
$16.13
Group Average
Enterprise
Value
(mln)
$12,413 TSX:CTC.A
LFY
1000
16.6x
Price/Earnings Ratios
FY1E
FY2E
1001
1002
15.9x
14.8x
LFY
1000
9.0x
EV/ EBITDA Ratios
FY1E
FY2E
1001
1002
8.7x
8.2x
US General Merchandizers
Costco Wholesale Corporation
Target Corp.
Wal-Mart Stores Inc.
The TJX Companies, Inc.
Group Average
$148.12
$82.70
$79.84
$66.29
$65,169
$53,072
$257,524
$45,307
$62,965
$63,658
$303,923
$44,216
COST
TGT
WMT
TJX
31.9x
21.6x
16.1x
21.0x
22.6x
28.2x
18.2x
16.2x
20.2x
20.7x
26.0x
16.5x
15.4x
17.9x
19.0x
14.9x
9.4x
8.3x
10.9x
10.9x
13.3x
8.7x
8.3x
10.6x
10.2x
12.4x
8.4x
8.1x
9.8x
9.7x
US Auto Parts Aftermarket
Advance Auto Parts Inc.
AutoZone, Inc.
O'Reilly Automotive Inc.
Group Average
$148.61
$702.00
$229.35
$10,872
$22,270
$23,244
$12,426
$26,561
$24,167
AAP
AZO
ORLY
22.1x
22.2x
31.2x
25.2x
17.4x
19.6x
26.4x
21.1x
15.3x
17.4x
23.3x
18.7x
10.0x
13.1x
17.0x
13.4x
9.3x
12.3x
14.9x
12.2x
8.5x
11.7x
13.8x
11.3x
US Sporting Goods Retailers
Cabela's Incorporated
Callaway Golf Co.
Dick's Sporting Goods Inc.
Hibbett Sports, Inc.
Group Average
$54.19
$9.89
$56.59
$48.97
$3,879
$767
$6,693
$1,219
$7,609
$838
$6,478
$1,134
CAB
ELY
DKS
HIBB
19.3x
49.5x
19.9x
17.1x
26.4x
17.2x
247.3x
17.8x
16.1x
74.6x
15.0x
38.6x
15.9x
14.5x
21.0x
17.0x
16.1x
8.8x
8.7x
12.7x
15.3x
23.8x
8.1x
8.4x
13.9x
13.5x
14.3x
7.5x
7.7x
10.8x
25.3x
31.6x
19.1x
12.8x
12.0x
10.7x
Total Group Average
Source: Canadian Tire Corporation, Capital IQ, Raymond James Ltd.
Executive Summary
Canadian Tire Corporation (CTC), with 493 dealer-owned Canadian Tire stores, 436 FGL Sports
banner stores, 297 gasoline outlets, and 383 Mark’s stores, is one of Canada’s largest and most
iconic retailers. While CTC’s core business is Retail with Canadian Tire Retail (CTR) as its core
platform, the generational shift CTC is embarking on places increased focus on FGL Sports, with
Sport Chek as its super brand.
Building a Sport(chek) Empire
With the August 2011 acquisition of the Forzani Group (FGL Sports), Canadian Tire emerged as the
largest sporting goods retailer in Canada, commanding an approximate 31.5% of the sporting
goods market. FGL Sports’ largest banner, Sport Chek, accounted for approximately 11.4% of the
sporting goods market in Canada, followed by its Sports Experts banner at 4.3% at the end of
2012, both of which increased market share through 2014. The acquisition not only served to
reinforce CTC’s leadership position within the Canadian sporting goods market, but to also stave
off (or at a minimum materially delay) the entrance of US-based Dick’s Sporting Goods. The
Canadian sporting goods industry is relatively concentrated with the 10 largest sporting goods
retailers commanding an estimated 54.2% of the market, versus the more competitive US market,
where the top 10 retailers represent approximately 40.6%. Within the sporting goods market, the
apparel and footwear segments are poised to see the fastest growth rate through 2017E.
According to estimates by Trendex North America, sales of sports apparel are expected to grow at
an annual CAGR of 2.7%, followed by the sports footwear industry at a CAGR of 2.5%.
CTC has leveraged its existing position in the sporting goods market, and continues to gain
momentum in both key growth segments and demographics. The planned 12-14 HERO stores (and
additional Sport Chek flagship stores), and the efficacy of the cascading of the learnings from
these stores across the broader base, will be key determinants of the momentum trends.
Show Me the (e)Canadian Tire Money
While Canadian Tire has long had a loyalty program in place through Canadian Tire Money (in fact
it is Canada’s oldest loyalty program), it lagged those offered by key peers, as it was a paper
versus smart currency. Given the competitive dynamics (and increased competitive intensity),
every basis point of market share is that much more valuable, which further highlights the
imperative that is a compelling, data analytics underpinned loyalty program. dunnhumby was an
integral player in the initial loyalty program analytics design and specification. Following an Oct28-14 national rollout, CTC customers can earn and redeem either digital or paper Canadian Tire
Money (paper Canadian Tire ‘Money’, remains in circulation).
e-Canadian Tire Money (just like the paper Canadian Tire Money in your sock drawer and glove
box) has no expiry date and can be shared with other members. In addition (in a similar vein to
key competitor programs), customers who use their Canadian Tire Options MasterCard collect 10x
the e-Canadian Tire ‘Money’ across Canadian Tire’s family of companies. Canadian Tire e-Money is
a critical, and long overdue evolution of Canadian Tire’s loyalty offering, in a smart always on
world, where real-time insights and digital rewards fulfillment are critical elements of the
customer experience. Further complementing CTC’s loyalty initiatives, and most importantly the
resonance of its banners with the (younger) target demographic, are key strategic initiatives
attached to the SCENE Loyalty program.
Automotive – The Heart and the Margin
While sport is the cornerstone of growth, and loyalty analytics the powerful glue that not only
holds the model together but makes it stronger (the currency is a means to and end), Automotive
is the not-so-little engine that could. Automotive and Living are the two largest categories for
Canadian Tire. With the increase in the competitive intensity within these categories (and the
imperative that is an acceleration of organic growth), CTC has allocated significant capital over the
last 5-plus years to these categories. While the Automotive category represents approximately
34% of Canadian Tire’s Point of Sale (POS), versus the Living category at approximately 33%,
Automotive is the heart (and margin).
The single biggest change within Automotive is, in our opinion, the placing of service (versus
product) at the centre of Canadian Tire’s offering, as the service element (done right) will create
an ever-larger moat around this invaluable crown jewel. We are cautiously optimistic that after a
number of false starts in Automotive, the team, the tools, and alignment of interests are such that
CTC is poised to get back on offence (versus defense) through 2017E.
Company Overview
Canadian Tire Corporation (CTC), with approximately 1,700 retail and gasoline outlets (and
Financial Services and CT REIT segments), is one of Canada’s largest and most iconic retailers.
While CTC’s core business is Retail and its core platform is Canadian Tire Retail (CTR), the
relatively recent shift in strategic priorities places increased focus on FGL Sports (specifically, the
Sport Chek banner) as the proverbial tip of the spear for CTC.
CTC has six business categories – Automotive, Living, Fixing, Playing (Sport), Apparel, and Financial
Services – all positioned to prepare Canadians for the jobs and joys of everyday living in Canada
(to paraphrase a management mantra). The CTR operated network comprises 584 (including 91
corporate PartSource) dealer-operated stores representing 20.5 mln sq. feet of retail space.
The FGL and Mark’s banners comprise 436 (7.2 mln sq. feet) and 383 stores (3.5 mln sq. feet),
respectively. Canadian Tire Gas bar locations currently number 297.
Exhibit 1: CTC Business Categories – 2014 Revenues
Source: Canadian Tire Corporation, Raymond James Ltd.
The evolution (20-years in the making) of CTR’s store concepts continues. The most recent
iteration began in 2008, with a focus on Smart Stores. As of December-2014, CTR has converted
337 (68.4%) and 22 (4.5%) of its base to the Smart Store and Small Market Store concepts,
respectively. The Smart Store format integrates a number of new store features designed to
enhance operating productivity and improve the customer experience. What we believe is worth
noting (based on discussions with management), in terms of the evolution of the footprint, is the
tighter focus on working formats versus experimenting with all manner of formats. The stores
feature a racetrack layout, easier-to-read navigational signage, customer help buttons, price check
stations, and additional customer assistance desks in key areas of the store, in addition to CTC
banner stores-within-stores and ProShops. The Smart Store concept is capital light and converted
stores have demonstrated a modest improvement in same-store sales performance (relative to
traditional Canadian Tires stores).
Exhibit 2: Canadian Tire Retail (CTR) SSS Performance
While CTC commands leading market shares in numerous key product lines, and is a leading
sporting goods retailer with particular strength in Automotive, consistency of its financial
performance (despite its extensive reach and scale) has been challenging.
CTC’s strategic objectives serve as the foundation for meeting targeted financial aspirations. Where
CTC previously provided 5-year targets, effective 2015E, it is now providing 3-year targets. Given the
accelerating pace of change in the Canadian retail landscape, and the challenged history in meeting
targets, the shift to 3-year aspirations appears prudent. Through 2017E, CTC has outlined 3 strategic
priorities, namely to: (i) attract and retain world class talent; (ii) develop best- in-class digital and
analytics capabilities; and, (iii) leverage the strength of its brand. Exhibit 3 details Canadian Tire’s
financial aspirations for the periods: 2005-2009; 2010-2014, and 2015-2017.
Exhibit 3: CTC Aspirations
2015-2017
Target
2015E
2016E
2017E
RJL Est.
Retail Sales growth
Canadian Tire
3%+
3.1%
3.0%
2.8%
2.9%
FGL Sports
9%+
10.5%
9.7%
9.3%
9.8%
Mark's
5%+
5.1%
5.4%
5.8%
5.4%
9%
9.5%
9.4%
9.6%
9.5%
8%-10%
5.8%
7.0%
8.8%
7.2%
6%+
7.6%
7.6%
7.4%
7.5%
2010-2014
Target
2010
2011
2012
2013
2014
Retail Sales growth
3%-5%
1.4%
2.0%
0.8%
2.5%
4.4%
2.4%
10%-12%
19.8%
-1.7%
6.8%
46.5%
24.3%
17.5%
ROIC
EPS growth
CTFS Return on Receivables
Return to shareholders
ROIC
Actual
10%+
8.0%
7.7%
7.4%
8.1%
8.1%
8.1%
Adj. EPS growth
8%-10%
18.5%
5.3%
6.9%
13.5%
10.0%
13.3%
CTFS Return on Receivables
4.5%-5%
5.0%
5.5%
6.8%
7.3%
7.4%
7.4%
2005-2009
Target
2005
2006
2007
2008*
2009*
Actual
Comparable store sales
3%-4%
3.0%
2.3%
-0.6%
0.3%
-2.6%
0.5%
10%
9.3%
9.3%
10.5%
8.9%
7.7%
9.1%
Adj. EPS growth
12%-15%
16.2%
11.0%
18.1%
-2.2%
-12.4%
6.1%
Adj. EBITDA growth
10%-15%
14.6%
6.3%
9.7%
1.3%
-2.0%
6.0%
ROIC
*Aspirations were re-assessed due to the credit market disruption and subsequent economic downturn
In order to better deliver against its financial aspirations, CTC is focused on making what, in our
opinion, is a critical generational shift, centered around both the brand and the experience. The
chosen cornerstone, upon which CTC has chosen to build its next generation brand, is the sporting
goods category.
For CTR, this translates into acting less like a general merchant, and more like a specialty retailer
with store-within-store and dedicated category-specific ProShops (currently led by Hunting and
Fishing). The opportunity in Automotive (specifically in the growth of service and assortment)
remains material, as are the stakes given the current (and expected) changes in the competitive
landscape.
With sporting goods as the cornerstone, FGL mind and market share gains, and specifically the
accelerated growth of the Sport Chek banner are strategic imperatives. The fight for increased
relevance with younger consumers will not be fought (or won) in the aisles of either a CTR or
Mark’s store. To win, CTC needs to deliver a knockout with Sport Chek, the halo effect of which
will impact multiple banners.
Investment Thesis
Perspective on Canadian Tire’s Business Model
It is impossible to do justice to a discussion of Canadian Tire without detailing (something of a
misnomer given the very limited disclosure) the newly strengthened Associate Dealer Agreement.
A new agreement (the culmination of a 2-year negotiation), which expires in 2024, was signed on
April-17-13, and is expected to provide a framework for a new era of cooperation between
Canadian Tire Corporation and its Associate Dealers. The Associate Dealer model is unique.
Canadian Tire stores are operated by independent third parties known as Associate Dealers.
Canadian Tire’s relationship with each Dealer is governed by an individual Dealer contract
pursuant to which each Dealer agrees to operate the retail business of a Canadian Tire store under
the Canadian Tire name and to use his or her best efforts personally to manage his or her
Canadian Tire store at its maximum capacity and efficiency. Each Dealer owns the fixtures,
equipment and inventory of, and is responsible for the store staff and operating expenses for, the
Canadian Tire store he or she operates. Each Dealer agrees to comply with the policies, marketing
plans and operating standards prescribed by Canadian Tire, including purchasing merchandise
primarily from Canadian Tire and offering merchandise for sale at prices not exceeding those set
by Canadian Tire. In return, Canadian Tire supports Associate Dealers with marketing, supply chain
management, purchasing, administrative, financial and information services. Except in limited
circumstances, the premises on which the Canadian Tire stores are located are owned or leased by
CTC and licensed to individual Associate Dealers. Individual Dealer contracts are all in a standard
form, each of which generally expires on December 31, 2024.
Canadian Tire’s model, operated through its Associate Dealers, is a pull system. In Canadian Tire’s
pull system, the Associate dealers determine what they want in the store, and corporate (CTC)
does its best to meet the dealers’ requirements, versus in a push system where corporate makes
the decisions and pushes inventory into the system. The primary benefit of a pull system is that it
allows each Dealer to leverage local knowledge and expertise in determining preferred inventory.
The offset is that a pull system is inherently inefficient (relative to a push system).
The pull system, in our opinion, plays to the Retail as Art model of yesterday, versus the Retail as
Science model of the best-in-class global retailers of tomorrow. As such, the increased flexibility of
the new dealer agreement is, we believe, less about a new era of cooperation, and more about
the strategic imperative that is Retail as Science, Data as Art. While dealers are undoubtedly
invaluable in determining timing on when to get snow shoes in stock up North, versus out West,
the specific inventory levels and assortment are, in our opinion, best left to data-driven decisions
by corporate.
The specifics on the road to a becoming a dealer are relatively scant; the process begins with an
online application, followed by a pre-screen, and a three-stage interview (the final interview
involves both senior management and representatives from the dealer network). The journey is
also relatively (given the economics) capital light, with successful applicants required to cover up
to 25% of the value of initial store inventory and fixed asset costs, or an estimated minimum of
$125,000 in accessible capital (and additional $125,000 for dealer training and development).
An approved dealer enters a minimum 6-month (can be extended for another 6 months if
warranted) dealer training program, which includes a number of store placements. In addition,
new dealers receive an elevated level of support from CTC for the first 2 years. A key component
of the dealer contract is upward mobility. While each Dealer receives training on store operations,
performance, and inventory and staff management (after which they are placed in a pool and
assigned a smaller store), the dealers laddered progression to larger and more profitable stores is
dependent on meeting performance targets (most specifically, sales targets). In addition to
improving dealer mobility (dealers are required to retire after 40 years in the system), the new
contract brings an increased (and critical) focus on the relationship (versus the contract
specifics), which allows for better flexibility in collaboratively working together to face the
rapidly changing face of Canadian Retail.
While the change in tone in the relationship to conversations, versus finger pointing, is undeniably
a critical (and positive) departure from the finger pointing of old, the billion dollar question in our
opinion is whether the conversations translate into the requisite sense of urgency and alignment,
under the CEO versus management by a committee of 493 CEOs.
As previously noted, sport is both the cornerstone of the targeted generation shift and earnings
growth. The reality is that sport is not only faster growing than core CTR categories, but it is also a
higher margin business. Given Canadian Tire’s success as a hi-lo (versus every-day low price)
retailer, and a growth strategy increasingly tied to all things automotive and sport, understanding
the swings and roundabouts of the new agreement becomes all the more important.
A dealer’s upward mobility (and primary motivators) in the network are: (i) sales growth and, (ii)
continuous engagement in personally running their store. The dealer of today whose average age
is now believed to be in excess of 50 years of age, while undoubtedly a savvy retailer in core
Canadian Tire categories, is likely significantly less experienced in the growth drivers of tomorrow.
The risks of this new reality is that dealers who previously were poised for the next step up the
ladder, are going to either have to hurry hard to stay on the ladder (a positive), or are simply going
to tap out of the race and dedicate less time to the store, and more time to the sun (a negative).
By its very nature, a pull-ordering system facilitates a mismatch of both strategic and economic
imperatives between dealers and corporate, as a dealer’s orders do not need to match with the
dealer’s retail sales. The dealer, as a rational individual (and business owner) acts in his own
economic self-interest first, and in the interest of CTC second. With dealers controlling both what
and how much inventory they order, and earning a spread between what they pay the
corporation and receive from customers, the incentive to order excess inventory (when on
promotion by the corporation) and sell (the excess) at regular prices when the promotion ends is
real (and creates ripples through the system). Given that hockey is Canada’s Game, and that
Canadian Tire was recently advertising a $99.99 (we’ll call it $100.00) Bauer Nexus 600 for $69.99
(we’ll call it $70.00), we decided to use a hockey stick to illustrate the above dynamic.
We assume that CTC’s COGS on the hockey stick is $40.00 with a retail price of $100.00 for total
gross margin dollars of $60.00, of which we assume CTC takes $25.00 and the dealer takes $35.00,
for CTC gross margins of 38.5% ($25.00/$65.00) and dealer gross margins of 35.0%
($35.00/$100.00). At full price, the margin dollars are split 41.6% CTC/58.3% Dealers.
If the dealer did not have an incentive (incremental risk for incremental dollars), then when the
hockey stick is on promotion (assuming no excess inventory is ordered because of the promotion),
the gross margin hit (of promotional prices) would be relatively balanced. However, if the dealer
knowing their market, and loving the game purchases excess inventory on promotion from CTC,
and sells it at regular prices, the implications are numerous.
The dealer over-purchases the promotion priced stick at $52.50 ($40.00 COGS plus $12.50 margin)
in the belief that he can sell the excess inventory at $100.00, versus the promotional price of
$70.00. In this scenario, CTC generates gross margin dollars of $12.50 and margins of 20.0%
($12.50/$62.50), while the dealer secures $37.50 and margins of 37.5% ($37.50/$100.00) on the
excess inventory. The kicker however, is that this is not free money for the dealer, but rather a
double-edged sword for both parties.
At the risk of stating the obvious, the supply chain inefficiencies the above scenario creates are
manifold, and the ripple effect through the system profound. Not only is inventory risk higher (the
dealer may not know their market as well as they like to think), but forecasting and replenishment
are complicated (and inventory at corporate is necessarily higher than is ideal). In addition,
consumers were too often met with sold out promotional products, which was often more a
function of the model, than actually being sold out. We believe that the above dynamics were
one of the drivers behind too much time spent on finger pointing and on the minutiae of
previous contracts, versus the current contract, which according to management, is focused on
the relationship and constructive dialogues about how to move forward together. A number of
key differences highlighted include:

Flexibility to Face the Future (Evolution of Digital and Loyalty)

Sharing of the right costs in the business

Allows for increased collaboration

Contract is the longest ever secured
Canadian Tire
Canadian Tire Retail’s (CTR) flagship banner, Canadian Tire, is one of the most shopped retailers in
Canada with 493 dealer-owned Canadian Tire stores (complemented by 91 PartSource stores and
297 gas bars) at Dec-31-14. Canadian Tire represents 50% of CTC’s revenues and 60% of CTR’s
retail sales. Canadian Tire is one of Canada’s most iconic brands, with commanding market share
in most categories, and Canada’s most-read flyer. The average Canadian Tire bannered store is
41,580 square feet.
Automotive – The Heart and the Margin
Automotive and Living are the two largest categories for Canadian Tire. With the increase in the
competitive intensity within these categories (and the imperative that is an acceleration of
organic growth), CTC has allocated significant capital over the last 5-plus years to these categories.
While the Automotive category represents approximately 34% of Canadian Tire’s Point of Sale
(POS), versus the Living category at approximately 33%, Automotive is the heart (and margin). The
reality of quite how appealing the economics of the Automotive (tires, accessories, parts, and
service) business are, has not been lost on key competitors of all shapes and sizes (Walmart
continues to accelerate the build out of its auto parts offering and has 1,000-plus SKUs available
online, while Amazon Canada launched its auto parts push in October 2013).
As such, we believe that the capital deployed to the Automotive category has at best served to
buttress the fortress, rather than expand the empire, leading to disappointing ROIC metrics from
the category. The Living category is, to our mind, a traffic-driving investment in margin.
The Canadian automotive aftermarket is an approximately $23.1 bln business according to
Statistics Canada. Sales in the Do-It-For-Me (DIFM) categories represent approximately 74% of the
market, with the Do-It-Yourself (DIY) market the balance. As depicted in Exhibit 4, labour receipts
make up the largest part of the aftermarket for auto parts, followed by installed parts and tires,
accessories and DIY parts. Sales of DIY auto parts account for an estimated 13% of aftermarket
retail sales, which according to Automotive Industries Association of Canada, Canadian Tire
continues to lead with an estimated 46.7% market share in 2012 (its highest share in recent
years).
The balance of auto parts is sold to dealerships and independent repair outlets that are supplied
by Wholesale Distributors (WD). The WD channel is dominated by Uni-Select, NAPA, and Advance
Auto Parts-owned CARQUEST. The commercial install market is necessarily dominated by new car
dealerships with an estimated 36.6% share of the DIFM market, followed closely by independent
repair shops at 32.2%. In our opinion, there are a number of tangible growth opportunities in the
DIFM market upon which we expect Canadian Tire to capitalize. Exhibit 4 details the size and
composition of the Canadian Automotive Aftermarket.
Exhibit 4: Size of Automotive Aftermarket – DIFM and DIY
Source: Canadian Tire Corporation, Statistics Canada, Raymond James Ltd.
Canadian Tire is the largest player in the aftermarket DIY auto parts industry in Canada,
commanding an estimated 9.2% share of total auto aftermarket sales, and the leading online tire
and wheels retailer. Canadian Tirebannered stores cater to the light to medium Do-It-Yourself
(DIY) customers, while PartSource caters to the hard-core DIY and the previously untapped
commercial installers markets. With the increase in the competitive intensity in the auto parts
market, particularly on the expansion of AutoZone, Canadian Tire responded with the creation of
PartSource, which caters to the hard-core DIY demographic. Additionally, Canadian Tire also
addressed in-store availability of parts and faster and more efficient part delivery through the
creation of a PartSource hub system. At approximately 15,000 square feet, a PartSource hub store
is more than twice the size of a regular PartSource store, and carries a broader product
assortment which enables better product availability and faster delivery to nearby Canadian Tire
and PartSource locations. There are currently 91 PartSource locations.
While Canadian automotive aftermarket sales (according to Statistics Canada) have grown at a
CAGR of 3.6% over the last decade, the pace of growth has moderated from a 4.9% CAGR in the
2005-2009 period to 2.3% in the 2010-2014 period. Factors influencing the automotive
aftermarket include vehicle age and mix on the road, the number of kilometers driven, gasoline
prices and, in the medium to long-term, new car sales. The DIY market benefits from older
vehicles, mostly in the 10-year plus age group, while WDs primarily benefit from 6-10-year old
vehicles. Exhibit 5 details the Canadian automotive aftermarket by category and growth.
Exhibit 5: Evolution of Canada’s Automotive Aftermarket Industry
The slower rate of growth is, in our opinion, due in large part to the decline in the average age of
vehicles on Canadian roads, which is a function of the very aggressive financing offers from new
car dealers. The low interest rate environment has made possible low-to-no interest financing for
periods of up to 84 months which, in turn, has translated into strong new vehicle sales despite the
restrained consumer spending (highlighting Canadian consumers’ preference for new vehicles
over other big-ticket items). New light vehicle sales growth in Canada in the 2010-2014 period
grew at a robust CAGR of 4.8% versus a decrease of 1.2% in the 2005-2009 period. With the
interest rate environment expected to remain at historically low levels in the near-future, the
strong growth in new vehicle sales is expected to continue through 2016E.
Automotive aftermarket retailers are direct beneficiaries of increased driving activity, as: (i) an
increase in distance driven increases the necessary spending on maintenance on older vehicles,
(ii) part failure rates inevitably rise with increased driving activity, particularly for categories like
brakes; and, (iii) an increase in distance driven leads to quicker wear and tear for parts like tires.
With the increasing complexity of modern vehicles and the expertise required for their
maintenance and repair, the growth rate of the DIFM market is expected to outpace that of the
DIY market.
Against this backdrop, Canadian Tire has implemented several initiatives to increase its presence
in the commercial install market and improve its automotive business and service offerings,
including the enhancement of customer-facing processes (in-store technology), upgrade of its IT
infrastructure, supply chain capabilities, and expanded product assortment. Additionally, in March
2014 Canadian Tire brought in Michael Broderick, an industry veteran with over 20 years of
automotive experience, to lead its Automotive business.
Living the National Brand Life
The second largest component of CTR’s sales is the Living category, accounting for an estimated
33% of CTR’s revenues (approximately $2,069 mln business). The Living category comprises of
home décor, home organization, and household essentials (cleaning supplies, personal hygiene
products), in addition to kitchen appliances, gardening, outdoor tools, and seasonal items.
According to Statistics Canada, the retailing of indoor furniture, household appliances (two-thirds
of which we moved to the Fixing market), home furnishings, housewares, lawn and garden
equipment, and pet food was $40.2 bln in 2014 (which represents a 10-year CAGR of 2.8%). We
estimate Canadian Tire’s 2014 market share at 5.1% (on revenues of approximately $2,069 mln)
versus 3.9% in 2010. The increase in market share is primarily attributed to Canadian Tire’s
expanded offering versus increased share in existing categories. Exhibit 6 details CTR’s Living
category sales and market share in the period 2010-2014.
Exhibit 6: Evolution of Living Revenues and CTR’s Market Positioning
The marked deceleration of sales growth in the living category in the 5-year period through 2014
masked (relatively) solid continued growth of pet food and accessories. While living category sales
growth decelerated from a 3.8% CAGR in the 5 years through 2009, to 1.8% through 2014, pet
food (and accessories) and housewares sales CAGR were 3.4% and 3.1%, respectively.
The pet food market in Canada is a $3.5 bln industry, and accounts for approximately 8.7% of
overall Living retail sales. Consumers are treating pets as members of the family and, as such,
consumer demand for high-quality, natural and nutritious products, continues to grow. According
to the Pet Industry Joint Advisory Council of Canada, approximately half of Canadian households
own a pet. In addition, the pet food market appears to be less cyclical, which is evidenced by the
reality that during the last economic downturn, pet-owners of all income levels cut back more on
personal spending than on pet-related expenditures (according to Ibisworld).
As such, it does not come as a surprise that sales of pet food grew at the fastest rate in the 5 years
to 2014, increasing at a CAGR of 3.4% versus the overall Living retail sales CAGR of 1.8%. Despite
outpacing the overall industry, the 3.4% CAGR reflects a meaningful deceleration from the very
robust 11.2% CAGR recorded in the 5 years through 2009. According to market research group
Packaged Facts, the total pet-related market (food, accessories, veterinary) through 2018 is
expected to grow at a 3.9% CAGR, led by growth in accessories.
The strong growth in the 2005-2009 period reflects both mass merchandizers and discounters
meaningfully expanding their product assortment, with a broad price range of pet food and
accessories, bringing premium offerings (we use the term loosely) to the mass channel. The
increased competitive intensity in pet food and accessories that this expansion created necessarily
resulted in increased bite in pet product pricing (driving prices and segment growth rates lower).
We believe that the rebalancing (or shake out) of the pet product market has largely run its course
given current share (and share trends in the last 5 years). Exhibit 7 details the evolution of petrelated spending and market share of the Retail Living category.
Exhibit 7: Retail Sales Growth of Pet Food and Accessories
Source: Statistics Canada, Raymond James Ltd.
A decade ago, if looked hard you would find a shelf or two of canned pet food in CTR, whereas
today, the pet product offering is on occasion a full aisle (or two). The push into expanded pet
product offerings was particularly opportune, as it is both a traffic-driving and margin-expanding
category with the best growth profile within CTR’s Living segment. We believe that pet product
sales are positioned to, at a minimum, maintain their current growth trajectory, as even within
the department and mass channels, there is a want for premium offerings (the mix impact of
which offsets the ticket pressures on basics). Heaven forbid our four-legged fiends (sorry, friends)
don’t get a new toy or Kong every second time we do a Canadian Tire (or dog food) run.
The $9.3 bln housewares segment’s 5-year CAGR of 3.1% through 2014 reflects a meaningful
acceleration from the more modest 1.8% CAGR recorded in the preceding 5 years to 2009. The
relative performance of housewares is all the more impressive, in the context of the paltry 1.2%
CAGR through 2014 of the Living category excluding housewares and pets, versus 3.8% in the
2005-2009 period. We believe the acceleration in sales of housewares reflects the disruption
driven merchandising innovation and new product introductions, necessitated by increased
competitive intensity in the space.
CTR revamped its Living strategy to include a wider assortment of merchandize from prominent
brands (such as KitchenAid, Lagostina, Cuisinart, and Miele), in addition to inspirational displays
and improved product adjacencies in order to enhance Canadian Tire’s brand image as a
destination for kitchen, home organization, and cleaning supplies. In fact, kitchen accounts for the
largest part of CTR’s Living sales at an estimated $690 mln (approximately a third of Living sales),
with kitchen appliances and cookware the two largest components. We estimate CTR had sales of
kitchen appliances of approximately $310 mln, followed by cookware sales of approximately $276
mln. Exhibit 8 below illustrates the 5-year CAGR’s of the Living category.
Exhibit 8: Retail Sales CAGR’s of the Living Segment through 2014
CTR’s expanded Living strategy continues to resonate with consumers, with the performance in
the kitchen category proving particularly robust. In addition, the sales performance of stores with
the full living and associated merchandizing strategy is significantly better than CTR stores without
the full living offering. Further underpinning the appeal of the strategy is the low capital intensity
of the enhanced Living strategy. While the Living category (with exception of pet products) is
largely an investment in margin (lower margin contributor), we believe that the low capital
intensity and traffic-driving nature served to strengthen CTR’s business, and protect its market
share in the face of increased competitive intensity.
Fixing to Play and Playing to Fix
Within CTR, the combined fixing and playing segments represent approximately 33% of revenues,
with fixing edging playing on a percent of revenue basis. We estimate fixing represents 17% of
revenues and playing 16%. While fixing is the slightly larger of the two segments, it is playing that
is the higher margin business (and of particular import in terms of CTR’s strategy, brand image
and repositioning).
CTR is a leading destination for the do-it-yourself home repairer, offering home renovation and
repair tools, and paint and accessories. According to Statistics Canada, total home renovation
spending (at Retail) was an estimated $29.0 bln in 2014, which grew at a 10-year CAGR of 3.1%
through 2014. The market is dominated by The Home Depot (HD-N, RJA: Market Perform) with an
estimated market share of 21.2%, followed by Home Hardware at 14.6%, Rona at 11.3%, Canadian
Tire at 3.7%, and Lowe’s (LOW-N, RJA: Market Perform) a distant fifth at an estimated 2.4%. We
estimate Canadian Tire’s Fixing revenues totaled approximately $1,066 mln in 2014 (17% of CTR’s
revenues). With a four-firm concentration ratio of 50.5%, the fixing market is relatively
concentrated.
At the risk of stating the obvious, the biggest differentiator is that the hardware stores (The Home
Depot, Home Hardware, Rona, and Lowe’s) carry dry wall, lumber, heavy-duty repair materials
(and a higher percentage of national brands), while CTR stores focus on the DIY customer
demographic. We would not be surprised (given the scale of the addressable opportunity) to see
CTR further up the ante in the Fixing segment with similar strategies to those effectively used in
the expanded Living category offering.
The home improvement industry is highly correlated with the housing market. Sale of existing
houses is one of the most important drivers of future home improvement spending. This is due to
the reality that many homeowners now routinely undertake minor renovations prior to putting
their homes on the market for sale, in addition to the future homeowners who generally embark
on renovation projects following a home purchase. According to a CMHC survey, an estimated
40% of households were planning on making improvements to their homes in 2014 with an
average project price tag of $20,000 (versus $15,000 in 2013). Exhibit 9 details actual and
expected total renovation spending through 2016E. We expect renovation expenditures to
increase 3.0% in 2015E, and 2.7% in 2016E.
Exhibit 9: Home Sales and Total Renovation Spending
Source: CREA, Statistics Canada, Raymond James Ltd.
The Canadian housing market has experienced significant growth over the last decade, supported
by an interest rate environment that has made home ownership (outside of Vancouver and
Toronto) more feasible for a greater swathe of the population. In spite of the negative impact of
declining oil on Canada’s economy, economic conditions appear to remain supportive of
continued housing demand, which is a function of continued low mortgage rates (by historical
standards) and demographic trends. Canada continues to attract a high level of immigrants, which
has been the major driver of Canadian population growth.
Sharply higher housing prices are also forcing many home buyers, particularly the prime new
household formation group of those aged between 25-34 years, to look for less expensive (read,
fixer-upper) properties. In addition, Canada’s population is also aging – the proportion of
Canadians aged 65-plus is expected to rise from 15% in 2013 to 23% by 2030. With an aging
population that is more likely to stay put in their existing homes, combined with the reality that a
rising proportion of homeowners are squeezed out of the red hot housing market in major
Canadian cities, demand for renovation spending (despite the expected 1.1% dip in home sales in
2015) is likely to stay strong through our forecast window.
Total renovation spending at Retail, with the exception of modest decreases in 2009 and 2011,
has increased every year over the last 10 years. During this 10-year period, the market grew at a
CAGR of 3.1% to an estimated $29.0 bln. Sales in the last 5-year period through 2014, however,
grew at a CAGR of 0.9% versus the preceding 5-year period CAGR of 5.4%. The more modest
growth, in our opinion, largely reflects an increasingly stretched consumer (on an increasingly rich
housing market buy-in), leaving less room for renovations.
Exhibit 10: Total Renovation Spending 2005-2016E ($ bln)
The growth in total renovation spending has, however, exceeded that of Canada’s GDP growth,
which in the 10-year period through 2014, increased at a CAGR of 1.9%. Home improvement sales
accounted for an estimated 1.8% of Canada’s GDP in 2014, up from an estimated 1.6% in 2005. In
addition, renovation spending has been the fastest growing component of residential investments
in Canada over the last 10-years, outstripping the growth in both new construction and home
resale-related expenditures.
While part of the growth in renovation spending is attributed to the growth in Canada’s housing
stock, the majority of the growth reflects increased expenditures per household. In fact, the
average Canadian household now spends close to $4,600 on home renovation projects annually
versus $2,500 in the 1994-1998 period. While the negative impact of lower oil prices will
necessarily dampen renovation spending in Alberta, the reality that approximately two-thirds of
renovation dollars are generated from Ontario and Quebec (where home sales are forecast to
increase by low single digits in both 2015E and 2016E) is supportive of continued home
improvement spending.
While an estimated 42% of Canadians identify CTR stores as their first choice for tools, this
number drops significantly to 10% for small-home renovation and maintenance projects. Against
this backdrop, CTR has revisited its Fixing business (with the same approach as in Automotive),
with an emphasis on fundamentals such as optimizing product assortment, and introducing
higher-quality brands, accompanied with marketing campaigns. By way of illustration, CTR’s wood
stain TV commercial that aired during 2Q14 resonated particularly well with consumers, which is
evidenced in the strong uplift in paint sales during the quarter.
As such, CTR’s product assortment is, we believe, sufficient to accommodate many small-home
renovation and maintenance-related projects. The medium to longer-term outlook on home
renovation spending is, we believe, more subdued. Housing affordability will necessarily decline as
borrowing costs increase off their historic lows, and consumers find themselves more financially
stretched. In the interim, Canadian households appear focused on managing down their mortgage
debt.
The $8.7 bln Canadian sporting goods market is characterized by intense competition between
existing retailers, exacerbated by increasing competition from online sales channels. The Playing
segment accounts for an estimated 16% of CTR’s revenues. The approximately $1,003 mln Playing
business has a strong focus on hardgoods, specifically sporting and recreational equipment, with
leading market positions in several key categories including hockey, camping, hunting, fishing, and
bicycles. Canadian Tire offers a broad range of sporting and recreational equipment, with a more
limited footwear and apparel product mix.
The Canadian sporting goods industry is comprised of four primary channels:

Traditional Sport Stores;

Mass Merchandizers and Department Stores;

Canadian Tire/Costco/Other;

Athletic Footwear Retailers.
Sport stores represent the largest piece of the Canadian sporting goods pie, commanding a 65.4%
share, followed by mass merchandizers (department stores and discount stores) in a distant
second place. FGL Sports’ Sport Chek banner (owned by CTC) is not only the largest player in the
Canadian sporting goods market, but it is also the only retailer among the top three players in all
three segments (equipment, footwear, and apparel) of the sporting goods market.
Mass merchandizers and department stores account for 14.9% of the Canadian sporting goods
market with Walmart Canada commanding a 9.6% market share, while other notable participants,
such as Sears and The Bay, are significantly smaller.
The third-largest segment, which includes Canadian Tire and Costco, represents 12.9% of the
Canadian sporting goods market.
The remainder of the market is serviced by the collection of athletic footwear stores, accounting
for 6.8%, including the likes of Foot Locker, and The Running Room. Exhibit 11 depicts sales of
Canadian sporting goods by retail channel.
Exhibit 11: Breakdown of the Canadian Sporting Goods Market – 2013
Source: Trendex North America, Raymond James Ltd.
With an estimated 8.7% market share, Canadian Tire is the third-largest player in the
approximately $8.7 bln Canadian sporting goods market. In the preceding decade, CTR was
squeezed by Walmart, whose market share essentially doubled from 5.4% in 2003 to 9.6% in
2012, while CTR’s share decreased modestly from 9.1% to 8.7% according to Trendex data. While
an estimated 57% of Canadian sporting goods buyers made a purchase at one of CTC’s banners in
2014, only 24% were made at CTR. In response, CTR made changes that included bringing in the
top sporting goods merchant from FGL Sports (CTC acquired FGL in 2011) to run CTR’s Playing
business. The focus and mandate were clear – increase CTR’s relevance as a sporting goods
destination. Exhibit 12, below, highlights the evolution of the Canadian sporting goods industry
and its largest players.
Exhibit 12: Evolution of Canadian Sporting Goods Market – 2012 versus 2003
Source: Trendex North America, Raymond James Ltd. (CTC banners marked in red)
The largest component of the Canadian sporting goods industry is equipment, which accounts for
an estimated 53.2%, with athletic footwear at 27.1% and apparel at 19.8%. The mass
merchandizers tend to compete most effectively at an entry level in the hardgoods market, given
their souring reach and the reality that price tends to trump either service or the shopping
experience at this end of the market. Canadian Tire is the largest player in the hardgoods (sports
equipment) market with an estimated 14.9% market share. Exhibit 13 details CTR’s sporting goods
market share.
Exhibit 13: Largest Canadian Sporting Goods Retailers – Market Share
Equipment
Footwear
Apparel
Ca na di a n Ti re
14.9%
Sport Chek
18.5%
Lul ul emon
11.0%
Wa l ma rt
12.5%
Foot Locker
6.2%
Sport Chek
9.2%
Sport Chek
9.0%
Runni ng Room
6.1%
Wa l ma rt
7.3%
Gol f Town
6.6%
Wa l ma rt
5.4%
Sea rs
6.0%
MEC
3.9%
Sports Experts
5.3%
Sports Experts
5.9%
Sports Experts
3.3%
Sea rs
1.7%
Ma rk's
5.9%
Cos tco
3.0%
Gol f Town
1.7%
Wi nners
5.1%
Sea rs
1.7%
Athl etes Worl d
1.7%
Cos tco
2.1%
Tota l CTC
27.2%
25.5%
21.0%
Canadian Tire’s sporting goods selection is largely comprised of hardgoods (70% of assortment),
with leading market positions in hunting, fishing, and camping, as well as strong market presence
in hockey equipment, biking, and biking accessories. CTR’s 14.9% equipment market share
imputes equipment sales of approximately $690.3 mln which, given market dynamics, was
necessarily the most exposed market in the last 10 years to the mass merchants’ share grab. CTR
has rolled out hunting and fishing store-within-store ProShops in key markets (following a
successful test in 2011). CTR’s 30 Fishing ProShops, 62 Hunting ProShops, and 104 combined
Fishing and Hunting ProShops, generated approximately 15% of Playing revenues in 2014,
implying revenues of approximately $150.4 mln. While CTR leads the equipment market of the
sporting goods industry, it does not have a meaningful footwear and apparel offering. CTC owned
FGL Sports banner Sport Chek is the leading player in the Footwear Market (and number two in
the Apparel Market).
FGL Sports
The Cornerstone of Growth
The Canadian sporting goods industry is relatively concentrated with the 10 largest sporting goods
retailers commanding an estimated 54.2% of the market, versus the more competitive US sporting
goods market, where the top 10 retailers represent approximately 40.6%. In addition, the sporting
goods by retail channel in Canada differ from that of the US, with sport stores representing 65.4%
of sales in Canada versus 51.2% in the US. Another striking difference between the two markets is
the spend per capita on sporting goods, with the average Canadian spending 28% more annually
at $240 versus the average American at $187. The higher spend per individual is most likely
attributable to Canadians’ love for sports with higher capital intensity – specifically hockey, skiing,
skating, and cycling. Exhibit 14 details the Canada versus US dynamic by channel and spend.
Exhibit 14: Canadian versus US Sporting Goods Distribution Channels
With the August 2011 acquisition of the Forzani Group (FGL Sports), Canadian Tire emerged as the
largest sporting goods retailer in Canada, commanding an approximate 31.5% of the sporting
goods market. FGL Sports’ largest banner, Sport Chek, accounted for approximately 11.4% of the
sporting goods market in Canada, followed by its Sports Experts banner at 4.3% at the end of
2012, both of which increased market share through 2014. The acquisition not only served to
reinforce CTC’s leadership position within the Canadian sporting goods market, but to also stave
off (or at a minimum materially delay) the entrance of US-based Dick’s Sporting Goods (which was
rumoured to have been eyeing FGL as the preferred platform to build a Canadian footprint).
Exhibit 15 details Sporting goods industry growth and FGL Sport market share growth.
Exhibit 15: FGL Market Share and Sporting Goods Industry Growth
Source: Forzani Group, Trendex North America, Statistics Canada, Raymond James Ltd.
In addition to becoming the largest player in the sporting goods industry in Canada, FGL Sports
was a complementary addition to the CTC family, with very minimal product overlap. When
historically an FGL Sports store opened in the vicinity of a CTR store, the sales impact on CTR was
(according to CTR management) negligible at 1%. Prior to the FGL Sports acquisition, CTR tended
to play in price-driven entry level sport equipment categories, with very little to offer in terms of
either sports apparel and footwear. The mix at FGL, with over 70% of revenues derived from
softgoods and footwear (Exhibit 16), is essentially the opposite of CTR. In addition, FGL’s
hardgoods offerings are tailored to the more serious athlete (higher price point, higher service
expectation) as opposed to the typical recreational sport enthusiast at CTR. Exhibit 16 below
highlights the complementary nature of the FGL Sports acquisition.
Exhibit 16: Comparison of Canadian Tire and FGL Sports, and FGL Sports’ Sales Mix
While CTR was historically strong in kid (recreational) and adult (recreational) segments, the
offering struggled to resonate (due to its offering, experience, and location) with the critical 18-35
demographic. With FGL, it was essentially game on with CTC in the mall and finally able to target
this demographic. Driving the appeal and brand resonance of FGL (and capitalizing on the halo
effect for other CTC banners) is a critical element of CTC’s growth strategy. FGL Sports’ banners
attract a relative young demographic (80% of Sport Chek’s customers are under the age of 40) and
have above-average incomes.
CTR’s playing merchandize assortment now targets a wider range of sports enthusiasts and covers
essentially all income and skill levels in the majority of key sports. We do believe that there
remains an untapped opportunity for FGL (and by extension CTC) in the high (or rather higher
end) of the cycling market, which continues to be serviced by the Independent Bike Dealer (IBD)
network or brand-specific stores (TREK). While we think it a stretch for CTC to successfully retail
the super-premium (Cervelo, Pinarello) end of the market, an opportunity exists in our opinion in
premium brands (Cannondale, TREK). An increased share in this growing segment could
necessarily be achieved in a number of ways. Exhibit 17 details the positioning of key players in
the Canadian sporting goods market.
Exhibit 17: Canadian Sporting Goods Retail Positioning
The combination of the continuous update of retail store concepts, revamp of store aesthetics,
and superior customer service, play a critical role in delivering a shopping environment that
complements that of the products offered. In fact, FGL Sports only hires sports enthusiasts with
thorough product knowledge. Additionally, it is necessary for retailers to cater to consumers’
constantly-evolving lifestyles and tastes. By way of illustration, sports apparel, including footwear
and clothing, has become particularly fashionable over the last few years. Sport Chek stores, with
their high proportion of athletic footwear, have been direct beneficiaries of this trend.
In May 2012, Canadian Tire announced an accelerated growth plan for FGL Sports, on the basis of
three strategic pillars. The first pillar is the focus on strategic banners, with Sport Check as its
super brand, and Atmosphere as its outdoor lifestyle banner. Sport Chek has been rolling out its
new concept flagship stores across Canada, with the latest addition in Burnaby, B.C. The second
pillar is the accelerated growth of FGL’s footprint, under which Sport Chek and Atmosphere will
add approximately 50% more square feet to their existing footprint by 2017. The third pillar
focuses on building customer connection and improving customer experiences.
As part of the accelerated growth plan, FGL Sports also embarked on a banner rationalization
initiative, under which the number of banners were reduced to three main banners (with the
latest acquisition of Pro Hockey Life the number of banners increased to four), and several
underperforming banners were closed (e.g., Sports Mart and Athlete’s World). The August 2013
acquisition of Pro Hockey Life added 23 high-end specialty hockey stores to the FGL Sports
umbrella. FGL’s Sports Experts banner (primarily located in Quebec) was unaffected by the
restructuring. Exhibit 18, below, illustrates the evolution of FGL Sports’ banners.
Exhibit 18: Evolution of FGL Sports Banners
2010
2011
2012
2013
2014
2015E
2017E
Sport Chek
140
150
161
171
189
195
205
Sports Experts
72
70
72
72
73
74
76
Atmos phere
65
68
57
66
66
67
69
Pro Hockey Li fe
-
-
-
23
14
14
14
L’Entrepôt du Hockey
-
-
-
-
9
9
9
Sport Ma rt
64
59
41
-
Inters port
53
51
47
45
44
44
44
Hockey Experts
17
19
22
17
15
15
15
Na tiona l
19
18
18
18
18
18
18
Athl etes Worl d
54
53
44
-
-
-
-
Neva da Bob's Gol f
6
1
-
-
-
-
-
Fi tnes s Source
1
-
2
S3
7
11
11
-
9
-
8
-
7
7
Tech Shop
3
-
-
-
-
-
-
Other
15
15
-
-
-
-
-
Buyi ng Members
18
19
20
-
-
-
-
Total
534
534
495
421
436
443
457
Source: Forzani Group Ltd., Canadian Tire Corporation, Raymond James Ltd.
FGL will also invest in the creation of 12-14 HERO stores (and additional Sport Chek flagship
stores) over the next several years. The HERO stores will incorporate the learnings from the
existing flagship stores, in addition to ongoing digital enhancements, increased customization
capabilities (e.g., personalized sneakers), and greater connection with the local community
through event boards and mobile engagement.
The reality of how appealing the economics of the upgraded stores are is highlighted in the
performance of the West Edmonton flagship store, which has seen a material 20% lift in average
basket since its opening in January 2014. Exhibit 19 details FGL’s SSS performance through 2014.
Exhibit 19: FGL Sports Same-store Sales Performance
In terms of the sporting goods market, sales growth has been muted relative to broader Retail
sales. In 2014, the sporting goods industry is estimated to have grown 2.5% to $8.7 bln versus
retail sales growth of 4.6%. Within the sporting goods market, the apparel and footwear segments
are poised to see the fastest growth rate through 2017E.
According to estimates by Trendex North America, sales of sports apparel are expected to grow at
an annual CAGR of 2.7%, followed by the sports footwear industry at a CAGR of 2.5%. Conversely,
should sports participation rates for capital-intensive sports such as hockey and skiing continue to
stagnate, sales of sports equipment are forecast to grow at a much slower 0.8% CAGR. CTC
(through both CTR and FGL) is very actively involved in driving renewed growth in participation
rates in sports (and key sports in particular). The key initiatives aimed at getting kids active are
Canadian Tire Jumpstart, Active at School, and the announcement on Jan-23-13 that CTC had
signed an 8-year deal as a premier partner of the Canadian Olympic Committee.
In addition, on Jan-23-13 CTC announced that it has inked a four-year partnership with the
Canadian Paralympic Committee, a new partnership with Hockey Canada (including sponsorship
of the World Juniors), the Canadian Soccer Association and Canada Snowboard. An expanded
partnership with Alpine Canada was also announced, which compliments the recently announced
partnership with Skate Canada.
Exhibit 20: Canadian Sporting Goods Market Outlook – 2012 through 2017E
Mark’s
Generational Shift Underway
Mark’s offers affordable industrial and casual apparel and accessories, and is one of the largest
specialty retailers in Canada. The store network at the end of 2014 was 383 of which 348 were
corporate stores (including 65 store-within-stores), and 35 were franchise stores. While Mark’s is
generally associated with industrial wear, it also offers men and women’s business, casual, and
active wear. In order to increase its appeal in the casual wear market, Canadian Tire launched a
network refresh initiative, which included converting its Marks Work Wearhouse stores to Mark’s
and offering an enhanced customer shopping experience with wider aisles, brighter interiors,
interactive features in addition to revamped product assortment in its casual wear line.
Mark’s 2014 revenues were $1,122 mln (9.9% of CTC revenues). In pursuit of building out its
brand, Mark’s key strategic initiatives since 2010 have been the rebranding of its stores, the
expansion of Imagewear and the launch of improved e-commerce capabilities. The rebranding
initiative involved new logos, taglines and an improved customer experience (underpinned by a
new store format, improved product assortment, clear navigational signage, and wider and
brighter aisles). The rebranding initiative saw Mark’s replacing Mark’s Work Wearhouse.
The end-game of the rebranding and store experience reset was to increase the appeal of the
brand, such that it begins to resonate with a younger, more urban consumer in the 35-50 age
group (as opposed to its current 50-year-old plus customer demographic). The tagline reset
dovetailed with the rebranding, supporting both new marketing campaigns and the formation of a
strategic partnership with Cineplex’s SCENE loyalty program, the membership base of which
skews to young and urban (perhaps too young and too urban for Mark’s today, but invaluable in
the longer term given the Scotiabank partnership). The average SCENE member is between the
ages of 18 and 35, with the majority of the member base under 40.
Mark’s management has moved to capitalize on the SCENE partnership. As part of Mark’s
Everything in Jeans campaign, SCENE members could earn 500 points with any jean purchase (the
promotion ran through March-2015). The Everything in Jeans campaign kicked off on Aug-10-14,
and drove double-digit jeans sales growth in the last two quarters of 2014 (jeans sales increased
38% in the August to October time frame). The campaign was the primary driver of Mark’s
positive 4Q14 SSS growth surprise of 1.2% on a tough year ago comp of 5.2%. In addition, the
growth of Mark’s assortment is being driven by National Brands, including, Helly Hansen, Merrell
and Columbia (to name a few). While these brands resonate better with the target demographic,
the challenge is to get the message to that demographic.
With the learnings from Sport Chek in mind, Canadian Tire has also been testing digital marketing
at Mark’s. The increased digital prowess is best illustrated by a digital flyer that Mark’s ran for
winter boots and jackets in response to an early snowstorm in September 2014 in Calgary. The
flyer generated a comp sales increase of 403% on target items in the relevant market. On the
heels of several successful pilots, Mark’s continues to ramp its digital marketing spend, and ecommerce capabilities, driving an expected lift in brand resonance. Exhibit 21 below details the
evolution of Mark’s same-store sales performance overlaid with the strategic initiatives
undertaken.
Exhibit 21: Mark’s Same-store Sales Performance
Petroleum
More Marketing than Margin Play
Canadian Tire Petroleum is one of Canada’s largest independent gasoline retailers, with 297 gas
bar locations across the country. In the 5 years through 2014, Petroleum has opened 38 new gas
bars, rebranded 20 competitor gas stations, and performed major rebuilds at 15 sites. The
majority of the gas bar sites are located adjacent to a CTR store, which serves to drive increased
traffic to these stores. Fuel is sourced from several Canadian suppliers, and all of the gas bars are
operated by independent retailers.
While the Petroleum business is a traffic driver for CTR stores, it is not a material contributor to
earnings, which given the vagaries (and volatility) of fuel retail is a positive for CTC. The fuel retail
market is both price sensitive and highly competitive. Petroleum maintains tight controls over its
cost structure and enters into long-term gasoline purchase agreements with integrated gasoline
wholesalers. Petroleum also engages in a cross-marketing strategy with other Canadian Tire
banners, in addition to cross-promotional activities with grocer(s).
The largest driver of profitability for Canadian Tire Petroleum is the margins of the attached
convenience stores operations attached to the petroleum retail apron. The gross margin on
gasoline of 7%-9% is significantly lower than on c-store sales of 30%-plus. As such, Petroleum
continues to push sales of ancillary products and non-gasoline service offerings such as
convenience store items and car washes.
Financial Services
Not All Credit Cards are Created Equal
The Financial Services segment or Canadian Tire Financial Services (CTFS), while a key driver of
CTC’s profitability with a solid track record, has found driving growth relatively challenging in the 5
years through 2014. While Financial Services represents only 8.6% of total revenues, the segment
generates much higher margins and, as such, accounts for approximately 39.3% of EBT. Canadian
credit card purchase volumes increased by 7.9% to $387.4 bln in 2014, of which MasterCard
represented approximately 31.7% (or $122.7 bln) according to Nilson data (VISA continues to
dominate with an approximate 60.3% share). While based on purchase volumes, RBC with $77.7
bln would the largest issuer in Canada, applying the more widely used measure of Outstandings,
TD is Canada’s largest card issuer. On total market Outstandings of $81.4 bln in 2014, TD’s market
share was 19.5%. CTB’s market share, on Outstandings of $4.3 bln, was approximately 5.3% in
2014, ranking CTB as the eighth largest card issuer in Canada.
Through Canadian Tire Bank (CTB), the corporation has continued to strengthen its Canadian Tire
branded credit card business, which now issues the co-branded (MasterCard) Options World Card
and (MasterCard) Sport Chek card, in addition to expanded deferred and equal payment
programs. On May-08-14, Canadian Tire announced that Financial Services has struck a strategic
partnership deal with Scotiabank for a cash consideration of $500 mln. The agreement also
includes a credit card funding facility, where Scotiabank will provide Financial Services with credit
card receivable financing of up to $2.25 billion, and an option to sell an additional 29% of the
portfolio to Scotiabank within the next 10 years, at fair market value. Scotiabank’s market share
based on Outstandings of $11.7 bln was 13.9%, ranking it third behind TD and RBC.
As part of this transaction (which closed on Oct-01-14), CTC reorganized its Financial Services
business by transferring substantially all of its domestic insurance, identity theft, and other
optional products from CTFS to CTB. Scotiabank is now the exclusive partner for new financial
products for CTB customers, such as mortgages, with both partners aggressively looking to
monetize the opportunities for new products, services and improved customer loyalty (both
Scotiabank and CTC are SCENE Loyalty partners) that the partnership is expected to generate. The
SCENE Loyalty program is a good fit for Scotiabank and CTC, in our opinion, given who they bank
today and the target demographic of tomorrow.
While the competitive intensity in the premium card market experienced a step-function change
late in 2013, the competitive dynamics in the mass (or more specifically sub-prime as it relates to
CTB) market were largely unchanged. We are not saying this market was not competitive, but
rather that it was not subject to the same level of disruption as in the premium and super
premium markets. We estimate (adjusted for the potential overlap in the Aerogold portfolio
through the transition year that was 2014) that there were approximately 84 mln credit cards in
circulation, of which CTB represents an estimated 4.2% or 3.5 mln cards (1.8 mln active accounts).
The challenge of both the competitive intensity and repositioning of the CTB credit card book is
highlighted by the deceleration in the growth of Gross Average Receivables (GAR) over the last
decade. In the 5-year period through 2009, the GAR CAGR was 9.6%, versus 2.8% in the 5-year
period through 2014. The deceleration in growth largely reflects the increased competitive
intensity in the Canadian credit card market, moderation in the risk profile following the 20082009 financial crisis, and new government regulations, such as changes in balance transfer
policies. While receivables experienced a brief period of negative growth in the 2010-2011 time
frame (largely attributable to a shift in CTB’s risk tolerance), growth resumed in 2012 (and
accelerated further in 2013 and 2014), albeit at a modest pace. The acceleration was primarily
due to CTB’s ongoing investments in new account acquisition, process enhancements (reduction
in approval timing, optimization of credit limit strategies), and new product offerings.
While approximately 10% of the Canadian lending market is sub-prime, it accounts for roughly
20% of CTB’s portfolio. Sub-prime accounts are generally charged higher interest rates due to
their higher risk nature. As a result, sub-prime accounts generally have higher net write-off rates.
Due to Canadian Tire’s above average weight of sub-prime accounts, its net write-off rate sits well
above the national Canadian average of 3.1%. While net write-off rate necessarily peaked in 2009
(at 7.8% versus the national average of 4.9%) at the height of the economic downturn, it has been
on a steady decline ever since. CTB’s net write-off rate exited 2014 at 6.0%. Exhibit 22 details
CTB’s GAR and Net Write off rate through our forecast window.
Exhibit 22: Financial Services Gross Average Accounts Receivable
CTB’s average account balance growth CAGR was 8.5% in the 5-years through 2009, which on
tighter (absolute and relative) risk management (and increased competitive intensity led by
Capital One) decreased to 3.2% in the 5-year period through 2014. The growth rate of account
balances has, however, increased from 1.3% in 2012 to 3.4% in 2014. Exhibit 23 details the growth
in average account balances and the number of accounts carrying a balance from 2005 to 2014.
Exhibit 23: Financial Services Average Account Balance and Number of Accounts with Balance
CT REIT
CT REIT, one of Canada’s largest REITs, was created in October 2013 through the spin-off of
approximately 18.9 mln square feet of Canadian Tire’s geographically diverse portfolio of
properties, comprised of 255 retail properties and one distribution centre. The aggregate gross
proceeds of the initial public offering were $3.6 bln, which the REIT financed through a $1.8 bln
equity issuance to Canadian Tire and public investors, in addition to $1.8 bln in preferred
instruments issued to Canadian Tire. Canadian Tire holds an 83.2% ownership in CT REIT.
Exhibit 24: Well Diversified Portfolio Spans Across Canada
Source: Canadian Tire Corporation
CT REIT’s principal tenant is Canadian Tire, which represents more than 96% of CT REIT’s base
minimum rent and approximately 97.9% of gross leasable area. Outside of Canadian Tire, CT
REIT’s largest tenants include Overwaitea Food Group, Best Buy, Precise Parklink, Marshalls, RBC,
and Shoppers Drug Mart, although each comprises less than 0.4% of annual base minimum rent.
CT REIT, with a weighted average remaining lease term of 14.5 years (longest in the industry),
arguably has one of the most stable lease profiles among Canadian REITs. Its portfolio of CTC
leases contains average contractual annual rent escalations of 1.5% annually over the initial term
of the leases, with a weighted average rental rate of $13.03 per square foot. In terms of
acquisitions, CT REIT completed 13 property and 2 land acquisitions in 2014, in addition to 2
developments and 6 property intensifications, bringing its total gross leasable area to in excess of
20.3 mln.
All geographies are well represented within CT REIT’s portfolio, with 43% of base minimum rent
generated in Ontario, 26% in Western Canada, 23% in Quebec, and the balance in Atlantic
Canada. In addition, CT REIT’s portfolio is mainly tilted to large urban centres (69% of base
minimum rent) with approximately 88% of the portfolio consisting of stand-alone Canadian Tire
retail stores (multi-tenant, CTC-anchored properties make up approximately 10% of the portfolio).
In terms of financial flexibility, CT REIT has a strong balance sheet that is largely unsecured, with
approximately 98% of its properties unencumbered. In effect, CT REIT’s indebtedness is comprised
of the $1.85 bln in Class C LP Units, $58.5 mln in mortgage payable, and $78 mln drawn on its
revolving bank credit facility, for total indebtedness of $1.98 bln. CT REIT’s debt to enterprise ratio
of 47.0% at the end of 2014 was essentially in line with the industry (mid 40%).
Canadian Tire and CT REIT operate under a Right of First Offer agreement, under which CT REIT
has the right of first offer to purchase any property CTC intends to sell. In return, Canadian Tire
also has the right of first offer to lease any property owned by CT REIT.
The Macro Market Dynamics and Model Imperatives
The Canadian retail industry has been undergoing significant changes since the birth of Canadian
Tire, characterized by the (continued) arrival of general merchandisers and discount retailers
(Walmart, Costco, and to a lesser extent Target), low- and high-end specialty retailers, and
specialty sport retailers (Cabela’s, Bass ProShop). As such, the competitive intensity in the
Canadian retail landscape has been elevated for a number of years, particularly in the general
merchandising, home, and auto parts sectors.
While Canadian Tire faces intense (and increasing) competition from specialty merchandisers,
online-only retailers as well as everyday low price-leader Walmart, it has weathered decades of
competitive threats through strategic evolution of its store concepts, and the addition of
complementary business segments. Additionally, while Target Canada’s short tenure did not have
a material impact on CTC’s operations, the exit of Target is, nonetheless, incrementally positive.
Retail sales in Canada have experienced a steady increase over the last decade, increasing at a
CAGR of 3.8% from $346.5 bln in 2004 to $505.0 bln in 2014. In comparison, Canadian Tire’s
organic retail revenues (excluding the FGL Sports business acquired in 2011) grew at a CAGR of
2.8% to $9.4 bln over the same period. While Canadian retail sales growth in the 5-year period
through 2014 accelerated to a CAGR of 4.0% from 3.7% in the preceding 5-year period, Canadian
Tire’s organic retail revenue CAGR decelerated from 4.0% in the 5 years through 2009 to 1.6%.
Inclusive of the FGL Sports acquisition, Canadian Tire grew its consolidated retail revenues at a 10year CAGR of 4.7%, outperforming overall Canadian retail sales in both 5-year periods.
Exhibit 25: Canadian Retail Sales versus CTC Retail Revenue Growth 2005–2014
In terms of online spending in Canada, while (according to data from Euromonitor and Statistics
Canada) Canadian online Retail sales in 2012 were a fairly modest $6.6 bln, both the 5-year CAGR
of 9.7% (versus Retail sales CAGR of 2.6%) and the acceleration in 2012 to 14% (versus Retail sales
growth of 2.5%) are, we believe, significant. Online Retail sales growth, in our opinion, accelerated
further in 2013 and 2014, driven in large part by Amazon.ca’s rapid expansion and Walmart
Canada’s accelerated e-commerce rollout, and smartphone proliferation (increased mobile
payment options and the ability to make purchases through mobile devices).
According to data from comScore, Amazon.ca had 15.7 mln unique visits in September 2014,
almost three-times more than that of Walmart.ca. For reference, Amazon.ca carries close to 50
mln items online versus Walmart Canada’s 150,000. In addition, it is worth remembering that
Amazon Prime was only launched in January 2013, and key product categories like beauty,
consumer electronics, and dry grocery were launched in the second half of 2013, followed by the
launch of a pick-up service (through Canada Post locations) in December 2014.
Canada continues to attract a high level of immigrants (the major driver of Canadian population
growth) which, combined with modest job creation and GDP growth, provides some incremental
lift for sales growth. However, Canadian consumers appear to be increasingly stretched
financially, as evidenced by elevated leverage levels (debt to disposable income of 163% at the
end of 4Q14 above pre-recession levels).
Exhibit 26: Debt to Disposable Income – Canada versus US
Source: Statistics Canada, BEA, Federal Reserve Board, Raymond James Ltd.
While approximately 75% of Canadians live within 160 km of the US border, combined with the
reality that gasoline and goods in general cost significantly less south of the border, purchases
made in the US account for a small portion of Canadian retail sales. According to Statistics Canada,
while cross-border shopping increased from $4.7 bln in 2006 to an estimated $8.0 bln in 2012,
purchases made in the US accounted for a negligible 1.7% of Canadian retail sales.
The recession in 2008-2009 resulted in a 12.2% decline in the number of day trips Canadians made
to the US. The number of trips to the US rebounded sharply following the recession, with sameday car trips increasing steadily through the end of 2012 (coinciding with the Canadian dollar
reaching parity with the US dollar). The 2013-2014 timeframe saw a meaningful weakening of the
Canadian dollar, which also drove a decline in the number of day trips to the US.
With current exchange rates (CAD/USD spot price of 0.8233, versus the 2014 exit of 0.8601), we
expect the number of same-day trips to the US to continue to decline in 2015E (purchases made
in US dollars are increasingly becoming more expensive for Canadian consumers), which should
positively impact Canadian retail sales growth.
Exhibit 27: Cross-border Shopping and Foreign Exchange
Show me the (Canadian Tire) Money
While Canadian Tire has long had a loyalty program in place through Canadian Tire Money (in fact
it is Canada’s oldest loyalty program), it lagged those offered by key peers, as it was a paper
versus smart currency. Given the competitive dynamics (and increased competitive intensity)
every basis point of market share is that much more valuable, which further highlights the
imperative that is a compelling, data analytics backed loyalty program. Against this backdrop,
Canadian Tire embarked on a digital transformation initiative which included the revamp of the
loyalty program it launched in 1958. Today, consumers can earn and redeem Canadian Tire
Money on smartphones and online. The digital rewards program complements paper Canadian
Tire ‘Money’, which remains in circulation. The enhanced loyalty program, which is offered in
addition to Canadian Tire’s iconic paper currency, was initially launched in Nova Scotia on Oct-102014 (following the 2012 pilot of the Canadian Tire Money Advantage program), followed by a
national rollout on Oct-24-2014. Exhibit 28 below depicts the evolution of Canadian Tire’s loyalty
program from its inception in 1958 to the new digital roadmap in 2014.
Exhibit 28: Evolution of Canadian Tire Money
Customers simply show their Canadian Tire Mobile App, program card or key fob with their
method of payment, or pay with a Canadian Tire Options MasterCard to collect e-Canadian Tire
Money. e-Canadian Tire Money (just like the paper Canadian Tire Money in your sock drawer and
glove box) has no expiry date and can be shared with other members. In addition (in a similar vein
to key competitor programs), customers who use their Canadian Tire Options MasterCard collect
10x the e-Canadian Tire ‘Money’ across Canadian Tire’s family of companies.
The digital loyalty program also features a mobile app, My Canadian Tire Money, which allows
users to collect and redeem Canadian Tire Money, track transactions, view bonus offers, and
return products without a printed receipt. Canadian Tire e-Money is a critical and long overdue
evolution of Canadian Tire’s loyalty offering, in a smart always on world, where real-time insights
and digital rewards fulfillment are critical elements of the customer experience. Exhibit 29 details
the paper currency and the smart currency.
Exhibit 29: Canada’s Oldest Loyalty Program Goes Digital
CTC’s initial April 2010 data analytics partnership with British data science company, dunnhumby
(which is one of the leading retail loyalty analytics players globally with a client list that includes
Tesco, Kroger, Macy’s, Nestle, Coca Cola, and Canadian grocer Metro) was a strategic imperative
(necessary to jumpstart the rethink of loyalty and loyalty analytics within CTC). Through the analysis
of unique customer identifier (Loyalty Card Membership) attached POS data, dunnhumby essentially
creates a 360˚ view of consumers, which enables Retailers to divide them into segments based on
their specific shopping behaviour. This, in turn, helps Retailers better understand the motivations
behind the specific behaviour (whether consumers’ purchase decisions were influenced by price,
promotion, availability), and reward them with more relevant offers to keep them engaged and
satisfied. Exhibit 30 below illustrates the customer centric approach that dunnhumby applies, which
provides some insight into the loyalty framework of CTC.
Exhibit 30: Customer Centricity Approach
Source: dunnhumby, Raymond James Ltd.
This deep level of customer understanding facilitates a more personal, one-to-one relationship
with consumers, which in turn helps Retailers make better business decisions on promotions,
pricing, assortment, and in-store availability, and thus reward them with meaningful and more
relevant offers. This is particularly challenging (and therefore all the more important) for a general
merchandiser the likes of Canadian Tire versus a grocer. The path to purchase, the rationale
behind that purchase (and what to infer about the consumer and hence how to incentivize them)
is a lot harder when they buy a brush one week, a BBQ the next (than when they buy berries week
after week). More relevant and meaningful offers in turn increase customers’ tendency to shop
the whole store (as opposed to cherry-picking promotions from the flyer), resulting in improved
promotional effectiveness and customer experiences. Exhibit 31 below depicts dunnhumby’s
loyalty approach.
Exhibit 31: dunnhumby’s Loyalty Approach
1. Customer data
Loyalty program
data
EPOS data
Traditional research
methods
enables…
2. Customer insight
Basket segmentation
• Basket size/value
• Affluence
• Shopping missions
Customer
segmentation
• Value & loyalty
• Lifestyles
• Lifestages
informs…
3. Customer experience drives…
Enabling better
business decisions
• Pricing
• Promotions
• Assortment
• Availability
4. Desired customer
behavior
Increased customer
lifetime value
• Sales growth
• Margin growth
• Market share
Building relationships
with customers
• Rewards
• Relevant marketing
While Canadian Tire Money helped to drive customers back into the stores, it did not generate
any data. Thus, Canadian Tire historically did not know who its most loyal customers were, and
which were just cherry-picking promotions from the flyer. In addition, the traditional Canadian
Tire MasterCard product provided relatively limited data on its customers. The addition of digital
loyalty is set to change this – the new loyalty card offers a much wider array of data that Canadian
Tire, in conjunction with its data analytics competencies, is now able to collect, analyze, and
combine into more meaningful insights on customers’ purchasing behavior. The applied insights
and resulting meaningful consumer segments in turn drive personalized promotions and content,
which is a key way for Retailers to deliver relevance and a compelling value proposition. In
addition, the more meaningful and relevant offers in turn reduce waste from mass promotions
(sending out one-fits-all flyers to consumers). Retailers can then reinvest the savings in more
targeted offers, driving incremental top-line growth, as depicted in Exhibit 32, below.
Exhibit 32: Loyalty Approach Creates Incremental Value for Retailers
The national launch on Oct-28-14 followed an initial 2-year pilot in Atlantic Canada. The initial
results showed that those with a loyalty card did not necessarily have larger baskets on each visit,
but they shopped more frequently. In addition to not being able to track customer purchases,
consumers who paid with a non-Canadian Tire Financial Services (CTFS) credit card previously did
not receive any Canadian Tire Money.
Exhibit 33: Comparison of Canadian Tire Options MasterCard and Walmart Reward MasterCard
Fundamentals
Members of the Canadian Tire Money program
earn Canadian Tire Money at a rate of 0.4% of
purchases. Canadian Tire Options MasterCard
holders earn 10x the e-Canadian Tire Money on
purchases made across CTC banners, inlcuding
on automotive service. For purchases made
outside the CTC family of businesses,
cardholders collect 2x the e-Canadian Tire
Money.
Members can sign up for a Walmart Reward
MasterCard credit card to earn 1% in Walmart
Rewards for every dollar spent on purchases
made on the account and an additional 0.25% in
Walmart Rewards for every dollar spent at
Walmart stores in Canada. Minimum
redemption hurdle rate is at $5.00
Economics
Value of a Point:
0.40-cents
Issuance:
0.40 cents per $1 spend
Redemption:
5-, 10-, 25-, 50-cent, $1
and $2 increments
Value of a Point:
1.25-cents
Issuance:
1.25 cents per $1 spend
Redemption:
20 points per $20
Source: Canadian Tire Corporation, Wal-Mart Stores Inc., Raymond James Ltd.
Features
e-Canadian Tire Money does not have an
expiry date. Promotional "Money" and
multipliers are used.
Walmart Rewards are earned in dollar
equivalents (not points) with the minimum
hurdle rate set at $5.00. Walmart rewards
don't have expiry dates. Promotional points
and points multipliers are used.
Omni-channel as the Channel
A recent PwC survey found that consumers are not focusing on only one channel for their
purchases, but instead are integrating all available options and spending more time with those
retailers that provide multiple channels. The same survey also found that while consumers are
increasingly researching products online, they still prefer to make their purchases at physical
stores. As such, online-only retailers Amazon and eBay are opening physical stores in order to
complement their online presence – as it turns out, there are merits to meeting the customer
face-to-face. Canadian retailers, despite the recent flurry of activity by key players (including CTC),
remain laggards in e-commerce. Online Retail sales in Canada represented a paltry 1.4% of Retail
sales (according to data from Euromonitor and Statistics Canada), particularly when compared to
the US at approximately 5.0%, and the UK at approximately 12.0.
According to data from Euromonitor and Statistics Canada, while Canadian online Retail sales in
2012 were a fairly modest $6.6 bln, both the 5-year CAGR of 9.7% (versus Retail sales CAGR of
2.6%) and the acceleration in 2012 to 14% (versus Retail sales growth of 2.5%), are, we believe,
significant. Online Retail sales growth, in our opinion, accelerated further in 2013 and 2014, driven
in large part by Amazon.ca’s rapid expansion and Walmart Canada’s accelerated e-commerce
rollout, and smartphone proliferation (increased mobile payment options and the ability to make
purchases through mobile devices).
Canada has one of the highest rates of Internet and smartphone penetration in the developed
world; however, this dominance has not translated into e-commerce leadership, as many
Canadian retailers were reluctant to develop their online sales channels. This reluctance has
created a window of opportunity for US retailers to capture a growing segment of the market,
which resulted in US retailers dominating the online retail channel in Canada. As depicted in
Exhibit 34 below, Indigo Books is leading the Made in Canada charge with a 1.5% online market
share, followed by Longo Brothers Fruit Markets (Longo’s) owned Grocery Gateway. Canadian
Tire, despite being one of the most frequented retailers in Canada, commands a paltry 0.1% of the
online sales market.
Exhibit 34: Online Retailers' Canadian Market Share
Source: Business Development Bank of Canada, Raymond James Ltd.
The 800-pound gorilla of online-only retailers, Amazon, has a head start over other retailers
entering the world of e-commerce, as it first launched service in Canada in 2002. Amazon
continues to lead in Canada, commanding a 32.1% share of online sales, a position which does
appear to be at risk in the foreseeable future. According to data from comScore, Amazon.ca had
15.7 mln unique visits in September 2014, almost three-times more than that of Walmart.ca
(Amazon.ca now boasts close to 50 mln items online versus Walmart Canada’s 150,000). In
addition, it is worth noting that Amazon Prime was only launched in January 2013, and key
product categories like beauty, consumer electronics, and dry grocery were launched in the
second half of 2013 (as illustrated in Exhibit 35 below).
Exhibit 35: Amazon.ca’s Expansion Timeline
Source: Amazon Inc., Raymond James Ltd.
Online Retail sales are poised to accelerate in Canada (both Amazon and Walmart quickly ramping
their e-commerce capabilities) as many Canadian brick-and-mortar companies are rushing to
enter the world of e-commerce (to play catch up with their US counterparts). According to the
Ipsos Canadian Interactive Reid Report, 82% of Canadian Internet users made a purchase online in
the last year. Against this backdrop, Canadian Tire has embarked upon a digital transformation
initiative, making it the cornerstone of its new 3-year strategic roadmap announced in October
2014. The omni-channel push by the more than 90-year old Canadian retailer comes after an
initial failed attempt to build a meaningful online presence, as Canadian Tire scrapped its online
website in 2009 following low utilization.
With digital retail only becoming more prevalent in recent years, Canadian Tire reassessed the
merits of having an online presence and, as a result, began a cautious foray into e-commerce in
2011 by selling tires online. The initial e-commerce venture was followed by a national rollout of
its new website. While admittedly coming off a low base, the strong double-digit website traffic
growth in recent quarters is particularly encouraging.
As outlined at its 2014 Investor Day, Canadian Tire is focused on a generational shift, facilitated
by: (i) attracting and retaining world class talent; (ii) creating a best-in-class digital ecosystem and
analytics competencies; and, (iii) leveraging the strength of CTC’s brands, with Sport Chek and
sporting goods as its cornerstone. With Sport Chek as the preferred path for CTC’s generational
shift, the accelerated growth plan of the Sport Chek banner and digitally-savvy flagship stores,
Sport Chek is making strides in digital marketing and ecommerce. In 2014, Sport Chek replaced its
paper flyer with a digital flyer four times, and in each case the digital flyer generated significantly
higher sales, in addition to providing incremental flexibility for stores (e.g., adjust for weather),
than the traditional paper flyer. As part of Sport Chek’s road to digitization, in excess of 20% of
adspend will be allocated to the digital flyer in 2015.
In an attempt to mitigate the growing threat of online Retailers, brick-and-mortar Retailers are
finding creative ways to leverage their physical stores by creating more in-store human
interactions, a feature online shopping is missing. A more meaningful relationship with
consumers, and the ability to connect consumers to the products, in turn facilitate (and maintain)
brand loyalty. Thus, many Retailers are pushing to integrate the physical store into the omnichannel experience – redevelop the retail strategy by managing the store network to complement
the online strategy. The re-introduction of canadiantire.ca also brought its “Pay & Pick Up”
service, where customers can shop Canadian Tire products online and then pick them up at their
local store. The appeal of a pick-up service is further highlighted by its average 20%-30% margin
advantage over home delivery.
While Canadian Tire also tested much smaller urban stores, called Canadian Tire Express, we
believe the format (based on performance to date) is likely to see limited (if any) further
expansion. At 6,100 sq. ft., the Express store offers approximately 25% of the assortment available
at its big-box parent. The store’s focus on the assortment is home repair, kitchen, seasonal items
and recreational sports. Approximately 30% of product assortment is devoted to kitchen and
household goods, with more than half of products allocated to Fixing for smaller household
projects (e.g. small tools, lightbulbs, paint, and nuts and bolts).
The Express store will also operate as a pick-up location for online shoppers. This is a feature
Canadian Tire has been testing with the revamp of its e-commerce website (recall the first
attempt was shut down in 2009), in which shoppers can place an order for an item online and
have it delivered to the closest Canadian Tire store. Exhibit 36 details a CTR online pick-up
location.
Exhibit 36: Canadian Tire Pay and Pick Up
Source: Retail Category Consultants, Raymond James Ltd.
In addition, Canadian Tire is also continuing to upgrade its Retail store network to a “Smart Store”
format. The new format integrates a number of new store features designed to enhance
operating productivity and improve the in-store customer experience. The stores feature a
racetrack layout, easier-to-read navigational signage, customer help buttons, price check stations,
and additional customer assistance desks in key areas of the store, all designed to help customers
comfortably navigate through the aisles. The stores also feature special boutiques departments,
such as automotive, sporting goods, and tools.
Corporate Structure, Financial Analysis, and Outlook
CTC Major Holders
Canadian Tire was founded in 1922 as an automotive service garage in Toronto by Alfred and John
William Billes. It was listed on the Toronto Stock Exchange in 1945 under a dual-class system,
consisting of common voting shares and Class A non-voting shares. Common shares represent
4.4% of total shares outstanding, with Class A non-voting shares representing the majority at
95.6%. The holders of the common shares are entitled to select 13 of the 16 directors for CTC’s
board, while holders of the Class A non-voting shares elect the remaining 3 directors.
The Billes family continues to hold a controlling interest of 61.4%; CTC co-founder Alfred Billes’
daughter Martha G. Billes holds 1.4 mln voting shares (40.9% of outstanding common shares),
while Owen G. Billes holds 0.7 mln voting shares (20.5% of outstanding common shares). The
Associate Dealers, as represented by CTC Dealers Holdings Ltd., hold an effective 20.6% interest in
the company, with CTC’s Deferred Profit Sharing Plan representing the balance (12.2% interest).
Exhibit 37 depicts the major shareholders of the company.
Exhibit 37: Major CTC Shareholders
Recent Financial Results
Canadian Tire’s revenue increased a better-than-expected 9.8% to $3,653.8 mln (versus
consensus of $3,533.0 mln) in 4Q14, on strong Christmas sales, winter tires, and sports gear. The
strong revenue growth primarily reflected same-store sales increases across its portfolio of retail
banners. The combination of continued retail banner repositioning and focus on improved
merchandizing is facilitating particularly solid performance across CTC’s retail banners.

CTC’s revenue increased a stronger-than-expected 9.8% to $3,653.8 mln, which was primarily
driven by same-store sales increases of increases of 2.8% at CTR, 4.9% at FGL Sports, and
1.2% at Mark’s.

Consolidated gross profit dollars increased 12.1% from $1,082.5 mln to $1,213.2 mln, for a
gross margin of 33.2%. The 68 bp gross margin increase reflects CTC’s tight focus on
managing costs, despite the materially weaker Canadian dollar.

Consolidated EBITDA totaled $437.5 mln, for an EBITDA margin of 12.0%, which was a solid
beat relative to consensus of $420.8 mln. The 53 bp EBITDA margin expansion reflects higher
gross margins slightly offset by lower SG&A leverage (SG&A margin of 21.1% versus 21.0% in
4Q13).
Outlook
We are initiating 2015E EPS of $8.28, and 2016E EPS of $8.92, versus consensus of $7.97 and
$8.78, respectively. We believe that CTC is well positioned to benefit from a recovery in both the
macro backdrop and consumer confidence through our forecast window. In addition, we expect
what increasingly appears to be lower gas prices for longer (and low current levels of confidence)
to represent a tailwind for the high-margin Automotive business (as lower gas prices translate into
higher mileage driven, which translates into higher wear and tear on vehicles). Within FGL sports,
the cascading of the HERO and flagship store learnings through the broader footprint, and the
untapped opportunity in key verticals and demographics will, we believe, generate a material
further lift in market share. The above (combined with assumed steady share in the segment
category) is, in our opinion, supportive of solid FCF growth, which in turn (in the absence of any
suitably compelling potential acquisition opportunities) is supportive of further increases in the
dividend (and modestly elevated buyback activity). In addition, with a new (strengthened) dealer
agreement and the necessary technology and talent in place, we believe CTC is better positioned
than at any point in the last decade, which (on improved execution and fewer aspirational misses)
we believe is supportive of further multiple expansion. Our earnings forecasts are based on the
following assumptions.
2015E Estimates

Revenue of $12,745.5 mln reflects a 2.3% increase from the prior year primarily reflecting
revenue growth of 2.1% at CTR, 7.3% at FGL Sports, and 4.5% at Mark’s, partially offset by
lower Petroleum revenues (driven by lower gasoline prices).

Consolidated gross margin of 32.3%, down a very modest 14 bp from the prior year, on our
expectations of continued cost discipline more than offset by the material weakening of the
Canadian dollar.

EBITDA margin improvement of 11 bp to $1,422.3 mln, reflecting our expectations of very
modest 14 bp gross margin decrease, more than offset by improved SG&A leverage (SG&A
margin of 21.2% versus 21.6% in 2014).

EPS growth of 4.3% to $8.28, on 2.2% fewer diluted shares outstanding and a 28.0% effective
tax rate (versus 26.7% in 2014).
2016E Estimates

Revenue growth of 4.5% to $13,314.6 mln primarily reflects retail revenue increases of 3.4%
at CTR, 9.9% at FGL, and 4.8% at Mark’s (and essentially unchanged Petroleum revenues).

We expect modest gross margin expansion of 49 bp to 32.8%, reflecting our expectations of
continued distribution, logistics and promotional tailwinds, and a more stable Canadian
dollar. While favourable mix impacts are possible through 2016E they are not explicitly baked
into our assumptions.

A 16 bp increase in EBITDA margin to 11.3% (consolidated EBITDA of $1,506.5 mln), on our
expectations of a 43 bp gross margin expansion partially offset by lower SG&A leverage
(SG&A margin of 21.6% versus 21.2% in 2015E).

EPS of $8.92, for a 7.7% increase from the prior year, reflecting 0.6% less diluted shares
outstanding and unchanged effective tax rate assumption of 28.0%.
Valuation and Recommendation
We are initiating coverage of Canadian Tire with an Outperform rating and $145.00 target price.
Our target price is based on our SOTP calculation, which applies a 10.0x multiple to our 2016E
EBITDA estimate, and the value of Canadian Tire Corporation’s interest in CT REIT, for an imputed
value of $145.24 as illustrated in Exhibit 38.
Exhibit 38: Canadian Tire SOTP Valuation
Canadian Tire
Ba s i s
Di s counted Va l ue per Sha re
10x EBITDA
$
CT REIT
RJL NAV
Net Debt
Book Va l ue
Di s count
164.71
1,623
8.94
(2,071)
(26.35)
-448
(17.40)
162
(2.06)
10%
Discounted SOTP
$145.24
Source: Raymond James Ltd.
EV/EBITDA Valuation Methodology
We apply a target EV/EBITDA multiple of 10.0x to our 2016E EBITDA of $1,507 mln, which is
essentially in line with its trailing 12-month average of 9.9x, and slightly above its 3-year average
multiple of 8.6x (and 5-year of 7.7x and 10-year of 7.4x). We believe the premium appropriately
reflects (i) CTC’s increased traction in the sporting goods market, (ii) improved brand and
competitive positioning, and (iii) loyalty initiatives and increased data analytics competencies. In
addition, the lower 5-year and 10-year averages of 7.7x and 7.4x, respectively, reflect a different
business (pre FGL Sports acquisition) and different macro backdrop (Great Recession).
Exhibit 39: Canadian Tire Forward EV/EBITDA Multiple
Source: Capital IQ, Raymond James Ltd.
Exhibit 40 below details the EV/EBITDA based SOTP sensitivity for Canadian Tire for a range of
EV/EBITDA multiples from 9.0x to 11.0x.
Exhibit 40: EV/EBITDA Based SOTP Sensitivity Table
EBITDA ($'mlns)
$ 145.24
9.0x
9.5x
10.0x
10.5x
11.0x
$1,486.5
$123.79
$133.25
$142.70
$152.16
$161.61
$1,496.5
$124.93
$134.45
$143.97
$153.49
$163.01
$1,506.5
$126.08
$135.66
$145.24
$154.82
$164.40
$1,516.5
$127.22
$136.86
$146.51
$156.15
$165.80
$1,526.5
$128.36
$138.07
$147.77
$157.48
$167.19
Source: Raymond James Ltd.
While we are not inclined to value Canadian Tire on an EPS basis, we believe it is pertinent to
include its 10-year forward and average P/E multiples (in terms of peer comparison). As illustrated
in Exhibit 41, Canadian Tire’s 10-year P/E multiple is 12.7x versus its 5-year average P/E multiple
of 11.9x (and TTM P/E multiple of 15.4x).
Exhibit 41: Canadian Tire Forward P/E Multiple
Exhibit 42: Peer Group Comparison
Company Name
Price
4/24/2015
Canadian Tire Corp. Ltd.
US Home Improvement Retailers
The Home Depot, Inc.
Lowe's Companies Inc.
Group Average
$131.54
LAST
$113.70
$73.16
Canadian Home Improvement Retailers/Distributors LAST
Richelieu Hardware Ltd.
$63.35
Rona Inc.
$16.13
Group Average
US General Merchandizers
Target Corp.
The TJX Companies, Inc.
Group Average
US Auto Parts Aftermarket
Advance Auto Parts Inc.
AutoZone, Inc.
O'Reilly Automotive Inc.
Group Average
US Sporting Goods Retailers
Cabela's Incorporated
Callaway Golf Co.
Dick's Sporting Goods Inc.
Group Average
LAST
$148.12
$82.70
$79.84
$66.29
Shrs
O/S
(mln)
Market
Cap.
(mln)
Earnings
Per Share
LFY
FY1E
FY2E
$10,341
7.94
8.28
8.92
1000
4.71
2.71
1001
5.23
3.31
1002
6.00
3.94
$1,257
$1,911
1000
2.63
0.90
1001
2.95
0.90
1002
3.26
0.97
442.4 $65,533
640.1 $52,936
3,243.0 $258,921
703.5 $46,638
1000
4.65
3.83
4.96
3.15
1001
5.25
4.55
4.93
3.29
1002
5.70
5.00
5.18
3.71
78.6
1,346.0 $153,040
990.0 $72,428
19.8
118.5
Price/Earnings Ratios
LFY
FY1E
FY2E
16.6
15.9
14.8
24.1
27.0
25.6
21.8
22.1
21.9
24.1
17.9
21.0
1000
1001
1002
EBITDA ('mln)
LFY
FY1E
FY2E
$1,376
9.0
8.7
8.2
19.0 $12,225 $13,288 $14,432
18.6 $6,420 $7,076 $7,726
18.8
13.8
13.0
13.4
12.7
11.8
12.2
11.7
10.8
11.2
21.5
17.9
19.7
19.5
16.6
18.0
16.2
10.9
13.6
14.3
8.1
11.2
13.1
7.7
10.4
31.9
21.6
16.1
21.0
22.6
28.2
18.2
16.2
20.2
20.7
26.0 $4,249 $4,747 $5,102
16.5 $6,728 $7,298 $7,578
15.4 $36,320 $36,153 $37,296
17.9 $4,195 $4,280 $4,646
19.0
14.9
9.4
8.3
10.9
10.9
13.3
8.7
8.3
10.6
10.2
12.4
8.4
8.1
9.8
9.7
$77
$191
$1,422
$87
$256
$1,507
Enterprise Value /
EBITDA Ratios
LFY
FY1E
FY2E
$95
$269
$148.61
$702.00
$229.35
73.4
33.0
104.8
$10,910
$23,147
$24,045
6.71
31.57
7.34
8.52
35.86
8.68
9.74
40.24
9.86
22.1
22.2
31.2
25.2
17.4
19.6
26.4
21.1
15.3
17.4
23.3
18.7
$1,243
$2,089
$1,468
$1,335
$2,224
$1,672
$1,460
$2,354
$1,809
10.0
13.1
17.0
13.4
9.3
12.3
14.9
12.2
8.5
11.7
13.8
11.3
$54.19
$9.89
$56.59
$48.97
71.8
77.7
121.2
25.6
$3,893
$768
$6,861
$1,255
2.81
0.20
2.84
2.87
3.15
0.04
3.18
3.04
3.61
0.26
3.55
3.39
19.3
49.5
19.9
17.1
26.4
17.2
247.3
17.8
16.1
74.6
15.0
38.6
15.9
14.5
21.0
$449
$52
$754
$134
$498
$35
$815
$140
$563
$59
$892
$151
17.0
16.1
8.8
8.7
12.7
15.3
23.8
8.1
8.4
13.9
13.5
14.3
7.5
7.7
10.8
24.2
31.6
19.1
12.8
12.0
10.7
Overall Group Average
* Estimates for Canadian Tire are from RJL, all other estimates are consensus from Capital IQ
Appendix A: Financial Statements
Exhibit 43: Canadian Tire Income Statement (C$ mln, unless otherwise stated)
Canadian Tire
(Year ended December)
Revenue
Cost of Sales
Selling and Administrative Expenses
Total Operating Expenses
Other Income
F2012
F2013
1Q14
2Q14
3Q14
4Q14
F2014
$11,427
$7,929
$2,700
$10,630
$11,786
$8,063
$2,829
$10,892
$2,573
$1,738
$706
$2,444
$3,166
$2,153
$744
$2,898
$3,070
$2,085
$729
$2,814
$3,654
$2,441
$874
$3,314
$12,463
$8,417
$3,053
$11,470
$18
$0
$6
($3)
($2)
($6)
$11
1Q15E
$2,630
$1,789
$696
$2,485
($2)
2Q15E
3Q15E
$3,208
$2,187
$742
$2,929
$3,142
$2,130
$725
$2,854
$18
$0
4Q15E
$3,765
$2,520
$893
$3,413
($6)
F2015E
F2016E
$12,746
$8,626
$3,056
$11,681
$13,315
$8,946
$3,246
$12,192
$11
$11
Gross Profit
Gross Profit Margin (%)
Gross Profit Margin (bp) Change
$3,498
30.6%
114
$3,722
31.6%
97
$835
32.5%
154
$1,013
32.0%
75
$985
32.1%
64
$1,213
33.2%
68
$4,046
32.5%
88
$841
32.0%
(50)
$1,021
31.8%
(16)
$1,012
32.2%
15
$1,245
33.1%
(13)
$4,120
32.3%
(14)
$4,369
32.8%
49
Adjusted EBITDA
Adjusted EBITDA Margin (%)
Adjusted EBITDA Margin (bp) Change
$1,139
10.0%
(22)
$1,236
10.5%
52
$212
8.3%
(28)
$375
11.8%
112
$352
11.5%
66
$438
12.0%
53
$1,376
11.0%
56
$226
8.6%
34
$366
11.4%
(44)
$382
12.2%
70
$448
11.9%
(6)
$1,422
11.2%
11
$1,507
11.3%
16
0.6%
4.8%
3.8%
1.4%
8.8%
4.4%
-0.5%
6.4%
2.9%
2.8%
8.2%
3.2%
3.2%
8.5%
6.8%
2.8%
4.9%
1.2%
2.1%
7.0%
3.5%
4.0%
5.0%
1.8%
2.0%
6.2%
2.7%
2.4%
6.0%
3.4%
2.0%
6.5%
6.3%
2.6%
5.9%
3.6%
2.8%
7.3%
1.8%
Same Store Sales (SSS)
CTR
FGL Sports
Mark's
Retail Sales per Sq. Ft.
CTR
FGL Sports
Mark's
$385.0
$0.0
$305.3
$389.0
$275.0
$315.3
$388.0
$282.0
$324.0
$388.0
$282.0
$325.0
$391.0
$284.0
$329.0
$398.0
$291.0
$335.0
$398.0
$284.8
$328.3
$392.7
$289.1
$335.7
$390.7
$290.7
$334.1
$396.1
$292.0
$340.8
$408.3
$304.1
$342.7
$408.3
$304.1
$342.7
$417.3
$313.8
$353.3
Revenue Growth (%)
10.0%
3.1%
3.8%
4.8%
3.9%
9.8%
5.7%
2.2%
1.3%
2.4%
3.1%
2.3%
4.5%
SG&A Margin (%)
SG&A Margin Change (bp)
20.5%
176
21.1%
60
24.1%
146
20.8%
42
20.7%
(1)
21.1%
16
21.6%
45
23.3%
(87)
20.6%
(27)
20.1%
(58)
21.1%
(8)
21.2%
(41)
21.6%
43
Depreciation & Amortization
Operating Income
$335
$803
$345
$890
$85
$128
$88
$287
$96
$256
$104
$334
$84
$143
$82
$297
$93
$288
$100
$347
Total Interest (net)
EBT
($126)
$677
($106)
$785
($24)
$104
($40)
$247
($21)
$235
($23)
$310
($109)
$895
($23)
$120
($22)
$275
($24)
$264
($23)
$323
($92)
$983
($87)
$1,047
Income Taxes
Minority Interest
Adjusted Net Earnings
$178
$0
$499
$220
$3
$569
$28
$5
$71
$68
$9
$181
$56
$6
$172
$87
$15
$208
$239
$35
$632
$34
$16
$71
$77
$16
$182
$74
$16
$174
$91
$16
$217
$275
$64
$644
$293
$64
$690
EPS (Basic)
Adjusted EPS (Diluted)
$6.13
$6.10
$7.06
$7.02
$0.88
$0.88
$2.27
$2.26
$2.19
$2.17
$2.68
$2.65
$8.00
$7.94
$0.92
$0.91
$2.36
$2.34
$2.26
$2.24
$2.83
$2.80
$8.36
$8.28
$9.01
$8.92
81.4
81.8
80.7
81.2
79.9
80.5
79.5
80.1
78.7
79.2
77.8
78.6
79.0
79.6
77.5
78.3
77.2
78.0
76.9
77.7
76.6
77.4
77.0
77.8
76.6
77.4
Basic Shares Outstanding (mln)
Diluted Shares Outstanding (mln)
$372
$1,004
$360
$1,075
$373
$1,134
Exhibit 44: Canadian Tire Balance Sheet (C$ mln)
Canadian Tire
F2012
F2013
F2014
F2015E
F2016E
(Year ended December)
Assets:
Current Assets:
Cash & Cash Equivalents
$1,016
$643
$662
$565
$946
Short-Term Investments
$169
$417
$289
$289
$289
Trade & Other Receivables
$751
$759
$880
$907
$956
$4,266
$4,570
$4,906
$4,906
$4,906
Income Tax Recoverable
$48
$32
$32
$32
$32
Prepaid Expenses & Deposits
$39
$68
$105
$105
$105
Loans Receivables
Merchandise Inventories
Assets Held For Sale
$6
$9
$13
$13
$13
$7,796
$7,978
$8,510
$8,493
$8,995
LT Receivables & Other Assets
$681
$686
$684
$684
$684
LT Investments
$183
$135
$176
$176
$176
$1,090
$1,186
$1,252
$1,163
$1,069
Total Current Assets
Non-Current Assets:
Goodwill & Intangible Assets
Investment Properties
$95
$94
$149
$149
$149
Property & Equipment
$3,344
$3,516
$3,743
$4,243
$4,628
Deferred Income Taxes
Total Assets
$40
$36
$39
$39
$39
$13,229
$13,630
$14,553
$14,946
$15,740
Liabilities & Shareholders' Equity
Current Liabilities:
Bank Indebtedness
$86
$69
$14
$14
$14
Deposits
$1,311
$1,178
$951
$951
$951
Trade & Other Payables
$1,631
$1,817
$1,961
$2,025
$2,113
Provisions
$186
$196
$206
$206
$206
Short-Term Borrowing
$119
$120
$200
$410
$525
Loans Payable
$624
$611
$604
$604
$604
$53
$58
$55
$55
$55
$662
$272
$588
$588
$588
$4,672
$4,322
$4,579
$4,852
$5,055
Income Taxes Payable
Current Portion of Long-Term Debt
Total Current Liabilities
Long-Term Provisions
$55
$38
$44
$44
$44
Long-Term Debt
$2,336
$2,339
$2,132
$1,867
$1,867
Long-Term Deposits
$1,112
$1,152
$1,286
$1,286
$1,286
$78
$100
$94
$94
$94
$212
$228
$788
$788
$788
Liabilities
$3,793
$3,858
$4,344
$4,079
$4,079
Total Liabilities
$8,464
$8,180
$8,922
$8,932
$9,134
$688
$587
$696
$535
$535
$3
$6
$3
$3
$3
($2)
$47
$82
$82
$82
$4,075
$4,527
$4,075
$4,620
$5,211
$0
$283
$775
$775
$775
$4,764
$5,450
$5,631
$6,015
$6,606
$13,229
$13,630
$14,553
$14,946
$15,740
Other Long-Term Liabilities
Shareholders' Equity
Capital Stock
Contributed Surplus
Accumulated Other Comprehensive Income
Retained Earnings
Non-controlling Interest
Total Shareholders' Equity
Total Liabilities & Shareholders' Equity
Exhibit 45: Canadian Tire Statement of Cash Flows (C$ mln)
Canadian Tire
F2012
F2013
F2014
F2015E
F2016E
$499
$573
$650
$708
$754
(Year ended September)
Operating Activities:
Net Income
Non-Cash Items:
Gross Impairment Loss on Loans Receivable
$324
Depreciation on Property & Equipment & Investment Property
$249
$254
$279
$271
$279
Income Tax Expense
$178
$220
$239
$275
$293
Net Finance Costs
$126
$106
$109
$92
$87
$86
$92
$93
$89
$93
Changes in Fair Value of Derivative Instruments
($1)
($38)
($34)
-
-
$16
-
-
-
-
Change in Fair Value of Redeemable Financial Instrument
-
-
$17
-
-
Other
$6
$15
$25
-
($34)
Amortization of Intangible Assets
Change in Operating Working Capital and Other
(4.9)
$270
($84)
($16)
($46)
($274)
($332)
-
($155)
($127)
($122)
Interest Received
Income Taxes Paid
-
($429)
Change in Loans Receivable
Interest Paid
-
$9
($110)
-
($101)
$12
$10
17.9
14.7
($161)
($191)
($257)
($275)
($293)
$702
$901
$586
Cash Flow from Operating Activities
$1,047
$1,093
Investing Activities:
Business Acquisitions
Acquisitions of Short-Term Investments
-
-
($264)
-
($339)
($432)
-
-
$361
$194
$665
-
-
($130)
($55)
($156)
-
-
Proceeds from the Maturity and Disposition of ST Investments
Acquisitions of Long-Term Investments
Proceeds from the Disposition of ST Investments
Additions to PP&E + Investment Property
$7
($222)
Proceeds from Assets Held for Sale
$1
($404)
-
$8
($539)
($770)
($665)
$30
$20
$21
-
-
($64)
($106)
($150)
-
-
$30
($22)
$3
-
-
-
($12)
-
-
-
($8)
($5)
($11)
-
($262)
($786)
($590)
($770)
($665)
$210
$115
Additions to Intangible Assets
Long-Term Receivables & Other Assets
Purchases of Stores
Other
Cash Flow from Investing Activities
($58)
-
Financing Activities:
Net Issuance of Short-Term Borrowing
($234)
($20)
$79
$235
$236
$236
-
-
($240)
($249)
($242)
-
-
-
-
Issuance of Loans Payable
Repayment of Loans Payable
Issuance of Share Capital
$12
$4
-
Repurchase of Share Capital
($33)
($106)
($291)
Issuance of LT Debt
$637
$265
$564
Repayment of LT Debt and Finance Lease Liabilities
($30)
($658)
($474)
($264)
Dividends Paid
($98)
($112)
($141)
($163)
Issuance of Trust Units to Non-controlling Interest
-
$303
-
-
Trust Unit Issue Costs
-
($24)
-
-
-
Distributions Paid to Non-controlling Interest
-
($4)
($20)
$0
$0
Proceeds on sale of ownership in Financial Services
-
-
$500
-
-
Transaction costs on sale of ownership in Financial Services
-
-
($23)
-
-
Payment of Transaction Costs Related to LT Debt
($3)
($1)
($2)
-
-
Change in Deposit
$41
($96)
($97)
-
Cash Flow From Financing Activities
$288
($462)
$89
($378)
($47)
Net Change in Cash & Cash Equivalents
$729
($347)
$85
($102)
$381
Cash & Cash Equivalents at Beginning of Period
$201
$930
$583
$667
$565
($0.2)
($0.3)
$643
$662
Effect of Exchange Rate Fluctuations on Cash Held
Cash & Cash Equivalents at End of Period
$1,016
(160.7)
-
$565
($162)
-
-
$946
Appendix B: Management and Board of Directors
Maureen J. Sabia, Non-executive Chairman of the Board
Ms. Sabia has served on Canadian Tire’s board since March 2007. She has been the Principal of
her own consulting practice since 1986. Ms. Sabia has an extensive background with both private
and public organizations. Prior to joining Canadian Tire’s board of directors, Ms. Sabia served on
the boards of O&Y FPT and Medway Capital. She also served as Director of several companies,
including Gulf Canada, Laurentian General Insurance, and Skyjack. Ms. Sabia holds an Honours
Bachelor of Arts degree in English and History from McGill University, and Juris Doctor degree
from the Faculty of Law, University of Toronto.
Stephen G. Wetmore, Non-executive Deputy Chairman of the Board
Mr. Wetmore served as Canadian Tire’s Chief Executive Officer from January 2009 to December
2014. Prior to joining Canadian Tire, Mr. Wetmore served as the Head of New Bell Aliant Income
Fund of BCE Inc. He also served as Chairman at Atlantic Provinces Economic Council, ChairmanNova Scotia Council at Scouts Canada, Executive Vice President at BCE, Inc., and Managing
Director at Scotia Holdings Plc. He is a Chartered Accountant and Member of the Canadian
Institute of Chartered Accountants. Mr. Wetmore holds Bachelor Degree in Commerce from
Acadia University.
Michael B. Medline, President and Chief Executive Officer
Mr. Medline has served as President since November 2013, and was appointed Chief Executive
Officer effective December 2014 in conjunction with the departure of Stephen G. Wetmore.
During his 13-year tenure at Canadian Tire, Mr. Medline has led the company through various
strategic initiatives and acquisitions, including Mark’s, Forzani Group, Pro Hockey Life, and the
May 2014 partnership with Scotiabank. Mr. Medline holds an MBA from the College of William
and Mary in Virginia, an LL.B. from the University of Toronto, and a BA from the University of
Western Ontario.
Dean McCann, Executive Vice-President and Chief Financial Officer
Mr. McCann was appointed Executive Vice President and Chief Financial Officer in March 2012.
Mr. McCann joined Canadian Tire in 1996, and held various senior positions at Canadian Tire
Financial Services and Canadian Tire Bank. Under his leadership, CT REIT was formed. Dean is a
Chartered Accountant and a graduate of the McMaster Chartered Director program. In addition,
he has held senior positions with the Boards of Niagara College and YMCA Niagara.
Allan MacDonald, Chief Operating Officer
Mr. MacDonald has served as Chief Operating Officer since May 2013. In his current role, Mr.
MacDonald is responsible for Canadian Tire’s operations including merchandizing, marketing,
supply chain, information technology, automotive, and digital and social integration. Previously,
Mr. MacDonald led the turnaround of Canadian Tire’s heritage Automotive business, and served
as the company’s Chief Marketing Officer. Prior to joining Canadian Tire, Mr. MacDonald held
several senior positions at Bell Canada, Aliant Inc., and British Telecom. He holds a Bachelor’s
degree in Business Administration from Acadia University and an MBA from Henley Management
College in England.
James R. Christie, Executive Vice-President
Mr. Christie has served in his current role since October 2013. Prior to joining Canadian Tire, Mr.
Christie was a Partner at Blake, Cassels & Graydon LLP. From 1995 to 2001, Mr. Christie was
Managing Partner of Blake’s and served as Chairman of the Firm from 2001 to 2009. Mr. Christie
graduated with a Bachelor of Laws Degree from the University of Toronto and was called to the
Bar of Ontario in 1978.
Eugene O. Roman, Senior Vice-President and Chief Technology Officer
Mr. Roman has served as Canadian Tire’s Chief Technology Officer since 2012. Previously, he held
the positions of Group President, Systems and Technology at Bell Canada (2002-2008) and Chief
Information and Technology Officer at Open Text (2008-2012). He holds a Master’s Degree in
Administration, Bachelor’s Degree in Economics, is a Certified Management Accountant, and is a
graduate of the Institute of Corporate Directors program. Mr. Roman is also an industry professor
in Design Engineering at McMaster University.
Risks
General Economic Conditions
The company’s business and operating performance may be adversely affected by economic
forces beyond its control. Rising consumer debt levels and changes in consumer preferences and
buying patterns, as well as changes in unemployment rate and labour costs could negatively
impact the company’s performance. External factors that affect global and/or regional economies,
interest rates, exchange rates, or major segments of the economy could alter investor confidence
and investment prospects; an increase in minimum wage could have an adverse impact on
operating costs and earnings.
Competitive Landscape
The Canadian retail landscape is highly competitive and continues to attract new entrants. The
industry has been undergoing significant changes over the years, with the most recent entrants
including US retail giants Target (first store opened in Ontario in 2013), and Nordstrom (first store
opened in Calgary in 2014). An increase in competition may result in price wars, market share loss,
and reduced sales and profitability.
Unfavourable Extreme Weather
Canadian Tire’s retail stores offer a large selection of seasonal merchandize. Unseasonable
weather can result in lower traffic to Canadian Tire stores and deter consumers from purchasing
seasonal products related to weather, such as snow blowers and gardening tools.
Supply Chain Disruption
Disruptions or delays in store inventory replenishment could negatively impact operations and
profitability. Factors resulting in disruptions of supply chain could include, but are not limited to,
shipping slowdown or disruption due to extreme weather conditions.
Commodity Price and Disruption
The operating performance of Canadian Tire Petroleum may be adversely impacted by the
fluctuations in the price of oil. The price of oil is subject to geopolitical, global supply, and demand
conditions, in addition to market speculation.
Foreign Currency
Canadian Tire sourced approximately 43% of its purchases in 2013 from global vendors, in
particular Asia. As purchases are made in US dollars, unfavourable currency fluctuations relative
to the Canadian dollar may adversely impact the company’s profitability. In order to mitigate the
impact of fluctuating foreign exchange rates, Canadian Tire has a comprehensive foreign exchange
hedge portfolio in place.
Company Citations
Company Name
Advance Auto Parts, Inc.
Amazon.com Inc.
Apple Inc.
AutoZone, Inc.
Best Buy Company, Incorporated
Cabela’s Inc.
Callaway Golf Co.
Cineplex Inc.
CT Real Estate Investment Trust
Dick`s Sporting Goods Inc.
eBay Inc.
Loblaw Companies Ltd.
Lowe`s Companies, Inc.
MasterCard, Inc.
Metro
Metro, Inc.
NetSuite, Inc.
O`Reilly Automotive, Inc.
Open Text
Retail Opportunity Investments Corp.
The Home Depot Inc.
Visa, Inc.
Whirlpool Corp.
Ticker
AAP
AMZN
AAPL
AZO
BBY
CAB
ELY
CGX
COST
CRT.UN
DKS
EBAY
HIBB
L
LOW
MA
MEOG.DE
MRU
N
ORLY
OTEX
ROIC
HD
V
WMT
WHR
Exchange
NYSE
NASDAQ
NASDAQ
NYSE
NYSE
NYSE
NYSE
TSX
NASDAQ
TSX
NYSE
NASDAQ
NASDAQ
TSX
NYSE
NYSE
XETRA
TSX
NYSE
NASDAQ
NASDAQ
NASDAQ
NYSE
NYSE
NYSE
NYSE
Currency
US$
US$
US$
US$
US$
US$
US$
C$
US$
C$
US$
US$
US$
C$
US$
US$
€
C$
US$
US$
US$
US$
US$
US$
US$
US$
Closing Price
148.61
445.10
130.28
702.00
35.39
54.19
9.89
49.11
148.12
12.74
56.59
59.20
48.97
62.99
73.16
90.72
33.30
35.48
91.45
229.35
55.83
17.71
113.70
67.48
79.84
196.49
RJ Rating
1
2
3
1
3
2
3
2
3
3
3
2
3
2
3
3
2
2
3
1
2
3
3
3
2
3
RJ Entity
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RATINGS AND DEFINITIONS
Raymond James Ltd. (Canada) definitions: Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least
15% and outperform the S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and
outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to perform
generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of funds for more highly
rated securities. Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next
six to twelve months and should be sold.
Raymond James & Associates (U.S.) definitions: Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and
outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain
MLPs, a total return of at least 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and
outperform the S&P 500 over the next 12-18 months. For higher yielding and more conservative equities, such as REITs and certain MLPs,
an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return
modestly exceeding the dividend yield over the next 12-18 months. Market Perform (MP3) Expected to perform generally in line with the
S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12
months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to
market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances,
including when Raymond James may be providing investment banking services to the company. The previous rating and price target are
no longer in effect for this security and should not be relied upon.
Raymond James Latin American rating definitions: Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0%
over the next twelve months. Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over
the next twelve months. Market Perform (MP3) Expected to perform in line with the underlying country index. Underperform (MU4)
Expected to underperform the underlying country index. Suspended (S) The rating and price target have been suspended temporarily.
This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in
certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous
rating and price target are no longer in effect for this security and should not be relied upon.
Raymond James Euro Equities, SAS rating definitions: Strong Buy (1) Expected to appreciate, produce a total return of at least 15%, and
outperform the Stoxx 600 over the next 6 to 12 months. Outperform (2) Expected to appreciate and outperform the Stoxx 600 over the
next 12 months. Market Perform (3) Expected to perform generally in line with the Stoxx 600 over the next 12 months. Underperform (4)
Expected to underperform the Stoxx 600 or its sector over the next 6 to 12 months. Suspended (S) The rating and target price have been
suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable
regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the
company. The previous rating and target price are no longer in effect for this security and should not be relied upon.
In transacting in any security, investors should be aware that other securities in the Raymond James research coverage universe might
carry a higher or lower rating. Investors should feel free to contact their Financial Advisor to discuss the merits of other available
investments.
Suitability Categories (SR): Total Return (TR) Lower risk equities possessing dividend yields above that of the S&P 500 and greater
stability of principal. Growth (G) Low to average risk equities with sound financials, more consistent earnings growth, at least a small
dividend, and the potential for long-term price appreciation. Aggressive Growth (AG)
Medium or higher risk equities of companies in
fast growing and competitive industries, with less predictable earnings and acceptable, but possibly more leveraged balance sheets. High
Risk (HR) Companies with less predictable earnings (or losses), rapidly changing market dynamics, financial and competitive issues,
higher price volatility (beta), and risk of principal. Venture Risk (VR) Companies with a short or unprofitable operating history, limited or
less predictable revenues, very high risk associated with success, and a substantial risk of principal.
RATING DISTRIBUTIONS
Coverage Universe Rating Distribution
Investment Banking Distribution
RJL
RJA
RJ LatAm
RJEE
RJL
RJA
RJ LatAm
RJEE
Strong Buy and Outperform (Buy)
65%
54%
50%
47%
46%
24%
0%
0%
Market Perform (Hold)
33%
40%
50%
28%
16%
9%
0%
0%
Underperform (Sell)
2%
6%
0%
25%
0%
0%
0%
0%
RAYMOND JAMES RELATIONSHIP DISCLOSURES
Raymond James Ltd. or its affiliates expects to receive or intends to seek compensation for investment banking services from all
companies under research coverage within the next three months.
Company Name
Disclosure
Raymond James Ltd - the analyst and/or associate has viewed the material operations of Canadian
Tire Corporation.
STOCK CHARTS, TARGET PRICES, AND VALUATION METHODOLOGIES
Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and
quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management
effectiveness; competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to
change depending on overall economic conditions or industry- or company-specific occurrences.
Target Prices: The information below indicates our target price and rating changes for the stock over the past three years.
Valuation Methodology: We value Canadian Tire on a sum-of-parts valuation based on historical and peer EV/EBITDA multiples,
and the imputed value of CT REIT.
RISK FACTORS
General Risk Factors: Following are some general risk factors that pertain to the projected target prices included on Raymond James
research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact
expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change
investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or
accounting policies or practices could alter the prospective valuation.
Consumer & Retail - Risks
The projected 6-12 month target prices in our Consumer & Retail coverage universe are exposed to a diverse set of risks due to the broad
range of included industries and verticals. The risks include, but are not limited to, commodity (input) cost volatility (cotton, coffee, corn),
increased competitive intensity, supply chain disruptions, management changes, regulatory changes and environmental, interest rate,
hedging and political risks. In addition, changes in key macro-economic economic indicators, including GDP, CPI, PPI, personal
consumption expenditure, consumer confidence, consumer debt levels and changes in labour market dynamics, can materially affect the
earnings power, applicable valuation metrics, and target prices of companies in our coverage universe.
Risks -- Canadian Tire Corporation
General Economic Conditions
The company’s business and operating performance may be adversely affected by economic forces beyond its control. Rising consumer
debt levels and changes in consumer preferences and buying patterns, as well as changes in unemployment rate and labour costs could
negatively impact the company’s performance. External factors that affect global and/or regional economies, interest rates, exchange
rates, or major segments of the economy could alter investor confidence and investment prospects; an increase in minimum wage could
have an adverse impact on operating costs and earnings.
Competitive Landscape
The Canadian retail landscape is highly competitive and continues to attract new entrants. The industry has been undergoing significant
changes over the years, with the most recent entrants including US retail giants Target (first store opened in Ontario in 2013), and
Nordstrom (first store opened in Calgary in 2014). An increase in competition may result in price wars, market share loss, and reduced
sales and profitability.
Unfavourable Extreme Weather
Canadian Tire’s retail stores offer a large selection of seasonal merchandize. Unseasonable weather can result in lower traffic to Canadian
Tire stores and deter consumers from purchasing seasonal products related to weather, such as snow blowers and gardening tools.
Supply Chain Disruption
Disruptions or delays in store inventory replenishment could negatively impact operations and profitability. Factors resulting in
disruptions of supply chain could include, but are not limited to, shipping slowdown or disruption due to extreme weather conditions.
Commodity Price and Disruption
The operating performance of Canadian Tire Petroleum may be adversely impacted by the fluctuations in the price of oil. The price of oil
is subject to geopolitical, global supply, and demand conditions, in addition to market speculation.
Foreign Currency
Canadian Tire sourced approximately 43% of its purchases in 2013 from global vendors, in particular Asia. As purchases are made in US
dollars, unfavourable currency fluctuations relative to the Canadian dollar may adversely impact the company’s profitability. In order to
mitigate the impact of fluctuating foreign exchange rates, Canadian Tire has a comprehensive foreign exchange hedge portfolio in place.
Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability
categories, is available for Raymond James at rjcapitalmarkets.com/Disclosures/index and for Raymond James Limited at
www.raymondjames.ca/researchdisclosures.
INTERNATIONAL DISCLOSURES
FOR CLIENTS IN THE UNITED STATES:
Any foreign securities discussed in this report are generally not eligible for sale in the U.S. unless they are listed on a U.S. exchange. This
report is being provided to you for informational purposes only and does not represent a solicitation for the purchase or sale of a security
in any state where such a solicitation would be illegal. Investing in securities of issuers organized outside of the U.S., including ADRs, may
entail certain risks. The securities of non-U.S. issuers may not be registered with, nor be subject to the reporting requirements of, the
U.S. Securities and Exchange Commission. There may be limited information available on such securities. Investors who have received
this report may be prohibited in certain states or other jurisdictions from purchasing the securities mentioned in this report. Please ask
your Financial Advisor for additional details and to determine if a particular security is eligible for purchase in your state.
Raymond James Ltd. is not a U.S. broker‐dealer and therefore is not governed by U.S. laws, rules or regulations applicable to U.S.
broker‐dealers. Consequently, the persons responsible for the content of this publication are not licensed in the U.S. as research analysts
in accordance with applicable rules promulgated by the U.S. Self Regulatory Organizations.
Any U.S. Institutional Investor wishing to effect trades in any security should contact Raymond James (USA) Ltd., a U.S. broker‐dealer
affiliate of Raymond James Ltd.
FOR CLIENTS IN THE UNITED KINGDOM:
For clients of Raymond James & Associates (London Branch) and Raymond James Financial International Limited (RJFI): This document
and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons
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For clients of Raymond James Investment Services, Ltd.: This report is for the use of professional investment advisers and managers and
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For purposes of the Financial Conduct Authority requirements, this research report is classified as independent with respect to conflict of
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Authority in the United Kingdom.
FOR CLIENTS IN FRANCE:
This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed,
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persons and may not be relied upon by such persons and is therefore not intended for private individuals or those who would be
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For institutional clients in the European Economic Area (EEA) outside of the United Kingdom: This document (and any attachments or
exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted.
Raymond James International and Raymond James Euro Equities are authorized by the Autorité de contrôle prudentiel et de résolution in
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Proprietary Rights Notice: By accepting a copy of this report, you acknowledge and agree as follows:
This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by
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Additional information is available upon request. This document may not be reprinted without permission.
RJL is a member of the Canadian Investor Protection Fund. ©2015 Raymond James Ltd.
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Canada Research Canadian Tire Corporation

Transcription

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