Canadian Tire 2006 net earnings rise 7.4% to $354.6 million; net operating earnings up 10.7%
----------------------------------------------- Year-over- Year-over- Consolidated 2006 year 2006 year Highlights(1): 4th Quarter change Full year change ------------------------------------------------------------------------- Retail sales $2.92 billion 5.9% $9.77 billion 7.4% Gross operating revenue(2) $2.43 billion 5.3% $8.27 billion 7.1% Earnings before income taxes and minority interest $169.2 million (10.0)% $557.8 million 5.7% Net earnings $108.3 million (8.4)% $354.6 million 7.4% Net earnings excluding non-operating gains and losses(3) $98.8 million (6.8)% $347.5 million 10.7% Basic earnings per share $1.33 (8.1)% $4.35 7.7% Adjusted basic earnings per share excluding non-operating gains and losses(3) $1.21 (6.5)% $4.26 11.0% (1) All dollar figures in this table are rounded. (2) Gross operating revenue numbers for 2005 have been restated for the adoption of EIC-156, "Accounting by a Vendor for Consideration given to a Customer", as required by the Canadian Institute of Chartered Accountants (CICA). (3) Non-GAAP measure, please refer to Section 12.0 of Management's Discussion and Analysis contained in the 2005 Annual Report.TORONTO, Feb. 8 /CNW/ - Canadian Tire Corporation, Limited (CTC, CTC.a) today reported 2006 net earnings of $354.6 million, an increase of 7.4 percent compared to $330.1 million in 2005. Excluding non-operating gains and losses, net earnings were $347.5 million, an increase of 10.7 percent compared to $313.8 million last year. Basic earnings per share were $4.35 in 2006, an increase of 7.7 percent compared to $4.04 per share recorded in 2005. Excluding non-operating gains and losses, adjusted basic earnings per share increased 11.0 percent to $4.26 compared to $3.84 the previous year. Fourth quarter net earnings totaled $108.3 million, an 8.4 percent decrease compared to $118.2 million for the corresponding 2005 period. Excluding non-operating gains and losses, net earnings for the quarter were $98.8 million, a 6.8 percent decrease compared to $106.1 million last year. Basic earnings per share were $1.33, an 8.1 percent decrease from the $1.44 recorded in the same period last year. Excluding non-operating gains and losses, adjusted basic earnings per share declined 6.5 percent to $1.21 compared to $1.30 in 2005. "During 2006 we experienced sales and revenue growth across each of our businesses reflecting healthy customer support for our products, services and store formats," said Tom Gauld, president and CEO. "Although the fourth quarter at Canadian Tire Retail was impacted by unseasonably warm weather in Eastern Canada and lower than expected dealer purchases in December, our consolidated 2006 net operating earnings grew by approximately 11 percent on revenue growth of 7 percent. The fundamentals of our business remain strong and our growth initiatives are working. In 2007, we will continue to improve and expand the number of our Concept 20/20 stores as well as the number of Mark's Work Wearhouse, PartSource and Petroleum outlets. Expansion of the successful Gas Advantage MasterCard, the introduction of new credit cards and the ongoing testing of high interest savings accounts, guaranteed investment certificates and mortgages will fuel longer-term growth at Financial Services while strengthening loyalty among our retail customers. During 2007, we will also be introducing a number of initiatives within Canadian Tire Retail to improve efficiency and productivity in our operations," added Gauld.Business Overview CANADIAN TIRE RETAIL (CTR) Q4 Q4 ($ in millions) 2006 2005 Change 2006 2005 Change ------------------------------------------------------------------------- Retail sales $2,156.7 $2,065.5 4.4% $7,226.8 $6,855.6 5.4% Same store sales (1) (year-over-year % change) 2.2% 5.4% 3.5% 3.4% Net shipments (2) (year-over-year % change) 3.8% 8.6% 4.9% 5.0% Earnings before income taxes and minority interest $71.5 $86.9 (17.8)% $306.1 $290.2 5.5% ------------------------------------------------------------------------- Less adjustment for: Gain on disposals of property and equipment $48.1 $7.0 $59.8 $12.4 Stock option agreement modification $(32.2) - $(32.2) - Loss on medium term notes redemption - - - $(5.3) ------------------------------------------------------------------------- Adjusted earnings before income taxes and minority interest $55.6 $79.9 (30.4)% $278.5 $283.1 (1.6)% ------------------------------------------------------------------------- (1) Same store sales include sales from stores that have been open for more than 53 weeks, including stores that have been expanded by more than 25 percent in the last year. (2) Net shipments are the total value of merchandise shipped to Canadian Tire and franchise PartSource stores, and through our online web store, less discounts and net of returns, recorded at the wholesale price charged to Associate Dealers and PartSource franchisees. The year-over-year percentage change for 2005 net shipments has been adjusted for "EIC-156" as required by the CICA.CTR's fourth quarter retail sales grew to $2.16 billion from $2.07 billion, an increase of 4.4 percent. Same store sales increased 2.2 percent in the quarter, led by strong sales in kitchen and home appliances, Christmas seasonal décor, toys and sports equipment. Results in the quarter were impacted by a decline in the sale of weather-related merchandise in December, which typically accounts for 20 percent of sales in the fourth quarter, due to the warm weather in Ontario and Quebec. For the year, CTR's retail sales grew 5.4 percent to $7.23 billion from $6.86 billion in 2005 while same store sales increased 3.5 percent. CTR's fourth quarter pre-tax earnings of $71.5 million decreased 17.8 percent from $86.9 million in the comparable 2005 period. The decrease in earnings largely reflects the reduced sales of weather-related products and a considerable drawdown of inventory in stores. CTR's adjusted fourth quarter pre-tax earnings of $55.6 million decreased 30.4 percent from $79.9 million in the same period last year. For the year, pre-tax earnings totaled $306.1 million, a 5.5 percent increase over the $290.2 million recorded in 2005. Adjusted pre-tax earnings in 2006 decreased 1.6 percent, to $278.5 million compared to $283.1 million in the previous year. Adjusted pre-tax earnings exclude the gain on disposals of property and equipment, which includes the sale of a strategic property in Toronto that closed in the fourth quarter, and the impact of previously disclosed amendments to the existing stock option agreements. In 2006, the Company initiated a note repayment for a real-estate partnership in which Canadian Tire was the general partner. Consolidated earnings benefited from the related elimination of minority interest, however CTR's year-over-year pre-tax earnings were negatively impacted by $9.4 million in costs associated with this transaction. As disclosed in the third quarter, amendments to the Company's stock option agreements impacted fourth quarter earnings by $40.5 million, of which CTR's share was $32.2 million with the balance absorbed by Mark's and Financial Services. The amendments will provide greater transparency to shareholders on the cost of stock options and will result in lower administrative costs and a more favourable tax treatment of stock option costs for the Company. CTR completed 73 Concept 20/20 projects during the year, opening seven new stores, retrofitting 53 stores, replacing 12 and expanding one store. The total number of Concept 20/20 stores now stands at 126. Sales at Concept 20/20 stores are higher than in previous store formats because the Concept 20/20 stores are larger, more modern and offer an expanded product assortment. In 2006, for example, same store sales at Concept 20/20 stores were up 8.0 percent. The strong sales performance of Concept 20/20 stores led to the decision to accelerate the format rollout in 2006 and 2007. The CTR network now totals 468 stores, including 23 Canadian Tire-Mark's Work Wearhouse combination stores, with total retail space of 16.2 million square feet. PartSource generated double-digit sales growth in the fourth quarter and for the full year, driven by the continued expansion of the network and growth in the commercial and retail customer segments. In 2006, PartSource opened six new stores and converted three stores that were acquired in 2005 to the PartSource banner, bringing the total network to 63 stores.CANADIAN TIRE PETROLEUM (Petroleum) Q4 Q4 ($ in millions) 2006 2005 Change 2006 2005 Change ------------------------------------------------------------------------- Sales volume (millions of litres) 457.4 396.3 15.4% 1,701.2 1,592.3 6.8% Retail sales $399.8 $367.5 8.8% $1,635.4 $1,444.2 13.2% Earnings (loss) before income taxes $(6.0) $3.0 (299.4)% $(5.4) $7.5 (172.9)% ------------------------------------------------------------------------- Less adjustment for: Gain (loss) on disposals of property and equipment $(0.3) $(0.2) $(0.6) $0.1 ------------------------------------------------------------------------- Adjusted earnings (loss) before income taxes $(5.7) $3.2 (279.9)% $(4.8) $7.4 (165.7)% -------------------------------------------------------------------------Petroleum's gasoline sales volumes increased 15.4 percent during the fourth quarter to 457.4 million litres from 396.3 million litres in the comparable 2005 period. The increase reflects the cumulative effect of Petroleum's expansion, strong customer response to the Gas Advantage MasterCard in Ontario, and ongoing promotions designed to continue driving sales at CTR and loans receivable at Financial Services. For the year, gasoline sales volumes grew by 6.8 percent to 1.7 billion litres from 1.6 billion litres in 2005. Non-gasoline sales also increased, led by a 16.5 percent rise in convenience store sales for the quarter and a 14.8 percent increase for the year. Petroleum recorded a pre-tax loss of $6.0 million for the quarter compared to a pre-tax profit of $3.0 million in the same 2005 period. The decrease was a result of significantly reduced gasoline margins in the highly competitive regions of Ontario and Quebec, where the majority of Petroleum sites are located, as well as increased environmental expenses, partially offset by improved comparable site gasoline volumes. Adjusted earnings also declined during the quarter with Petroleum reporting a loss of $5.7 million compared to a profit of $3.2 million one year ago. For the year, Petroleum posted a pre-tax loss of $5.4 million compared to a pre-tax profit of $7.5 million in 2005. Adjusted earnings declined during the year with Petroleum reporting a loss of $4.8 million compared to a profit of $7.4 million in 2005. Petroleum opened three new gas bars, four car washes and three convenience stores, including one "Q" site, during 2006. Petroleum also re-branded seven gas bars including five convenience stores and three car washes during the year.MARK'S WORK WEARHOUSE (Mark's) Q4 Q4 ($ in millions) 2006 2005 Change 2006 2005 Change ------------------------------------------------------------------------- Total retail sales $367.2 $326.6 12.4% $903.0 $790.7 14.2% Same store sales(1) (% increase over prior year) 10.0% 17.4% 13.0% 17.4% Earnings before income taxes $50.0 $42.2 18.7% $90.1 $65.0 38.8% ------------------------------------------------------------------------- Loss on disposal of property and equipment (0.5) (0.9) (1.2) (1.3) Stock option agreement modification (2.7) - (2.7) - ------------------------------------------------------------------------- Adjusted earnings before income taxes $53.2 $43.1 23.6% $94.0 $66.3 41.7% ------------------------------------------------------------------------- (1) Mark's same store sales exclude new stores, stores not open for the full period in each year and store closures.Mark's fourth quarter sales grew to $367.2 million, an increase of 12.4 percent from the $326.6 million recorded in the comparable 2005 period. Total same store sales rose 10.0 percent in the quarter. Sales of winter apparel and footwear, while up modestly in total, declined in Ontario and Quebec due to the unusually warm weather during December. Mark's strongest sales growth in the quarter was experienced in women's wear although growth in both industrial and casual men's wear also had a positive impact in the quarter. The opening of 15 new stores and the continued strong customer response to Mark's "Clothes That Work" marketing and merchandising strategy helped drive the growth in total retail sales in the fourth quarter. Mark's total retail sales for 2006 were $903.0 million, a 14.2 percent increase compared to $790.7 million a year ago, while total same store sales increased 13.0 percent in 2006. Mark's pre-tax earnings were $50.0 million for the quarter, an 18.7 percent increase over the $42.2 million recorded for the same period last year. The growth in earnings is attributable to the increase in same store sales and an improved gross margin rate. Adjusted fourth quarter pre-tax earnings increased 23.6 percent to $53.2 million compared to $43.1 million in the comparable 2005 period. Mark's pre-tax earnings for the year were $90.1 million, a 38.8 percent increase over the $65.0 million recorded in 2005. Adjusted pre-tax earnings in 2006 increased 41.7 percent, to $94.0 million compared to $66.3 million in the previous year. Mark's opened 18 new stores in 2006, including 10 new Canadian Tire-Mark's Work Wearhouse combination stores. Mark's also expanded or renovated 13 stores and relocated 14 stores during the year, bringing the total store network to 339 and total retail space to 2.7 million square feet.CANADIAN TIRE FINANCIAL SERVICES (Financial Services) Q4 Q4 ($ in millions) 2006 2005 Change 2006 2005 Change ------------------------------------------------------------------------- Total managed portfolio end of period $3,632.5 $3,395.1 7.0% Earnings before income taxes $53.7 $55.8 (3.7)% $167.0 $165.0 1.2% ------------------------------------------------------------------------- Less adjustment for: Gain on redemption of investment - - 6.9 - Loss on disposals of property and equipment (0.3) - (0.6) (0.3) Gain (loss) on sale of loans receivable 8.2 13.0 (12.7) 19.9 Stock option agreement modification (5.6) - (5.6) - ------------------------------------------------------------------------- Adjusted earnings before income taxes $51.4 $42.8 20.1% $179.0 $145.4 23.1% -------------------------------------------------------------------------Financial Services' total managed portfolio of loans receivable was $3.6 billion at the end of 2006, a 7.0 percent increase over the $3.4 billion portfolio at the end of 2005. The expansion of the total managed portfolio is attributable to continued growth in the number of accounts carrying a balance and an 8.2 percent increase in the average account balance to $1,837 at the end of 2006 from $1,698 at the end of 2005. Portfolio growth also benefited from the expansion of the new Gas Advantage MasterCard throughout Ontario. Financial Services' pre-tax earnings for the fourth quarter were $53.7 million, a 3.7 percent decrease from the $55.8 million recorded in the fourth quarter of 2005. Continued portfolio growth, tight expense management that resulted in a reduction in the operating expense ratio, and a substantial improvement in the aging trends in loans receivable helped offset lower year-over-year gains on the sale of loans receivable and $6.1 million in expenses related to the retail banking initiative. Excluding the gain on sale of loans receivable and Financial Services share of the impact of the stock option agreement modification, the fourth quarter adjusted earnings before income taxes increased 20.1 percent to $51.4 million from $42.8 million for the same period last year. For the year, Financial Services recorded pre-tax earnings of $167.0 million, a 1.2 percent increase over the $165.0 million recorded in 2005. Adjusted earnings increased 23.1 percent to $179.0 million compared to $145.4 million in the previous year. The net write-off rate for 2006 was 6.0 percent, at the high end of the targeted range of five to six percent. Financial Services launched two initiatives during the year to enhance the division's growth and profitability. The expansion of the Gas Advantage MasterCard throughout Ontario continued to receive favourable customer response at Petroleum's gas pumps. Financial Services also introduced retail banking products in two pilot markets in the fall of 2006, including high interest savings accounts, guaranteed investment certificates and mortgages. The pilot represents an opportunity to leverage Financial Services' capabilities and customer loyalty to drive growth beyond 2009. 2007 PLANS AND FORECAST The Company's earnings forecast, based on its 2007 business plan, is in the range of $4.65 to $4.85 per share, excluding non-operating items, and contemplates the following key initiatives:- Continued roll-out of approximately 70 CTR Concept 20/20 projects, of which nine will be additions to the chain. Total retail square feet will increase approximately 10 percent by the end of the year. - The addition of eight new PartSource stores and continued acquisitions of small independent or regional competitors. - Continued expansion of Mark's retail space through approximately 55 projects, of which 29 will be additions to the chain. Total retail square feet will increase approximately 14 percent by the end of the year. - Developing and testing at least one new store format integrating the complete Mark's concept with a larger Canadian Tire store. - The addition of five new and five re-branded Petroleum sites, in line with the interrelated marketing objective to enhance traffic and customer loyalty for CTR and Financial Services credit cards. - Further regional expansion of the Gas Advantage MasterCard business and the testing of at least one additional new card product. - The continued testing of the new high interest savings accounts, guaranteed investment certificates and mortgages in the two pilot regions. In addition, a number of new initiatives will be launched within CTR to enhance the long-term competitiveness and productivity of its operations, including: 1) Upgrade and simplification of information technology (IT) infrastructure and applications to reduce IT operating costs and enhance the productivity of Canadian Tire's workforce. 2) Improvements to Dealer ordering and shipping processes to better align the flow of product to the stores and customer purchase patterns, thereby reducing corporate and store inventory levels and operational complexity. 3) Enhancements to the automotive parts supply chain capabilities to support PartSource expansion and continued growth and efficiencies at CTR.The 2007 earnings forecast includes approximately $25 million in expenses, or $0.20 per share, for the retail banking initiative. The forecast also includes targeted incremental expenditures to support the productivity and technology initiatives noted above. Total projected capital spending for 2007 will be in the range of $580 to $620 million, the majority of which will support store and network expansions and the completion of the new Eastern Canada distribution centre planned to open in 2008 and be fully operational in 2009. "We have an aggressive plan this year designed to meet our short and long-term growth objectives while balancing the need to improve operational efficiencies and ensure we have robust and scaleable infrastructure for the future," noted Gauld. DIVIDENDS The Board of Directors today approved an increase in the 2007 quarterly dividend payments from $0.165 per share to $0.185 per share, an annualized increase of 12 percent. The total annualized dividend payment will rise from $0.66 per share to $0.74 per share. Declaration of the increased dividend is expected in March 2007 for payment on June 1, 2007 to shareholders of record as of April 30, 2007. Canadian Tire's policy is to maintain dividend payments equal to approximately 15 to 20 percent of the prior year's normalized basic net earnings per share, after giving consideration to the period end cash position, future cash requirements and investment opportunities. Normalized net earnings per share for this purpose exclude gains and losses on the sale of credit card and loans receivable and non-recurring items but include gains and losses on the ordinary course disposition of property and equipment. Dividends paid by the Corporation in 2006 and subsequent years are considered "eligible dividends" under the draft federal tax legislation contained in Bill C-28. Under the proposed legislation, eligible dividends received by an individual are subject to a lower rate of tax than non-eligible dividends. FORWARD-LOOKING STATEMENTS This disclosure contains statements that are forward-looking. Actual results or events may differ materially from those forecasted in this disclosure because of the risks and uncertainties associated with Canadian Tire's business and the general economic environment. Risks and uncertainties are disclosed in other public filings by the Company, such as Management's Discussion and Analysis in the Annual Report and include, but are not limited to: changes in interest, currency exchange and tax rates; the ability of Canadian Tire to attract and retain quality employees, Associate Dealers, Petroleum agents and PartSource and Mark's Work Wearhouse store operators and franchisees; and the willingness of customers to purchase the Company's merchandise, financial products and services. Risk factors associated with the assumptions that underlie Canadian Tire's forecasted performance in 2007, as outlined previously, and that have the potential to affect the operating performance and results of the Company's divisions include:- expansion activity planned for Mark's, PartSource, Petroleum and CTR, including the associated supply chain infrastructure, could be affected by the Company's ability to acquire and develop suitable real estate properties and obtain municipal and other required government approvals, and the availability of construction material and labour; - unseasonable weather patterns could affect the sales of seasonal merchandise at CTR and Mark's, particularly in the second and fourth quarters which historically are these divisions' largest selling periods; - adverse environmental occurrences could damage the Company's reputation or threaten its licenses to operate, particularly in the Petroleum division; - changes in commodity prices could affect the profitability of Petroleum, CTR and Mark's; - the earnings of Financial Services could be affected by customers' inability to repay their Canadian Tire credit card or personal loan balances or by an unsatisfactory response to the retail banking pilot initiative; and - failure to comply with applicable laws and regulations could result in sanctions and financial penalties by regulatory bodies that could impact the Company's earnings and reputation. Areas of compliance include environment, health and safety, competition, transportation of dangerous goods, tax, customs and excise and regulations governing financial institutions.The Company has developed its 2007 forecast on the assumption that there will not be a material deviation in the risks described in this disclosure compared to the current operating environment. The Company cannot provide any assurance that forecasted financial or operational performance will actually be achieved, or if it is, that it will result in an increase in the price of Canadian Tire shares. REVIEW BY BOARD OF DIRECTORS The Canadian Tire Board of Directors, on the recommendation of its Audit Committee, has approved the contents of this disclosure. CONFERENCE CALL Canadian Tire will conduct a conference call to discuss information included in this news release and related matters at 4:00 p.m. EST on Thursday, February 8, 2007. The conference call will be available simultaneously and in its entirety to all interested investors and the news media through a webcast at http://investor.relations.canadiantire.ca, and will be available through replay at this website for one week. Canadian Tire Corporation, Limited (TSX: CTC, CTC.a), operates more than 1,100 stores, gas bars and car washes in an inter-related network of businesses engaged in retail, financial services and petroleum. Canadian Tire Retail, Canada's most shopped general merchandise retailer, with 468 stores operated by Associate Dealers across Canada offers a unique mix of products and services through three specialty categories in which the organization is the market leader - Automotive, Sports and Leisure, and Home Products. www.canadiantire.ca offers Canadians the opportunity to shop online. PartSource is an automotive parts specialty chain with 63 stores designed to meet the needs of purchasers of automotive parts - professional automotive installers and serious do-it-yourselfers. Canadian Tire Petroleum is one of the country's largest and most productive independent retailers of gasoline, operating 260 gas bars, 251 convenience stores and kiosks, and 74 car washes. Mark's Work Wearhouse is one of the country's leading apparel retailers operating 339 stores in Canada. Under the Clothes that Work™ marketing strategy, Mark's sells apparel and footwear in work, work-related, casual and active-wear categories, as well as health-care and business-to-business apparel. www.marks.com offers Canadians the opportunity to shop online. Canadian Tire Financial Services manages over 4 million Canadian Tire MasterCard accounts and markets related financial products and services for retail and petroleum customers. Canadians can also access Financial Services online at www.ctfs.com. Over 50,000 Canadians work across Canadian Tire's organization from coast-to-coast in the enterprise's retail, financial services, and petroleum businesses.2006 YEAR END INTERIM REPORT FINANCIALS Consolidated Statements of Earnings and Retained Earnings (Unaudited) ------------------------------------------------------------------------- (Dollars in millions except 13 weeks ended, 52 weeks ended, per share December 30, December 31, December 30, December 31, amounts) 2006 2005 2006 2005 ------------------------------------------------------------------------- (Restated (Restated - Note 2) - Note 2) Gross operating revenue $ 2,426.1 $ 2,304.3 $ 8,269.1 $ 7,721.6 ------------------------------------------------------------------------- Operating expenses Cost of merchandise sold and all other operating expenses except for the undernoted items 2,180.5 2,035.1 7,415.7 6,896.1 Interest Long-term debt (Note 5) 16.2 21.3 71.2 79.5 Short-term debt 2.4 1.7 4.5 4.6 Depreciation and amortization 51.0 49.2 191.7 185.0 Employee profit sharing plan 6.8 9.1 28.2 28.7 ------------------------------------------------------------------------- Total operating expenses 2,256.9 2,116.4 7,711.3 7,193.9 ------------------------------------------------------------------------- Earnings before income taxes and minority interest 169.2 187.9 557.8 527.7 Income taxes Current 80.0 74.0 222.7 187.2 Future (19.1) (6.3) (21.9) 2.8 ------------------------------------------------------------------------- Total Income taxes 60.9 67.7 200.8 190.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net earnings before minority interest 108.3 120.2 357.0 337.7 ------------------------------------------------------------------------- Minority interest (Note 11) - 2.0 2.4 7.6 ------------------------------------------------------------------------- Net earnings $ 108.3 $ 118.2 $ 354.6 $ 330.1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic earnings per share $ 1.33 $ 1.44 $ 4.35 $ 4.04 Diluted earnings per share (Note 7) $ 1.32 $ 1.43 $ 4.31 $ 3.98 ------------------------------------------------------------------------- Weighted average number of Common and Class A Non-Voting Shares outstanding 81,616,331 81,873,572 81,575,556 81,764,082 ------------------------------------------------------------------------- Retained earnings, beginning of period $ 1,812.6 $ 1,546.9 Net earnings 354.6 330.1 Dividends (53.8) (47.4) Repurchase of Class A Non-Voting Shares (Note 8) (25.3) (17.0) ------------------------------------------------------------------------- Retained earnings, end of period $ 2,088.1 $ 1,812.6 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statements of Cash Flows (Unaudited) ------------------------------------------------------------------------- 13 weeks ended, 52 weeks ended, (Dollars in December 30, December 31, December 30, December 31, millions) 2006 2005 2006 2005 ------------------------------------------------------------------------- Cash generated from (used for): Operating activities Net earnings $ 108.3 $ 118.2 $ 354.6 $ 330.1 Items not affecting cash Net provision for loans receivable 51.6 51.4 207.4 199.9 Depreciation and amortization of property and equipment 50.1 48.6 189.1 182.0 Loss (gain) on sales of loans receivable (Note 4) (8.2) (13.0) 12.7 (19.9) Employee future benefits expense (Note 6) 1.8 1.2 7.2 6.2 Amortization of other assets 0.9 1.3 4.7 5.8 Loss on sale of Associate Dealer receivables (Note 3) 2.5 0.1 2.5 0.1 Other 0.1 8.3 (1.6) 4.6 Future income taxes (19.1) (6.3) (21.9) 2.8 Gain on disposals of property and equipment (47.0) (5.9) (57.4) (10.9) ------------------------------------------------------------------------- Cash generated from operations 141.0 203.9 697.3 700.7 ------------------------------------------------------------------------- Changes in other working capital components 514.2 394.3 (14.8) (287.2) ------------------------------------------------------------------------- Cash generated from operating activities 655.2 598.2 682.5 413.5 ------------------------------------------------------------------------- Investing activities Additions to property and equipment (223.6) (120.1) (529.2) (387.0) Investment in loans receivable (224.8) (249.0) (442.4) (695.4) Long-term receivables and other assets (66.8) (19.8) (73.5) (24.7) Purchases of stores (2.3) (3.6) (7.8) (4.9) Asset retirement obligations (1.0) (0.5) (2.1) (1.3) Employee future benefits (0.5) (0.4) (1.9) (1.7) Securitization of loans receivable 310.8 326.7 171.8 395.2 Proceeds on disposition of property and equipment 86.8 20.3 340.1 78.2 Sale of Associate Dealer receivables (Note 3) 347.5 47.8 347.5 47.8 ------------------------------------------------------------------------- Cash generated from (used for) investing activities 226.1 1.4 (197.5) (593.8) ------------------------------------------------------------------------- Financing activities Commercial paper (113.0) - - - Issuance of long-term debt 0.3 0.8 1.2 516.4 Class A Non-Voting Share transactions (Note 8) (14.4) (42.7) (25.3) (23.3) Dividends (13.5) (11.8) (52.2) (45.7) Repayment of long-term debt (Note 5) (1.3) (1.3) (205.4) (231.3) Repayment of limited partnership interest (Note 11) - - (300.0) - ------------------------------------------------------------------------- Cash generated from (used for) financing activities (141.9) (55.0) (581.7) 216.1 ------------------------------------------------------------------------- Cash generated (used) in the period 739.4 544.6 (96.7) 35.8 Cash and cash equivalents, beginning of period 1.9 293.4 838.0 802.2 ------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 741.3 $ 838.0 $ 741.3 $ 838.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Balance Sheets (Unaudited) ------------------------------------------------------------------------- (Dollars in millions) December 30, December 31, As at 2006 2005 ------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $ 741.3 $ 838.0 Accounts receivable (Note 3) 340.5 652.8 Loans receivable (Note 4) 694.2 720.8 Merchandise inventories 667.3 675.5 Prepaid expenses and deposits 46.2 42.4 Future income taxes 51.5 43.6 ------------------------------------------------------------------------- Total current assets 2,541.0 2,973.1 ------------------------------------------------------------------------- Long-term receivables and other assets (Note 4) 283.5 140.0 Goodwill 46.4 46.2 Intangible assets 52.4 52.4 Property and equipment 2,881.3 2,743.9 ------------------------------------------------------------------------- Total assets $ 5,804.6 $ 5,955.6 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES Current liabilities Accounts payable and other $ 1,579.5 $ 1,545.5 Income taxes payable 81.1 71.2 Current portion of long-term debt (Note 5) 3.0 204.3 ------------------------------------------------------------------------- Total current liabilities 1,663.6 1,821.0 ------------------------------------------------------------------------- Long-term debt (Note 5) 1,168.4 1,171.3 Future income taxes 75.0 89.0 Other long-term liabilities (Note 16) 112.4 63.2 ------------------------------------------------------------------------- Total liabilities 3,019.4 3,144.5 ------------------------------------------------------------------------- Minority interest (Note 11) - 300.0 SHAREHOLDERS' EQUITY Share capital (Note 8) 702.7 702.7 Contributed surplus 0.1 1.5 Accumulated foreign currency translation adjustment (5.7) (5.7) Retained earnings 2,088.1 1,812.6 ------------------------------------------------------------------------- Total shareholders' equity 2,785.2 2,511.1 ------------------------------------------------------------------------- Total liabilities, minority interest and shareholders' equity $ 5,804.6 $ 5,955.6 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (Unaudited) (continued) ------------------------------------------------------------------------- 1. Basis of presentation These unaudited interim consolidated financial statements (the "financial statements") have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP") and include the accounts of Canadian Tire Corporation, Limited and its subsidiaries and partnership (up until April 3, 2006 - see Note 11), collectively referred to as the "Company". These financial statements do not contain all disclosures required by Canadian GAAP for annual financial statements, and accordingly, the financial statements should be read in conjunction with the most recently prepared annual financial statements for the 52 weeks ended December 31, 2005. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Estimates are used when accounting for items such as income taxes, impairment of assets, employee benefits, product warranties, inventory provisions, amortization, uncollectible credit card receivables and personal loans, environmental reserves, asset retirement obligations and the liability for the Company's loyalty programs. 2. Accounting policies These financial statements follow the same accounting policies and methods of their application as the most recent annual financial statements for the 52 weeks ended December 31, 2005, except as noted below. Effective January 1, 2006, the Company implemented, on a retroactive basis, the Emerging Issues Committee of the Canadian Institute of Chartered Accountants' Abstract 156 (EIC-156) "Accounting by a Vendor for Consideration Given to a Customer (Including a Reseller of the Vendor's Products)". This Abstract requires a vendor to generally record cash consideration given to a customer as a reduction to the selling price of the vendor's products or services and reflect it as a reduction of revenue when recognized in the income statement. Certain exceptions apply where the vendor receives an identifiable benefit in exchange for the consideration and the vendor can reasonably estimate the fair value of the identifiable benefit. The Abstract must be applied retroactively to annual and interim financial statements beginning on or after January 1, 2006. As a result of the retroactive implementation of this new standard, the impact on the Consolidated Statements of Earnings for the 13 weeks ended December 30, 2006 was to decrease both "gross operating revenue" and "cost of merchandise sold and all other operating expenses except for the undernoted items" by $15.1 million (2005 - $14.9 million). For the 52 weeks ended December 30, 2006, both "gross operating revenue" and "cost of merchandise sold and all other operating expenses except for the undernoted items" were decreased by $57.1 million (2005 - $53.0 million). There was no impact on net earnings or earnings per share. 3. Accounts Receivable During the fourth quarter, the Company sold certain Associate Dealer receivables to independent investors. According to the terms of the sale, the Company retained full servicing responsibility for which it received no compensation. For the quarter and year ended December 30, 2006, the Company recognized a loss of $2.5 million (2005 - $0.1 million) on the sale of Associate Dealer receivables, which assumes no expected credit losses and a servicing liability at 1.0 percent. Quantitative information about accounts receivable managed by the Company is as follows: Total principal amount of receivables December 30, December 31, (Dollars in millions) 2006 2005 --------------------------------------------------------------------- Associate Dealer receivables $ 579.9 $ 570.2 Associate Dealer receivables sold (350.0) (47.9) Other accounts receivable 110.6 130.5 --------------------------------------------------------------------- Receivables held $ 340.5 $ 652.8 --------------------------------------------------------------------- --------------------------------------------------------------------- 4. Loans Receivable The Company sells pools of loans receivable ("the Loans") to third party trusts ("the Trusts") in transactions known as securitizations. Loans include both credit card and personal loans receivable. The transactions are accounted for as sales in accordance with Accounting Guideline 12, "Transfers of Receivables" ("AcG-12"), and the Loans are removed from the Consolidated Balance Sheets. The Company retains the interest-only strip, and for the personal loan securitization, a subordinated interest in the loans sold (the "seller's interest") and cash deposited with one of the Trusts (the "securitization reserve"), all of which are retained interests. The seller's interest and securitization reserve provide that Trust with a source of funds in the event that the interest and principal collected on the Loans is not sufficient to pay the Trust's creditors. The Trusts' recourse to the Company is limited to the retained interests. The Company also assumes responsibility for servicing the Loans, for which it does not receive any direct compensation. The proceeds of the sale are deemed to be the cash received, interest-only strip and securitization reserve, less any servicing obligation assumed. The proceeds are allocated between the Loans, interest-only strip, seller's interest and securitization reserve based on their relative fair value at the date of sale, with any excess or deficiency recorded as a gain or loss on sale respectively. The Company estimates fair values by discounting future cash flows or comparing the appropriate yield curves to matching maturity terms. Retained interests are measured at fair value and are reviewed for impairment on a quarterly basis. For the 13 weeks ended December 30, 2006, the Company recognized a pre-tax gain of $8.2 million (2005 - $13.0 million pre-tax gain) on the securitization of the Loans. For the 52 weeks ended December 30, 2006, the Company recognized a pre- tax loss of $12.7 million (2005 - $19.9 million pre-tax gain). As the Company does not control the Trusts, they have not been consolidated in these financial statements. Quantitative information about loans managed and securitized by the Company is as follows: (Dollars in Total principal Average balances millions) amount of for the receivables as at(1) 52 weeks ended ------------------------- ------------------------- December 30, December 31, December 30, December 31, 2006 2005 2006 2005 ------------ ------------ ------------ ------------ Total net managed credit card loans $ 3,372.3 $ 3,143.4 $ 3,115.8 $ 2,818.2 Credit card loans sold (2,702.9) (2,422.8) (2,413.7) (2,224.2) ------------ ------------ ------------ ------------ Credit card loans held 669.4 720.6 702.1 $ 594.0 Net managed personal and mortgage loans(2) 226.9 216.5 256.7 190.0 Loans sold (124.5) (206.1) (164.6) (8.6) ------------ ------------ ------------ ------------ Loans held 102.4 10.4 92.1 181.4 Total loans receivable 771.8 731.0 $ 794.2 $ 775.4 ------------ ------------ Less: long-term ------------ ------------ portion(3) 77.6 10.2 ------------ ------------ Current portion of loans receivable $ 694.2 $ 720.8 ------------ ------------ ------------ ------------ (1) Amounts shown are net of allowance for credit losses. (2) Personal loans are unsecured loans that are provided to qualified existing credit cardholders for terms of three to five years. Personal loans have fixed monthly payments of principal and interest; however, the personal loans can be repaid at any time without penalty. Mortgage loans are issued for terms of up to ten years, have fixed or variable interest rates and are secured. (3) The long-term portion of loans is included in "Long-term receivables and other assets". Net credit losses for the 13 weeks ended December 30, 2006 were $53.7 million (2005 - $47.8 million). Net credit losses for the 52 weeks ended December 30, 2006 were $204.8 million (2005 - $182.1 million). Net credit losses are charge-offs net of recoveries and are based on the total managed portfolio of loans. 5. Long-Term Debt On January 16, 2006, medium term notes totaling $200.0 million matured and were repaid. On March 31, 2006, a mortgage payable on a shopping centre in Kitchener, Ontario with a maturity date of October 2011 and an interest rate of 7.6 percent that was assumed in 2005, was refinanced with a promissory note with the same terms and conditions. The promissory note is secured by a portfolio of bonds and cash totaling $16.2 million, which is included in long-term receivables and other assets. 6. Employee Future Benefits The net employee future benefit expense for the 13 weeks and 52 weeks ended December 30, 2006 was $1.8 million (2005 - $1.2 million) and $7.2 million (2005 - $6.2 million), respectively. 7. Diluted Earnings Per Share The reconciliation of the number of shares used in the diluted earnings per share calculation is as follows: 13 weeks 13 weeks 52 weeks 52 weeks ended ended ended ended December 30, December 31, December 30, December 31, 2006 2005 2006 2005 ------------ ------------ ------------ ------------ Average number of shares for basic earnings per share calculations 81,616,331 81,873,572 81,575,556 81,764,082 Dilutive options 252,782 968,521 640,953 1,132,320 ------------ ------------ ------------ ------------ Average number of shares for dilutive earnings per share calculations 81,869,113 82,842,093 82,216,509 82,896,402 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 8. Share Capital (Dollars in millions) December 30, December 31, 2006 2005 ------------ ------------ Authorized 3,423,366 Common Shares 100,000,000 Class A Non-Voting Shares Issued 3,423,366 Common Shares (December 31, 2005 - 3,423,366) $ 0.2 $ 0.2 78,047,456 Class A Non-Voting Shares (December 31, 2005 - 78,032,724) 702.5 702.5 ------------ ------------ $ 702.7 $ 702.7 ------------ ------------ ------------ ------------ The Company issues and repurchases Class A Non-Voting Shares. The net excess of the repurchase price over the issue price is allocated to retained earnings. The following transactions occurred with respect to Class A Non- Voting shares: (Dollars in 52 weeks ended 52 weeks ended millions) December 30, 2006 December 31, 2005 ------------------------- ------------------------- Number $ Number $ ------------ ------------ ------------ ------------ Shares outstanding at the beginning of the period 78,032,724 702.5 77,699,631 708.8 Issued 1,222,032 57.4 1,617,593 60.4 Repurchased (1,207,300) (82.7) (1,284,500) (83.7) Excess of repurchase price over issue price - 25.3 - 17.0 ------------ ------------ ------------ ------------ Shares outstanding at the end of the period 78,047,456 702.5 78,032,724 702.5 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 9. Stock-based Compensation Plans Stock options (referred to as "stock options with tandem stock appreciation rights") were granted in 2006, with a feature that enables the employee to exercise the stock option or receive a cash payment equal to the difference between the market price of a Class A Non-Voting share at the exercise date and the exercise price of the stock option. As the employee can demand settlement in cash and the Company is obligated to pay cash upon demand, compensation expense is accrued over the vesting period of the stock options based on the expected total compensation to be paid upon the stock options being exercised. On November 9, 2006, the Board of Directors approved an amendment to the Company's stock options issued prior to 2006, providing employees holding such stock options the right to elect to surrender options and receive a direct cash payment in lieu of exercising the options in the traditional fashion. The cash payment is calculated as the difference between the exercise price of the stock option and the market price of the Company's Class A Non-Voting shares as calculated on the date of surrender, multiplied by the number of Class A Non- Voting shares covered by the stock options surrendered. Upon amendment to the stock option plan, the Company was required to recognize an obligation and corresponding expense for the current intrinsic value of stock options subject to vesting. The obligation will be revalued at each reporting period based on the changes in the market price of the Company's Class A Non-Voting shares for the unexercised stock options subject to vesting. The Company recorded a pre-tax expense for these options of $40.5 million in the fourth quarter of 2006. The compensation expense recorded for stock options for the 13 weeks ended and 52 weeks ended December 30, 2006 was $40.9 million and $41.6 million, respectively. For a description of the Company's stock-based compensation plans, see the most recent annual audited financial statements for the year ended December 31, 2005. 10. Pro forma Stock Option Disclosure With the amendments to the Company's stock options effective November 9, 2006, the Company now expenses the intrinsic value of stock options over their respective vesting periods. Consequently, there is no longer a requirement to provide proforma stock option disclosure. 11. Minority Interest In November 2001, the Company formed a limited partnership for the purpose of raising $300 million of capital in relation to a portfolio of its retail properties. The Company was the general partner in this partnership. A third party investor group invested $300 million in the partnership for a limited partnership interest with preferential rights to distribution of income and capital. The limited partnership interest was entitled to a cumulative, quarterly preferred distribution on its capital account (approximately 4.89% annualized year to date up to the date of Note repayment (2005 - 3.98%)) and the partnership followed a full distribution policy. The partnership invested in the retail properties by way of a note and equity in an entity that owns the portfolio of properties. The partnership had an indefinite life, but could be liquidated in certain circumstances including shortfalls in cash flows generated by the retail properties and repayment of the note. The assets and liabilities, results of operations and cash flows of the partnership were included in the financial statements of the Company. The preferred interest was treated as minority interest on the Consolidated Balance Sheets and in the Consolidated Statements of Earnings. On April 3, 2006, the note was repaid and the equity was redeemed. The limited partnership repaid the limited partners. Accordingly, the minority interest ceased to be reflected on the Consolidated Balance Sheets after April 3, 2006, and no further charge has been reflected in the Consolidated Statements of Earnings after April 3, 2006. 12. Segmented Information - Income Statement --------------------------------------------------------------------- 13 weeks 13 weeks 52 weeks 52 weeks ended ended ended ended December 30, December 31, December 30, December 31, 2006 2005 2006 2005 (Dollars in (Restated (Restated millions) Note 2) Note 2) --------------------------------------------------------------------- Gross operating revenue(1) CTR $ 1,576.8 $ 1,516.9 $ 5,355.4 $ 5,093.9 Financial Services 198.0 190.6 721.7 685.8 Petroleum 375.1 346.9 1,545.3 1,361.3 Mark's 309.5 275.0 762.3 664.4 Eliminations (33.3) (25.1) (115.6) (83.8) --------------------------------------------------- Total gross operating revenue $ 2,426.1 $ 2,304.3 $ 8,269.1 $ 7,721.6 --------------------------------------------------------------------- --------------------------------------------------------------------- Earnings before income taxes and minority interest CTR $ 71.5 $ 86.9 $ 306.1 $ 290.2 Financial Services 53.7 55.8 167.0 165.0 Petroleum (6.0) 3.0 (5.4) 7.5 Mark's 50.0 42.2 90.1 65.0 --------------------------------------------------- Total earnings before income taxes and minority interest $ 169.2 $ 187.9 $ 557.8 $ 527.7 Income taxes 60.9 67.7 200.8 190.0 Minority interest - 2.0 2.4 7.6 --------------------------------------------------- Net earnings $ 108.3 $ 118.2 $ 354.6 $ 330.1 --------------------------------------------------------------------- --------------------------------------------------------------------- Interest expense CTR $ 24.9 $ 26.1 $ 97.9 $ 96.5 Financial Services 4.9 4.0 20.3 13.5 Petroleum - - - - Mark's 0.6 1.0 3.0 2.6 Eliminations (11.8) (8.1) (45.5) (28.5) --------------------------------------------------- Total interest expense $ 18.6 $ 23.0 $ 75.7 $ 84.1 --------------------------------------------------------------------- --------------------------------------------------------------------- Depreciation and amortization expense CTR $ 38.7 $ 38.1 $ 147.7 $ 143.5 Financial Services 3.9 3.1 13.0 12.5 Petroleum 4.1 4.0 15.2 14.4 Mark's 4.3 4.0 15.8 14.6 --------------------------------------------------- Total depreciation and amortization expense $ 51.0 $ 49.2 $ 191.7 $ 185.0 --------------------------------------------------------------------- --------------------------------------------------------------------- (1) Gross operating revenue includes dividend and interest income. Segmented Information - Total Assets ------------------------------------------- (Dollars in As at As at millions) December 30, December 31, 2006 2005 ------------------------------------------- CTR $ 4,502.5 $ 4,604.7 Financial Services 1,476.0 1,350.9 Petroleum 477.9 494.5 Mark's 406.7 342.9 Eliminations (1,058.5) (837.4) ------------------------- Total $ 5,804.6 $ 5,955.6 ------------------------------------------- 13. Supplementary Cash Flow Information The Company paid income taxes during the 13 weeks ended December 30, 2006, amounting to $51.6 million (2005 - $43.2 million) and made interest payments of $27.1 million (2005 - $25.1 million). For the 52 weeks ended December 30, 2006, the Company paid income taxes amounting to $212.5 million (2005 - $155.8 million) and made interest payments of $87.3 million (2005 - $83.5 million). The Company incurred capital expenditures on property and equipment of $275.9 million for the 13 weeks ended December 30, 2006, of which $223.6 million had been paid for by the end of the quarter (2005 - $142.9 million of which $120.1 million had been paid for by the end of the quarter). For the 52 weeks ended December 30, 2006, property and equipment acquired totaled $557.4 million, of which $529.2 million had been paid for by the end of the year (2005 - $391.1 million, of which $387.0 million had been paid for by the end of the year). 14. Legal Matters The Company and certain of its subsidiaries are party to a number of legal proceedings. The Company believes that each such proceeding constitutes a routine legal matter incidental to the business conducted by the Company and that the ultimate disposition of the proceedings will not have a material effect on the Company's consolidated earnings, cash flow or financial position. 15. Tax Matters In the ordinary course of business, the Company is subject to ongoing audits by tax authorities. While the Company believes that its tax filing positions are appropriate and supportable, from time to time certain matters are reviewed and challenged by the tax authorities. The Canada Revenue Agency (CRA) has reassessed and is also expected to reassess the Company regarding the tax treatments of commissions paid to foreign subsidiaries of the Company (covering periods from 1995 onwards), and dividends received on an investment made by a wholly-owned subsidiary of the Company related to reinsurance (covering periods from 1999 to 2003). The applicable provincial tax authorities are expected to reassess for the corresponding periods. The Company does not have a significant exposure on these matters subsequent to the 2003 taxation year. The reassessment and expected reassessments in these matters are based on multiple grounds, some of which are highly unusual and the Company will appeal these reassessments as and when they are received. If the CRA (and applicable provincial tax authorities) were entirely successful in their reassessments - an outcome that the Company and its tax advisors believe to be very unlikely - it is estimated that the total liability of the Company for additional taxes, interest and penalties could be approximately $258 million. Although the Company will appeal these reassessments, current tax legislation requires the Company to remit to the CRA and its provincial counterparts approximately $161 million, of which $69 million has already been remitted. The timing of future remittances will be determined by the receipt of the reassessments. In the event that the Company is successful in its appeal, in whole or in part, some, or all of the funds remitted to the various tax authorities will be refunded to the Company. The Company regularly reviews the potential for adverse outcomes in respect of tax matters. The Company believes that the ultimate disposition of these reassessments will not have a material adverse effect on its liquidity, consolidated financial position or results of operations because the Company believes that it has adequate provision for these tax matters. Should the ultimate outcome materially differ from the provisions, the Company's effective tax rate and its earnings could be affected positively or negatively in the period in which the matters are resolved. 16. Disposition of Properties On November 29, 2005, the Company announced its agreement to sell and leaseback two distribution centres to a third party. On January 31, 2006, the Company and the third party completed the sale and leaseback agreements for the two distribution centres. The proceeds from the sale of the two distribution centres totaled $229.1 million, resulting in a net pre-tax gain of approximately $46.3 million. As the Company entered into long-term leasebacks of the two distribution centres from the third party, the gain is being amortized over the lease terms. The unamortized gain is included in other long-term liabilities. On October 30, 2006, the Company announced an agreement to sell surplus land at one of its locations in Toronto, Ontario. On December 7, 2006, the Company completed the sale of this surplus land for total proceeds of $149.7 million, of which $134.7 million took the form of an interest-free mortgage in favour of the Company. A gain of $119.6 million will be recorded on the transaction, with $49.2 million recognized on closing. The balance will be reflected as imputed interest income on the interest-free mortgage, the principal amount of which is payable over 10 years, or earlier, at the option of the purchaser. 17. Comparative Figures Certain of the prior period's figures have been reclassified to conform to the current year presentation.Interest Coverage Exhibit to the Consolidated Financial Statements ------------------------------------------------------------------------- The Company's long-term interest requirements for the 52 weeks ended December 30, 2006, after annualizing interest on long-term debt issued and retired during this period, amounted to $76.5 million. The Company's earnings before interest on long-term debt, income taxes and minority interest for the 52 weeks then ended were $626.8 million, which is 8.2 times the Company's long-term interest requirements for this period. %SEDAR: 00000534EF
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For further information: Media: Caroline Casselman, Director, Community & Public Affairs, (416) 480-8159, caroline.casselman@cantire.com; Investors: Michelle Dodokin, Director, Investor Relations, (416) 480-3070, michelle.dodokin@cantire.com