Canadian Tire first quarter net earnings rise 35.5% to $64.5 million
All businesses contribute to strong earnings and revenue growth-------------------------------------
Consolidated Highlights(1):
Year-
over
2007 2006 year
1st Quarter 1st Quarter change
-------------------------------------------------------------------------
Retail sales $1.81 billion $1.71 billion 5.6%
Gross operating revenue $1.74 billion $1.57 billion 10.9%
Earnings before income taxes and
minority interest $99.2 million $78.0 million 27.3%
Net earnings $64.5 million $47.6 million 35.5%
Net earnings excluding non-
operating gains and losses(2) $66.9 million $53.7 million 24.4%
Basic earnings per share $0.79 $0.58 35.5%
Adjusted basic earnings per share
excluding non-operating gains and
losses(2) $0.82 $0.66 24.4%
(1) All dollar figures in this table are rounded.
(2) Non-GAAP measure. Please refer to section 12.0 in Management's
Discussion and Analysis in our 2006 Financial Report.TORONTO, May 10 /CNW/ - Canadian Tire Corporation, Limited (CTC.a, CTC)
today reported first quarter net earnings of $64.5 million, an increase of
35.5 percent compared to $47.6 million in the same period of 2006. Excluding
non-operating gains and losses, net earnings were $66.9 million, an increase
of 24.4 percent compared to $53.7 million last year.
Basic earnings per share were $0.79, an increase of 35.5 percent compared
to $0.58 per share recorded in the first quarter of 2006. Excluding
non-operating gains and losses, adjusted basic earnings per share increased
24.4 percent to $0.82 compared to $0.66 the previous year.
"We are pleased with our first quarter results and the continued momentum
in each of our businesses. Our performance benefited from strong revenue
growth, enhanced margins and tight expense controls," said Tom Gauld,
president and CEO. "We remain confident in our growth strategies and in our
earnings forecast for 2007."Business Overview
CANADIAN TIRE RETAIL (CTR)
($ in millions) Q1 2007 Q1 2006 Change
-------------------------------------------------------------------------
Retail sales(1) $1,242.6 $1,205.1 3.1%
Same store sales(2)
(year-over-year % change) 1.3% 2.8%
Net shipments (year-over-year % change) 11.1% (0.1)%
Earnings before income taxes and minority
interest $40.0 $38.5 4.0%
-------------------------------------------------------------------------
Less adjustment for:
Gain on disposals of property and equipment $ - $3.4
-------------------------------------------------------------------------
Adjusted earnings before income taxes and
minority interest(3) $40.0 $35.1 14.0%
-------------------------------------------------------------------------
(1) Includes sales from Canadian Tire stores, PartSource stores, sales
from CTR's online web store and the labour portion of CTR's auto
service sales.
(2) Same store sales include sales from stores that have been open for
more than 53 weeks.
(3) Non-GAAP measure. Please refer to section 12.0 in Management's
Discussion and Analysis in our 2006 Financial Report.CTR's first quarter retail sales grew to $1.24 billion from
$1.21 billion, an increase of 3.1 percent. Same store sales at the new Concept
20/20 stores increased a strong 6.6 percent. Overall, same store sales
increased 1.3 percent over the prior year. During the construction and
remerchandising of stores undergoing conversion to the Concept 20/20 format,
sales are negatively impacted. Excluding the impact of 39 stores undergoing
conversion, same store sales were up 1.9 percent in the first quarter. After a
slow start to seasonal product sales, CTR's sales of winter-related
merchandise, including snow shovels and snow blowers, and footwear and
apparel, returned to expected levels in late January and February as cold
weather arrived in key markets. Additionally, the better living and kitchen
and home appliance categories showed strong growth during the quarter. These
strong sales results were partially offset by a decline in the sales of tools
and electronics, attributable to a decrease in flyer space. In addition,
expected early spring seasonal product sales were delayed due to the late
arrival of the season.
CTR's pre-tax first quarter earnings of $40.0 million increased
4.0 percent from $38.5 million in the comparable 2006 period. Adjusted pre-tax
earnings, excluding non-operating items, increased 14.0 percent to
$40.0 million from $35.1 million in the same period last year. The comparative
year-over-year adjusted pre-tax earnings were also affected by the
elimination, in April 2006, of income from a limited real estate partnership,
which contributed $3.8 million in the first quarter of 2006. The increase in
earnings reflects a significant increase in product shipments to stores over
the prior year due to Associate Dealers restocking their inventories, which
were relatively low at the beginning of the period. Shipments also benefited
from the significant number of Concept 20/20 store openings planned for the
second quarter. Margins benefited from productivity improvements in the supply
chain.
During the quarter, CTR opened six Concept 20/20 stores, including four
replacement and two retrofitted stores. For the full year, CTR plans to
complete 70 Concept 20/20 store projects, of which nine will be new additions
to the chain. Total retail square feet will increase by approximately
1.6 million, or approximately 10 percent, by the end of the year.
PartSource experienced double digit total sales growth in the quarter on
the continued strength of retail and commercial sales and the expansion of the
store network. PartSource opened one new store during the quarter, bringing
its total store network to 64. PartSource plans to open up to eight new stores
during 2007 through new store openings and small-scale acquisitions.CANADIAN TIRE PETROLEUM (Petroleum)
($ in millions) Q1 2007 Q1 2006 Change
-------------------------------------------------------------------------
Sales volume (millions of litres) 415.3 384.8 7.9%
Retail sales $385.4 $354.0 8.9%
Earnings before income taxes $2.5 $1.7 50.0%
-------------------------------------------------------------------------
Less adjustment for:
Loss on disposals of property and
equipment $(0.2) $(0.1)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(1) $2.7 $1.8 58.8%
-------------------------------------------------------------------------
(1) Non-GAAP measure. Please refer to section 12.0 in Management's
Discussion and Analysis in our 2006 Financial Report.Petroleum's gasoline sales volumes increased 7.9 percent during the first
quarter to 415.3 million litres from 384.8 million litres a year ago. The
increase was mainly a result of continuing strong response to Petroleum's
customer offerings, including the Gas Advantage MasterCard in Ontario.
Convenience store sales increased 16.9 percent over the comparable 2006
period, while car wash sales increased 20.8 percent.
Petroleum recorded pre-tax earnings of $2.5 million, a 50 percent
increase over the $1.7 million recorded in the comparable 2006 period.
Adjusted pre-tax earnings increased 58.8 percent to $2.7 million from
$1.8 million one year ago. The increase was due to higher gasoline margins,
related to improving market conditions, and expense management.
During the quarter, Petroleum opened four new gas bars and one re-branded
site, one car wash and five convenience stores. Plans for 2007 include opening
nine new gas bar sites in strategic locations, modernizing up to 25 sites to
improve the customer experience, and re-branding competitor sites as
opportunities arise.MARK'S WORK WEARHOUSE (Mark's)
($ in millions) Q1 2007 Q1 2006 Change
-------------------------------------------------------------------------
Total retail sales $178.3 $151.7 17.6%
Same store sales(1)
(% increase over prior year) 15.7% 10.0%
Earnings before income taxes $11.3 $8.4 34.3%
-------------------------------------------------------------------------
Loss on disposal of property and
equipment(2) (0.3) (0.1)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(3) $11.6 $8.5 35.7%
-------------------------------------------------------------------------
(1) Mark's same store sales exclude new stores, stores not open for the
full period in each year and store closures.
(2) Gains and losses on disposal of property and equipment were not
previously disclosed in our 2006 financial reports.
(3) Non-GAAP measure. Please refer to section 12.0 in Management's
Discussion and Analysis in our 2006 Financial Report.Mark's first quarter total retail sales grew to $178.3 million, an
increase of 17.6 percent from the $151.7 million recorded in the comparable
2006 period. Mark's total retail sales growth was strong in all three of its
major categories with women's wear up 24.6 percent, men's wear up 18.3 percent
and industrial wear up 14.9 percent. Total same store sales rose 15.7 percent
during the quarter with double-digit growth in all of Mark's major regions
across the country.
For the quarter, Mark's pre-tax earnings were $11.3 million, a 34.3
percent increase over the $8.4 million recorded a year ago. Adjusted pre-tax
earnings increased 35.7 percent to $11.6 million compared to $8.5 million in
the same 2006 period. The growth in earnings was attributable to the sales
increases noted above, as well as an improved gross margin rate and an
improved expense rate.
During the quarter, Mark's opened two new stores and relocated an
additional five stores. In 2007, Mark's expects to open 24 of its 29 planned
new stores, and expand, relocate or renovate 26 stores as originally planned.
During 2007, total retail square footage is planned to increase by
approximately 14 percent from 2.7 million to 3.1 million.CANADIAN TIRE FINANCIAL SERVICES (Financial Services)
($ in millions) Q1 2007 Q1 2006 Change
-------------------------------------------------------------------------
Total managed portfolio end of period $3,473.5 $3,294.2 5.4%
Earnings before income taxes $45.4 $29.4 54.5%
-------------------------------------------------------------------------
Less adjustment for:
Loss on disposals of property and
equipment $(0.1) $(0.1)
Loss on sales of loans receivable $(3.0) $(12.7)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(1) $48.5 $42.2 15.1%
-------------------------------------------------------------------------
(1) Non-GAAP measure. Please refer to section 12.0 in Management's
Discussion and Analysis in our 2006 Financial Report.Financial Services' total managed portfolio of loans receivable was
$3.5 billion at the end of the first quarter, a 5.4 percent increase over the
$3.3 billion portfolio at the end of the comparable 2006 period. Of this total
portfolio, personal loan receivables represent approximately 6.0 percent.
Total ending credit card loans receivable reached $3.3 billion, up 8.7 percent
from $3.0 billion in 2006 due to continued growth in the number of accounts
with a balance, principally as a result of the continued growth of the Gas
Advantage MasterCard in Ontario. Growth in the credit card loan portfolio was
also due to a 5.6 percent increase in the average account balance to $1,829
from $1,731 at the end of the first quarter of 2006.
The net write-off rate for the total managed portfolio on a rolling
12-month basis was 5.95 percent. The net write-off rate for the credit card
portfolio improved during the quarter to 5.82 percent from 6.19 percent in the
comparable 2006 period, reflecting the benefits of a number of initiatives to
enhance overall credit card portfolio quality.
Financial Services' pre-tax earnings of $45.4 million increased
54.5 percent from the $29.4 million recorded in the first quarter of 2006.
Excluding the impact of the loss on the sales of loans receivable and a small
loss on the disposals of property and equipment, adjusted pre-tax earnings for
the quarter increased 15.1 percent to $48.5 million compared to $42.2 million
in the comparable 2006 period. The results reflect growth in the credit card
loan portfolio, lower than planned write-off and allowance costs, and a
reduction in the operating expense ratio, partially offset by ongoing expenses
related to the retail banking initiative of $4.8 million as compared to
$0.2 million in the first quarter of 2006.
During the quarter, Financial Services supported the retail banking
initiative with a multi-faceted marketing program including flyer inserts,
direct mail, and television and radio advertisements to increase customer
awareness in pilot markets. In 2007, Financial Services plans to introduce
additional retail banking products into the market and will incur
approximately $25 million in expenses during the year associated with the
marketing and operations of the overall initiative.
The division also plans to increase its total managed portfolio of loans
receivable to $3.9 billion, with the expansion of the Gas Advantage MasterCard
program into other regions of the country, and increase its revenues from
insurance and warranty products by approximately 9 percent in 2007.
EARNINGS GUIDANCE
The Company confirms its expectation that earnings per share for 2007
will be in the range of $4.65 to $4.85, excluding non-operating items. While
first quarter 2007 results were strong, the quarter typically represents a
relatively small proportion of full year earnings.
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 2006 Financial Report and include, but are not
limited to: changes in interest, currency exchange and tax rates; the ability
of Canadian Tire to attract and retain quality employees, Associate Dealers,
Petroleum agents and PartSource and Mark's Work Wearhouse store operators and
franchisees; and the willingness of customers to purchase the Company's
merchandise, financial products and services.
Risk factors associated with the assumptions that underlie Canadian
Tire's forecasted performance in 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 3:30 p.m. EST on
Thursday, May 10, 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 general merchandise and apparel retail stores, gas stations 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 64 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 265 gas bars, 256 convenience stores and
kiosks, and 75 car washes. Mark's Work Wearhouse is one of the country's
leading apparel retailers operating 340 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.
Management's discussion and analysis (MD&A)
-------------------------------------------------------------------------
Introduction
This Management's Discussion and Analysis (MD&A) provides management's
perspective on our Company, our performance and our strategy for the future.
We, us, our, Company and Canadian Tire
In this document, the terms "we", "us", "our", "Company" and "Canadian
Tire" refer to Canadian Tire Corporation, Limited and its business units and
subsidiaries.
Review and approval by the Board of Directors
The Board of Directors, on the recommendation of its Audit Committee,
approved the contents of this MD&A on May 10, 2007.
Quarterly and annual comparisons in this MD&A
Unless otherwise indicated, all comparisons of results for the first
quarter (13 weeks ended March 31, 2007) are against results for the first
quarter of 2006 (13 weeks ended April 1, 2006).
Restated figures
Some figures in this MD&A were restated as required by EIC-156,
"Accounting by a Vendor for Consideration Given to a Customer (Including a
Reseller of the Vendor's Products)", which was issued by the Canadian
Institute of Chartered Accountants (CICA) and implemented by us in Q1 2006.
See section 11.3 of our 2006 Financial Report MD&A for a further explanation
of these restatements.
Certain of the prior period's figures have been reclassified to conform
to the current year presentation.
Accounting estimates and assumptions
The preparation of consolidated financial statements that conform with
Canadian generally accepted accounting principles (GAAP) requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent liabilities at the date of the
Consolidated Financial Statements and the reported amounts of revenue and
expenses during the reporting period. We calculate our estimates using
detailed financial models that are based on historical experience, current
trends and other assumptions that are believed to be reasonable under the
circumstances. Actual results could differ from those estimates. In our
judgment, none of the estimates detailed in Note 1 of our Consolidated
Financial Statements for the quarter ended March 31, 2007 requires us to make
assumptions about matters that are highly uncertain. For these reasons, none
of the estimates is considered a "critical accounting estimate" as defined in
Form 51-102F1 published by the Ontario Securities Commission.
Forward-looking statements
This MD&A contains statements that are forward-looking. Actual results or
events may differ materially from those forecasted in this disclosure because
of the risks and uncertainties associated with Canadian Tire's business and
the general economic environment. In addition to the principal risks
identified in section 9.2 of our 2006 Financial Report, there are other
external factors that could affect our results. These include, but are not
limited to: changes in interest rates, currency exchange rates and tax rates;
the ability of Canadian Tire to attract and retain quality employees,
Associate Dealers, Petroleum agents and PartSource and Mark's store operators
and franchisees; and the willingness of customers to shop at our stores or
acquire our financial products and services.
Other specific risk factors that may cause actual results or events to
differ materially from those forecasted in this MD&A include:- expansion activity planned for Mark's Work Wearhouse (Mark's),
PartSource, Canadian Tire Petroleum (Petroleum) and Canadian Tire
Retail (CTR), as well as the associated supply chain infrastructure,
could be affected by the Company's ability to acquire and develop
real estate properties, obtain municipal and other required
government approvals, access construction labour, lease suitable
properties, and weather conditions that could impact the timing of
construction;
- unseasonable weather patterns could affect the sales of seasonal
merchandise at CTR and Mark's throughout the year, 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 licences to operate, particularly in the
Petroleum division;
- changes in commodity prices could affect the profitability of
Petroleum, CTR and Mark's;
- disruptions in the supply of gasoline could affect Petroleum's
revenue and earnings;
- the earnings of Canadian Tire Financial Services (Financial Services)
could be affected by customers' inability to repay their Canadian
Tire credit card or loan balances or by an unsatisfactory response to
the retail banking initiative; and
- failure to comply with applicable laws and regulations could result
in sanctions and financial penalties by regulatory bodies that could
impact our earnings and reputation. Areas of compliance include
environmental, health and safety, competition law, transportation of
dangerous goods, customs and excise tax and regulations governing
financial institutions.We cannot provide any assurance that forecasted financial or operational
performance will actually be achieved, or if it is, that it will result in an
increase in the price of Canadian Tire shares.
1.0 Our Company
1.1 Overview of the business
Canadian Tire has been in business for over 85 years, offering everyday
products and services to Canadians through its growing network of interrelated
businesses. Canadian Tire, our Associate Dealers, franchisees and Petroleum
agents operate more than 1,100 general merchandise and apparel retail stores,
gas stations and car washes. The Company also provides a variety of financial
services to Canadians, primarily its proprietary Options MasterCard™ and
Canadian Tire-branded credit cards, personal loans, insurance and warranty
products. In October 2006, Financial Services began offering high interest
savings accounts, guaranteed investment certificates and residential mortgages
in two pilot markets.
Canadian Tire's model of interrelated businesses provides market
differentiation and competitive advantage. Canadian Tire's businesses benefit
from the Company's key capabilities in merchandising, marketing and
advertising, supply chain and real estate, which enable us to achieve a
greater level of efficiency. Canadian Tire's primary loyalty program, Canadian
Tire 'Money' - shared by CTR, Financial Services and Petroleum - is an example
of how interrelationships between the businesses create a strong competitive
advantage for the Company.
The success of the loyalty program has proven - through high customer
acceptance and redemption - to be a key element of Canadian Tire's total
customer value proposition and is designed to drive higher total sales across
CTR, Financial Services and Petroleum. For example, a customer who fills up
with gas at Petroleum's gas stations and uses Canadian Tire credit cards
spends considerably more at Canadian Tire stores, on average, than a customer
who only shops at Canadian Tire stores.
Mark's has already derived meaningful cost and operating synergies from
Canadian Tire's strengths in real estate and supply chain since its
acquisition by the Company in 2002. Canadian Tire co-locates Mark's and
Canadian Tire stores in certain locations and, increasingly, is extending its
national marketing and advertising channels to boost customer traffic and
loyalty to Mark's and increase its brand penetration.
Canadian Tire's four main businesses are described below.
CTR is Canada's most shopped general merchandise retailer with a network
of 468 Canadian Tire stores that are operated by Associate Dealers, who are
independent business owners. Associate Dealers buy merchandise from the
Company and sell it to consumers in Canadian Tire stores. CTR also includes
our online shopping channel and PartSource. PartSource is a chain of
64 specialty automotive hard parts stores that cater to serious
"do-it-yourselfers" and professional installers of automotive parts. The
PartSource network consists of 46 franchise stores and 18 corporate stores.
Mark's is one of Canada's leading clothing and footwear retailers,
operating 340 stores nationwide, including 290 corporate and 50 franchise
stores that offer men's wear, women's wear and industrial apparel. Mark's
operates under the banner "Mark's", and in Quebec, "L'Equipeur". Mark's also
conducts a business-to-business operation under the "Imagewear by Mark's Work
Wearhouse" brand.
Petroleum is Canada's largest independent retailer of gasoline with a
network of 265 gas stations, 256 convenience stores and kiosks, 75 car washes,
13 Pit Stops and 82 propane stations. The majority of Petroleum's sites are
co-located with Canadian Tire stores as a deliberate strategy to attract
customers to Canadian Tire stores. Substantially all of Petroleum's sites are
operated by agents.
Financial Services markets a range of Canadian Tire-branded credit cards,
including the Canadian Tire Options MasterCard, Commercial Link MasterCard and
Gas Advantage MasterCard. Financial Services also offers personal loans,
insurance and warranty products and an emergency roadside assistance service
called "Canadian Tire Roadside Assistance". Canadian Tire Bank, a wholly-owned
subsidiary of Financial Services, is a federally regulated bank that manages
and finances Canadian Tire's MasterCard and retail credit card portfolios, as
well as the personal loan portfolio. In October 2006, Canadian Tire Bank began
offering high interest savings accounts, guaranteed investment certificates
and residential mortgages in two pilot markets.
2.0 Our strategy
2.1 Five-year Strategic Plan
Canadian Tire has a five-year Strategic Plan to guide the Company's
growth from 2005 to 2009. The Plan has five strategic imperatives outlined
below. Each of these imperatives is supported by specific initiatives,
outlined in section 4.0, on business segment performance.1 - grow sales and revenues
2 - improve our earnings performance
3 - embed a Customers for Life culture across our entire organization
4 - extend growth and performance beyond 2009
5 - enhance value creation through financial flexibility and maximization
of the value of real estate assets2.2 Financial Aspirations
As part of our initial strategic planning process, we developed five
financial aspirations that we believe are important and logical metrics for
both the Company and its shareholders to track progress against the Plan.
These metrics are not to be construed as guidance or forecasts for any
individual year within the Plan, but rather as long-term targets that we
aspire to achieve over the life of the Plan, based on the successful execution
of our various initiatives.2005-2009
Financial Aspirations Strategic Plan
-------------------------------------------------------------------------
Same store sales (see note below)
(simple average of annual percentage growth,
CTR stores only) 3% to 4%
Gross operating revenue
(compound annual growth rate) 7% to 9%
EBITDA(1) and minority interest
(compound annual growth rate) 10% to 15%
Basic earnings per share
(compound annual growth rate) 12% to 15%
After-tax return on invested capital
(annual simple average) 10%
-------------------------------------------------------------------------
(1) Earnings before interest, income taxes, depreciation and
amortization. See section 11.0 on non-GAAP measures.Same store sales
Previously, we reported on CTR's comparable store sales growth as part of
our overall financial aspirations. Beginning in the fourth quarter of 2006, we
began reporting solely on CTR's same store sales growth and accordingly,
changed our financial aspirations to reflect our new practice. The key reasons
for the change in reporting were that same store sales growth is the metric
used by management and most commonly used in the retail industry and the same
store sales calculation will include the large number of store expansions
included in the Concept 20/20 store rollout, whereas the comparable store
sales metric did not.
3.0 Our performance in 2007
3.1 Consolidated resultsConsolidated financial results
($ in millions except per share amounts) Q1 2007 Q1 2006 Change
-------------------------------------------------------------------------
Retail sales(1) $1,806.3 $1,710.8 5.6%
Gross operating revenue 1,743.4 1,572.1 10.9%
EBITDA(2) and minority interest 163.6 143.7 14.0%
Earnings before income taxes and
minority interest 99.2 78.0 27.3%
Effective tax rate 35.0% 36.0%
Net earnings 64.5 47.6 35.5%
Basic earnings per share $ 0.79 $ 0.58 35.5%
Adjusted basic earnings per share(2) $ 0.82 $ 0.66 24.4%
-------------------------------------------------------------------------
(1) Represents sales at CTR (which includes PartSource), Mark's corporate
and franchise stores and Petroleum's sites.
(2) See section 11.0 for non-GAAP measures.
Highlights of top-line performance by business
(year-over-year percentage change) Q1 2007 Q1 2006
---------------------------------------------------------------
CTR retail sales(1) 3.1% 4.7%
CTR net shipments 11.1% (0.1)%
Mark's retail sales 17.6% 11.4%
Petroleum retail sales 8.9% 13.1%
Petroleum gasoline volume 7.9% 0.5%
Financial Services' credit card sales 14.2% 18.9%
Financial Services' gross average
receivables 6.2% 17.6%
---------------------------------------------------------------
(1) Includes sales from Canadian Tire stores, PartSource stores
and CTR's online web store and the labour portion of CTR's
auto service sales.First quarter
Consolidated gross operating revenue increased in the first quarter due
to strong shipments at CTR, higher sales at Mark's and Petroleum and increases
in loans receivable at Financial Services. CTR's shipments were favourably
impacted by Associate Dealers restocking their inventories, which were
relatively low at the beginning of the period. Petroleum registered volume
gains and achieved higher and more stable retail pricing and margins.
Higher operating revenue, combined with margin improvement at Mark's and
Petroleum, lower interest costs, strong cost containment, a lower effective
tax rate and the impact of non-operating items, contributed to the strong
growth in earnings in the quarter.
Impact of non-operating items
The following tables show our consolidated earnings on a pre-tax and
after-tax basis, excluding non-operating gains and losses for the sale of
loans receivable and disposals on property and equipment that occurred in the
first quarter of 2007.Adjusted consolidated earnings before income taxes and minority
interest(3)
($ in millions) Q1 2007 Q1 2006 Change
-------------------------------------------------------------------------
Earnings before income taxes and
minority interest $ 99.2 $ 78.0 27.3%
Less pre-tax adjustment for:
Loss on sales of loans receivable(1) (3.0) (12.7)
Gain (loss) on disposals of property
and equipment(2) (0.6) 3.1
-------------------------------------------------------------------------
Adjusted earnings before income taxes
and minority interest(3) $ 102.8 $ 87.6 17.5%
-------------------------------------------------------------------------
(1) See section 4.4.on Financial Services' performance.
(2) See section 4.1 for CTR's performance, section 4.2 for Mark's
performance, section 4.3 for Petroleum's performance and section 4.4
for Financial Services' performance.
(3) See section 11.0 on non-GAAP measures.
Adjusted consolidated net earnings(1)
($ in millions except per share amounts) Q1 2007 Q1 2006 Change
-------------------------------------------------------------------------
Net earnings $ 64.5 $ 47.6 35.5%
Less after-tax adjustment for:
Loss on sales of loans receivable (2.0) (8.1)
Gain (loss) on disposals of property
and equipment (0.4) 2.0
-------------------------------------------------------------------------
Adjusted net earnings(1) $ 66.9 $ 53.7 24.4%
-------------------------------------------------------------------------
Basic earnings per share $ 0.79 $ 0.58 35.5%
Adjusted basic earnings per share(1) $ 0.82 $ 0.66 24.4%
-------------------------------------------------------------------------
(1) See section 11.0 on non-GAAP measures.Seasonal impact
We usually experience stronger revenues and earnings in the second and
fourth quarters of each year because of the seasonal nature of some
merchandise at CTR and Mark's and the timing of marketing programs. The
following table shows our financial performance by quarter for the last two
years.
Consolidated quarterly results($ in millions except per Q1 Q4 Q3 Q2
share amounts) 2007 2006 2006 2006
-------------------------------------------------------------------------
Gross operating revenue(1) $1,743.4 $2,426.1 $2,023.3 $2,247.6
Net earnings 64.5 108.3 95.4 103.3
Basic earnings per share 0.79 1.33 1.17 1.27
Fully diluted earnings per share 0.79 1.32 1.16 1.25
-------------------------------------------------------------------------
($ in millions except per Q1 Q4 Q3 Q2
share amounts) 2006 2005 2005 2005
-------------------------------------------------------------------------
Gross operating revenue(1) $1,572.1 $2,304.3 $1,888.6 $2,020.6
Net earnings 47.6 118.2 84.4 92.2
Basic earnings per share 0.58 1.44 1.03 1.13
Fully diluted earnings per share 0.58 1.43 1.02 1.11
-------------------------------------------------------------------------
(1) Quarterly gross operating revenue for 2005 has been restated for the
impact of EIC-156 as required by the CICA. See section 11.3 in our
2006 Financial Report MD&A for additional information.
4.0 Business segment performance
4.1 Canadian Tire Retail
4.1.1 Strategic Plan update and outlook
The following outlines CTR's performance in the first quarter of 2007 in
the context of the 2005-2009 Strategic Plan, and provides an outlook for 2007
and for the full Plan period.
-------------------------------------------------------------------------
Strategic Plan update and outlook
-------------------------------------------------------------------------
Concept 20/20 store program
Concept 20/20 is the cornerstone of Canadian Tire Retail's current growth
agenda. Concept 20/20 stores are experiencing strong first-, second- and
third-year sales, caused by increases in customer traffic and average
transaction value, thereby providing the potential for a more attractive
return on investment than previous store formats. Concept 20/20 same
store sales were strong in the first quarter of 2007, up 6.6%
year-over-year. On average, customers spend 40 percent more time in
Concept 20/20 stores than in other store formats, demonstrating that the
attractive Concept 20/20 store design, product displays and open-plan
layout encourages customers to browse the stores, increasing the
likelihood of incremental purchases. The strong sales performance of
Concept 20/20 led to the decision to accelerate the store rollout in 2006
and 2007.
-------------------------------------------------------------------------
2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
First quarter
CTR opened four new Concept 20/20 CTR plans to open approximately
stores in the quarter, all of 270 Concept 20/20 stores between
which are replacement stores. 2005 and 2009.
CTR also expanded and retrofitted 2007 Outlook
two new-format stores to the
Concept 20/20 format. CTR plans to open approximately 70
new Concept 20/20 stores, adding
At the end of Q1 2007, CTR had 1.6 million retail square feet as
468 stores, including 132 Concept follows:
20/20 stores (of which 20 are - 19 new Concept 20/20 stores,
Concept 20/20 Canadian Tire- including 10 replacement stores
Mark's Work Wearhouse combination - 51 expansions and retrofits
stores). CTR added approximately
181,000 retail square feet to the
network for a total of
16.4 million at the end of the
quarter.
-------------------------------------------------------------------------
Exciting, new and exclusive (ENE) products
Canadian Tire has built a reputation for offering innovative products.
CTR's objective is to introduce new products into the market that are
only available at Canadian Tire. Examples of ENE products include
cordless lawn mowers, solar-paneled tents that light up at night and
flexible wiper blades.
-------------------------------------------------------------------------
2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
In the first quarter, retail CTR plans to continue to increase
sales of ENE products decreased sales of ENE products by
by 46.3 percent compared to the approximately 10 percent in 2007.
first quarter of 2006. The
decrease in the first quarter
was due to the timing of ENE
product sales and a very strong
comparable first quarter for
particular ENE items in 2006.
-------------------------------------------------------------------------
Global sourcing
Canadian Tire is increasing the percentage of foreign-sourced products
carried in its stores. The benefits of global sourcing are three-fold:
access to innovative products; margin protection; and the ability to
offer compelling price points.
-------------------------------------------------------------------------
2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
In the first quarter, CTR plans to increase the percentage
approximately 40 percent of of products sourced from suppliers
products sold in CTR's retail outside of North America to
stores were purchased from approximately 50 percent by the end
suppliers outside North America. of 2009.
-------------------------------------------------------------------------
PartSource network expansion
PartSource will continue its expansion into new markets through a
combination of opening new stores and small-scale acquisitions.
PartSource's strategy to buy small local businesses and convert them to
the PartSource banner has proven successful, with high rates of customer
retention after conversion. PartSource began testing corporate stores in
2005, and due to the initial success of the pilot, will continue to roll
out corporate stores.
-------------------------------------------------------------------------
2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
First quarter PartSource plans to increase its
- opened one new corporate store network to at least 100 stores by
the end of 2009.
PartSource had a total of 64
stores at the end of the first 2007 Outlook
quarter of 2007, including 18
corporate stores and 46 franchise In 2007, PartSource plans to add
stores. eight new stores through a
combination of new store openings
and small-scale acquisitions.
PartSource and CTR will also
undertake enhancements to the
automotive parts supply chain to
support continued growth and
efficiency in PartSource and CTR.
-------------------------------------------------------------------------
Inventory practices program
CTR's long-term objective is to ship more than 90 percent of products to
stores on-time. In addition, CTR is working with Associate Dealers to
improve ordering and shipping processes to better align the flow of
product to customer purchasing patterns, thereby reducing corporate and
store inventory levels and operational complexity, and increasing
inventory turns.
-------------------------------------------------------------------------
2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
In the first quarter of 2007, the CTR plans to increase inventory
percentage of products shipped turns to 13 times by the end of 2009
on-time to stores decreased through improved inventory management
3.1 percent, to 89.0 percent and ordering practices.
compared to 92.1 percent in the
first quarter of 2006. In 2007, CTR will begin making
improvements to Associate Dealer
Inventory turns for the first ordering and shipping processes, as
quarter of 2007, based on cubic previously described.
volume, increased to 10.3 from
10.0 in the first quarter of 2006.
-------------------------------------------------------------------------
4.1.2 Key performance indicators
The following are key measures of CTR's sales productivity:
- total same store sales growth
- average retail sales per store
- average sales per square foot of retail space
- average transaction value
CTR total retail and same store sales
(year-over-year percentage change) Q1 2007 Q1 2006
-------------------------------------------------------------------------
Total retail sales(1) 3.1% 4.7%
Same store sales 1.3% 2.8%
-------------------------------------------------------------------------
(1) Includes sales from Canadian Tire stores, PartSource stores, sales
from CTR's online web store and the labour portion of CTR's auto
service sales.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CTR's retail sales
Retail sales represent total merchandise sold at retail prices and the
labour portion of automotive sales to consumers across CTR's network of
stores, including CTR's online web store and PartSource.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CTR same store sales(1) by store format
(year-over-year percentage
change) Q1 2007
-------------------------------------------
Same store sales
Concept 20/20 stores 6.6%
New-format stores (1.4)%
Traditional stores (0.8)%
-------------------------------------------
(1) Same store sales excludes PartSource
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CTR's same store sales
Same store sales include sales from all stores that have been open for
more than 53 weeks.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Historically, Concept 20/20 stores were classified as "new-format" stores
in our financial disclosures. As of Q4 2006, we have been reporting three
separate classes of stores, defined as follows:
-------------------------------------------------------------------------
Concept 20/20 store New-format store Traditional store
format format format
(mid 2003 to 2007) (1994 to mid 2003) (1994 and prior)
Average retail Average retail Average retail
square footage: square footage: square footage:
52,000 34,000 16,000
-------------------------------------------------------------------------
Larger format Large format, Smaller than either
launched in September including "Class Of" the new-format or
2003, ranging in size and "Next Generation" Concept 20/20 stores
from 25,000 to 84,000 stores, ranging in on average.
square feet. Concept size from 15,000 to Traditional stores
20/20 stores make up 65,000 square feet, are characterized by
approximately most of which were varied sizes and
40 percent of the opened between 1994 layouts. Traditional
retail square footage and mid 2003. New- stores make up
of the network. See format stores make up approximately
section 4.1.1, approximately half of 10 percent of the
Strategic Plan update the retail square retail square footage
and outlook, for more footage in the in the network.
information on the network. This format
Concept 20/20 rollout. immediately preceded
the Concept 20/20
format.
-------------------------------------------------------------------------
CTR store count
Q1 2007 2006 2005 2004 2003
-------------------------------------------------------------------------
Concept 20/20 stores 132 126 53 25 4
New-format stores 235 237 292 302 305
Traditional stores 101 105 117 130 143
-------------------------------------------------------------------------
Total new-format,
traditional and
Concept 20/20 stores 468 468 462 457 452
PartSource stores 64 63 57 47 39
-------------------------------------------------------------------------
CTR continues to expand and retrofit its store network, with a focus on
the Concept 20/20 stores, consistent with the goals embodied in the 2005-2009
Strategic Plan and consumer preference for this store format, as evidenced by
the same store sales trends.
Average retail sales per Canadian Tire store(1),(2)
For the For the
12 months 12 months
ended ended
March 31, April 1,
($ in millions) 2007 2006
-------------------------------------------------------------------------
Concept 20/20 stores $ 20.7 $ 20.1
New-format stores 15.5 15.2
Traditional stores 7.9 7.9
-------------------------------------------------------------------------
(1) Retail sales are shown on a 52-week basis in each year and exclude
sales from PartSource stores, CTR's online web store and the labour
portion of CTR's auto service sales.
(2) Only includes stores that have been open for a minimum of two years
as at the end of the quarter.
Sales at new-format and Concept 20/20 stores are higher than at
traditional stores as they are larger, have a more convenient layout and offer
a broader selection of merchandise. The average dollar amount of each retail
sale at new-format and Concept 20/20 stores continues to increase partly
because they allow for larger displays of promotional, seasonal and ENE
products, which are key sales drivers. With the increasing number of larger
Concept 20/20 stores, this trend is continuing.
Average sales per square foot of Canadian Tire retail space(1),(2)
For the For the
12 months 12 months
ended ended
March 31, April 1,
2007 2006
-------------------------------------------------------------------------
Retail square footage(1) (millions of square feet) 16.4 15.0
Concept 20/20 stores(2),(3) ($) $ 395 $ 383
New-format stores(2),(3) ($) 456 446
Traditional stores(2),(3) ($) 506 503
-------------------------------------------------------------------------
(1) Retail square footage is based on the total retail square footage
including stores that have not been open for a minimum of two years
as at the end of the quarter.
(2) Retail sales are shown on a 52-week basis in each year for those
stores that have been open for a minimum of two years as at the end
of the quarter. Sales from PartSource stores, CTR's online web store
and the labour portion of CTR's auto service sales are excluded.
(3) Retail space does not include warehouse, garden centre and auto
service areas.Average sales per square foot of retail space in the larger store formats
are lower than in traditional stores, because the additional space is utilized
to display more merchandise, accommodate wider aisles and include more
appealing product displays. The larger store formats generate higher sales
overall and offer a more compelling shopping experience.
CTR's first quarter retail sales grew 3.1 percent and same store sales
increased 1.3 percent over the prior year, while same store sales at the new
Concept 20/20 stores increased a strong 6.6 percent. After a slow start to
seasonal product sales, CTR's sales of winter-related merchandise, including
snow shovels and snow blowers, and footwear and apparel, returned to expected
levels through January and February as cold weather arrived in key markets.
Additionally, the better living and kitchen and home appliance categories
showed strong growth during the quarter. These sales results were partially
offset by a decline in the sales of tools and electronics, attributable to a
decrease in flyer space. In addition, expected early spring seasonal product
sales were delayed due to the late arrival of the season.
PartSource experienced double-digit increases in total sales in the first
quarter, driven by the continued expansion of the corporate store network and
growth in the commercial customer segment.
Temporary impact of stores being converted to the Concept 20/20 format
During the construction and remerchandising of stores undergoing
conversion to the Concept 20/20 format, sales are negatively impacted.
Excluding the impact of the stores undergoing conversion, same store sales
were 1.9 percent higher in the first quarter of 2007 compared with the first
quarter of 2006.
4.1.3 CTR's financial results($ millions) Q1 2007 Q1 2006 Change
-------------------------------------------------------------------------
Retail sales $1,242.6 $1,205.1 3.1%
Net shipments (year-over-year % change) 11.1% (0.1)%
Gross operating revenue $1,074.7 $ 969.2 10.9%
EBITDA(1) and minority interest 99.0 97.5 1.6%
Earnings before income taxes and
minority interest 40.0 38.5 4.0%
-------------------------------------------------------------------------
Less adjustment for:
Gain on disposals of property and
equipment - 3.4
-------------------------------------------------------------------------
Adjusted earnings before income taxes
and minority interest(1) $ 40.0 $ 35.1 14.0%
-------------------------------------------------------------------------
(1) See section 11.0 on non-GAAP measures.CTR's net shipments
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CTR's net shipments are the total value of merchandise shipped to
Canadian Tire Associate Dealer stores and PartSource franchise stores, at
wholesale prices, net of returns, discounts and other adjustments. CTR
shipments also include retail sales at PartSource corporate stores.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Explanation of CTR's financial results
Gross operating revenue increased 10.9 percent primarily due to higher
net shipments to Associate Dealers. The net shipment increase was
proportionately greater than the increase in retail sales due to the Associate
Dealers rebalancing their inventory levels, which were relatively low at the
beginning of the period, especially in the tools, electronics, kitchen and
appliance categories. Shipment growth was also driven by Associate Dealers
purchasing a number of promotional items and building inventories of seasonal
items in advance of the spring selling season. Over longer periods of time
retail sales and shipments to Associate Dealers are significantly correlated.
Pre-tax earnings increased 4.0 percent over the prior year due to higher
shipments and improved operating margins, driven by savings in advertising
expense resulting from a reduction in the number of catalogues printed and
increased contributions to advertising from suppliers, as well as improved
supply chain productivity and an increase in the extent of direct shipments to
Associate Dealers, as reflected by improved inventory cube turns.
The comparative year-over year adjusted pre-tax earnings were up
14.0 percent and were affected by the elimination, in April 2006, of income
from a limited real estate partnership, which contributed $3.8 million in the
first quarter of 2006 and by the impact of a $3.4 million gain on the disposal
of property and equipment in the first quarter of 2006.
4.1.4 Business risks
CTR is exposed to a number of risks in the normal course of its business
that have the potential to affect its operating performance. These include,
but are not limited to, supply chain disruption risk, seasonality risk and
environmental risk. These specific risks and management's mitigation
strategies are explained in more detail in Section 4.2.1.5 of our 2006
Financial Report.
Please also refer to section 8.0 of this MD&A for a discussion of some
other industry-wide and company-wide risks affecting the business.
4.2 Mark's Work Wearhouse
4.2.1 Strategic Plan update and outlook
The following outlines Mark's performance in the first quarter of 2007 in
the context of the 2005-2009 Strategic Plan, and provides an outlook for 2007
and for the full Plan period.-------------------------------------------------------------------------
Strategic Plan update and outlook
-------------------------------------------------------------------------
Network expansion
Mark's is focused on achieving "Superbrand" status for the Mark's name,
with the objective of capturing an increasingly significant share of
overall apparel sales in each geographic market and in each category in
which Mark's competes. To increase Mark's market presence, the Company
has an aggressive plan of continuing to expand the network of Mark's
stores. Mark's also plans to expand, renovate and relocate some existing
stores to the latest Mark's format.
-------------------------------------------------------------------------
Q1 2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
First quarter Mark's plans to expand the
- opened two new corporate network to approximately 400
stores and closed one Work stores by the end of 2009.
World corporate store
- relocated five corporate 2007 Outlook
stores
- converted two franchise stores In 2007, Mark's now expects to
to corporate stores open 24 of its 29 planned new
stores, and expand, relocate or
Mark's total retail square renovate 26 stores as originally
footage at the end of the first planned. Mark's now expects to
quarter of 2007 was 2.7 million increase its total retail square
square feet. feet by approximately 14 percent
in 2007.
-------------------------------------------------------------------------
Category expansion
Mark's plans to grow through continued expansion of its three major
categories: men's casual and dress wear; women's wear; and industrial
wear. The expansion of the women's wear category has enabled Mark's to
leverage female customer traffic in the stores. Mark's is also leveraging
its reputation for quality industrial wear by selling innovative,
specialty work clothing.
-------------------------------------------------------------------------
Q1 2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
First quarter
- total retail sales of women's Mark's will continue to develop
wear increased by 24.6 percent and expand high-potential product
- total retail sales of men's categories.
wear increased by 18.3 percent
- total retail sales of
industrial wear increased by
14.9 percent
-------------------------------------------------------------------------
4.2.2 Key performance indicators
The following are key performance indicators for Mark's:
- retail and same store sales growth
- average sales per corporate store
- average sales per square foot of retail space
Mark's retail and same store sales growth
(year-over-year percentage change) Q1 2007 Q1 2006
-------------------------------------------------------------------------
Total retail sales 17.6% 11.4%
Same store sales(1) 15.7% 10.0%
-------------------------------------------------------------------------
(1) Mark's same store sales excludes new stores, stores not open for the
full period in each year and store closures.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Mark's retail sales
Mark's retail sales represent total merchandise sales to consumers and
business-to-business customers, net of returns across Mark's entire
network of stores, recorded at retail prices.
-------------------------------------------------------------------------
-------------------------------------------------------------------------Retail sales for the quarter exhibited double-digit growth in all
regions, with particularly strong results in Quebec (increase in total retail
sales of 23.8 percent with same store sales increase of 17.3 percent), the
Greater Toronto area (increase of 22.6 percent and same store sales increase
of 21.7 percent) and British Columbia (increase of 19.2 percent and same store
sales increase of 20.1 percent).
From a product category perspective, in the quarter, corporate store
retail sales of women's wear were up 25.4 percent with the largest dollar
increases occurring in outerwear and tops. Corporate store retail sales of
men's casual and dress wear were up 18.6 percent with the largest dollar
increases occurring in tops and outerwear. Corporate store retail sales of
Mark's industrial wear business were up 14.9 percent with the largest dollar
increases occurring in industrial footwear and accessories.
Seasonal mark downs, an attractive value proposition and product
assortment combined with the arrival of cold winter weather in key markets,
helped generate the sales growth.Average corporate store sales(1)
For the For the For the
12 months 12 months 12 months
ended ended ended
March 31 April 1 April 2
2007 2006 2005
-------------------------------------------------------------------------
Average retail sales per store
($ thousands)(2) $ 2,817 $ 2,443 $ 2,130
Average sales per square foot ($)(3) 347 314 284
-------------------------------------------------------------------------
(1) Calculated on a rolling 12-month basis.
(2) Average retail sales per corporate store include corporate stores
that have been open for 12 months or more.
(3) Average sales per square foot is based on sales from corporate
stores. We have prorated square footage for corporate stores that
have been open for less than 12 months.
Mark's continues to improve the productivity of its stores, as
demonstrated by a 10.3 percent increase in sales per square foot for the
rolling 12 months ended March 31, 2007. The increases in sales productivity
are related to the factors driving sales performance described in the previous
paragraphs.
4.2.3 Mark's financial results
($ millions) Q1 2007 Q1 2006 Change
-------------------------------------------------------------------------
Retail sales(1) $ 178.3 $ 151.7 17.6%
Gross operating revenue(2) 152.1 128.7 18.2%
EBITDA(3) 16.0 12.8 24.9%
Earnings before income taxes 11.3 8.4 34.3%
-------------------------------------------------------------------------
Less adjustment for:
Loss on disposals of property
and equipment(4) (0.3) (0.1)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(3) $ 11.6 $ 8.5 35.7%
-------------------------------------------------------------------------
(1) Includes retail sales from corporate and franchise stores.
(2) Gross operating revenue includes retail sales at corporate stores
only.
(3) See section 11.0 on non-GAAP measures.
(4) Adjusted earnings reflects losses on disposals of property and
equipment that were not previously disclosed in Q1 2006.Explanation of Mark's financial results
The 18.2 percent increase in gross operating revenue is attributable
primarily to the strong growth in same store sales combined with the
cumulative impact of new store builds and the conversion of franchisees to
corporate stores.
Pre-tax income increased 34.3 percent due to higher sales combined with a
20 basis point improvement in gross margin. Margin improvement reflects
reduced product costs in relation to retail values due to Mark's on-going
global sourcing initiative combined with higher markups, offset partially by
increased seasonal markdowns. Expenses increased by 16 percent, but improved
as a percentage of corporate store sales by 70 basis points compared to the
first quarter of 2006. The increase in expenses was made up primarily of
staffing, occupancy, advertising and distribution costs reflecting Mark's
current and future growth prospects.
4.2.4 Business risks
Mark's is exposed to a number of risks in the normal course of its
business that have the potential to affect its operating performance. These
include, but are not limited to, seasonality risk and market obsolescence
risk. These risks and management's mitigation strategy are explained in more
detail in Section 4.2.2.5 of our 2006 Financial Report.
Please also refer to section 8.0 of this MD&A for a discussion of some
other industry and company-wide risks affecting the business.
4.3 Canadian Tire Petroleum
4.3.1 Strategic Plan update and outlook
Petroleum plays a strategic role in increasing customer loyalty and
driving revenue and earnings for CTR and Financial Services. Petroleum
increases Canadian Tire's total value proposition by offering Canadian Tire
'Money' loyalty rewards on gas purchases paid for in cash or by Canadian
Tire's Options MasterCard. Petroleum also supports other cross-marketing
promotions and joint product launches, such as Canadian Tire's Gas Advantage
MasterCard, which has gained wide popularity since its introduction in Ontario
in mid 2006. Customers who have a Canadian Tire MasterCard and purchase gas at
Petroleum are Canadian Tire's most loyal and profitable customers.
The following outlines Petroleum's performance in the first quarter of
2007 in the context of the 2005-2009 Strategic Plan, and provides an outlook
for 2007 and for the full Plan period.-------------------------------------------------------------------------
Strategic Plan update and outlook
-------------------------------------------------------------------------
Site renewal and expansion
Petroleum is focusing on modernizing existing sites and adding new sites
in high-potential markets. On an opportunistic basis, Petroleum will
also continue its re-branding initiative to convert competitor sites to
the Canadian Tire brand.
-------------------------------------------------------------------------
Q1 2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
First quarter Management will continue to
evaluate the appropriate level
In the first quarter, Petroleum of investment in Petroleum on
opened four new gas stations and an annual basis.
re-branded one gas station.
Petroleum did not close any gas 2007 Outlook
stations during the quarter.
In 2007, Petroleum plans to open
Petroleum also opened five new nine new petroleum sites in
convenience stores and one car strategic locations and invest
wash. in the modernization of
approximately 25 existing sites.
At the end of the quarter,
Petroleum had 265 gas stations, In addition, Petroleum will open
including 42 re-branded sites, nine convenience stores at the
and 256 convenience stores. new petroleum sites referred to
above.
-------------------------------------------------------------------------
Enhancing interrelatedness
Petroleum's business is integrated with CTR and Financial Services
through Canadian Tire 'Money' and various cross-marketing programs
designed to build customer loyalty. Petroleum is also exploring the
potential of cross-marketing programs with Mark's to extend Petroleum's
marketing leverage across the Company.
-------------------------------------------------------------------------
Q1 2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
Petroleum's cross-marketing In 2007, Petroleum will
programs include: aggressively seek out additional
- 'Multiplier' coupons that cross-marketing opportunities to
increase the Canadian Tire leverage its customer loyalty to
'Money' offered on gas drive sales and earnings across
purchases paid for in cash or the enterprise.
by the Canadian Tire Options
MasterCard
- coupons offering discounts on
Canadian Tire merchandise with
the purchase of gas
- the Gas Advantage MasterCard
rolled out in Ontario in mid
2006
-------------------------------------------------------------------------
4.3.2 Key performance indicators
Gasoline sales volume is a key top-line performance indicator for
Petroleum, as measured by the number of gasoline litres sold. Fluctuations in
the wholesale and retail price of gasoline may result in fluctuations in
Petroleum's margin and profitability.
Gasoline sales volume
Q1 2007 Q1 2006 Change
-------------------------------------------------------------------------
Sales volume (millions of litres) 415.3 384.8 7.9%
-------------------------------------------------------------------------
Strong performance by the Gas Advantage MasterCard and an improvement in
the Western Canada loyalty program continued to drive gasoline volume in the
first quarter of 2007. On a comparable site basis, gasoline volume increased
by 6.6 percent in the quarter. The supply chain disruption caused by a fire at
a key supplier's refining facility in Ontario did not have a material impact
on Petroleum's sales volume or financial results for the quarter.
Petroleum's convenience and car wash sales
(year-over-year percentage change) Q1 2007 Q1 2006
-------------------------------------------------------------------------
Total retail sales
Convenience store sales 16.9% 9.2%
Car wash sales 20.8% 10.4%
-------------------------------------------------------------------------
Comparable sales
Convenience(1) 12.3% 4.4%
Car wash 17.1% (23.5)%
-------------------------------------------------------------------------
(1) Comparable convenience sales excludes three "Q" convenience stores.
The increase in customer traffic at our Petroleum sites, in spite of
disruptions to the supply of gasoline during the quarter and an increase in
tobacco and lottery sales drove the increase in convenience store sales in the
first quarter of 2007. The cumulative impact of the increase in the number of
sites, a new initiative at CTR stores to sell car wash vouchers for use at
Petroleum's sites and softness experienced in the comparable period in the
prior year contributed to higher total car wash sales for the current quarter.
4.3.3 Petroleum's financial results
($ in millions) Q1 2007 Q1 2006 Change
-------------------------------------------------------------------------
Retail sales $ 385.4 $ 354.0 8.9%
Gross operating revenue 362.8 335.1 8.3%
EBITDA(1) 6.5 5.3 22.5%
Earnings before income taxes 2.5 1.7 50.0%
-------------------------------------------------------------------------
Less adjustment for:
Loss on disposals of property and
equipment (0.2) (0.1)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(1) $ 2.7 $ 1.8 58.8%
-------------------------------------------------------------------------
(1) See section 11.0 on non-GAAP measures.-------------------------------------------------------------------------
-------------------------------------------------------------------------
Petroleum's retail sales
Retail sales include the sales of gasoline at Petroleum's entire network
of petroleum sites, including re-branded sites, recorded at retail pump
prices, and excluding goods and services taxes and provincial sales
taxes, where applicable. Retail sales also include sales of products sold
at our convenience stores, car wash sales, propane and PitStop sales, all
of which we record at retail selling prices.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gasoline pricing
Petroleum buys gasoline at wholesale cost, which varies by geographic
region, and sells it at market prices. Petroleum has a multi-year
contract with a major supplier to purchase the majority of its gasoline
requirements at competitive rates.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Explanation of Petroleum's financial results
Growth in gasoline volume and double-digit increases in convenience and
car wash sales contributed to Petroleum's revenue growth in the first quarter.
Retail prices in the key Ontario market increased and exhibited less
volatility during the quarter, leading to a significant improvement in
gasoline margins. Effective expense control also contributed to improved
profitability. Petroleum incurred $0.2 million in environmental expenses in
the first quarter related to clean-up costs associated with certain sites.
4.3.4 Business risks
Petroleum is exposed to a number of risks in the normal course of its
business that have the potential to affect its operating performance. These
include, but are not limited to, commodity price risk and environmental risk.
These risks and management's mitigation strategy are explained in more detail
in Section 4.2.3.5 of our 2006 Financial Report.
Please also refer to section 8.0 for a discussion of some other
industry-wide and company-wide risks.
4.4 Canadian Tire Financial Services
4.4.1 Strategic Plan update and outlook
The following outlines Financial Services' performance in the first
quarter of 2007 in the context of the 2005-2009 Strategic Plan, and provides
an outlook for 2007 and for the full Plan period.-------------------------------------------------------------------------
Strategic Plan update and outlook
-------------------------------------------------------------------------
Total managed portfolio of loans receivable (credit card loans, personal
loans and residential mortgage loans)
Financial Services plans to grow its portfolio through increases in
average balances, new account acquisition, the introduction of new credit
cards and continued testing of the personal loan portfolio. Financial
Services is leveraging its low-cost in-store acquisition program as a
high-volume channel to grow the base of customer accounts. The average
balance on customer accounts is gradually increasing through initiatives
such as low-rate balance transfer offers. In addition, management
believes that there are further opportunities to grow the customer base
by introducing premium and specialty credit cards with different bonus
features. The Gas Advantage MasterCard, for example, offers a compelling
customer value proposition which drives credit card balances while
increasing gasoline volume at Petroleum. The average balance on Financial
Services' credit card accounts is $1,829, well below the industry average
of over $2,500, which translates into a substantial long-term growth
opportunity.
-------------------------------------------------------------------------
Q1 2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
First quarter Over the 2005-2009 Plan period,
Financial Services plans to
Gross average loans receivable increase the number of accounts with
were $3.5 billion in the first balances by three to four percent
quarter, up 6.2 percent from the annually.
first quarter of 2006. The growth
reflects a 2.0 percent increase 2007 Outlook
in customer accounts with a
balance and a 4.1 percent Financial Services plans to increase
increase in the average account total portfolio gross average loans
balance. receivable to $3.7 billion in 2007.
Financial Services also plans to
introduce at least one new credit
card product and expand the Gas
Advantage MasterCard into other
regions of the country.
-------------------------------------------------------------------------
Insurance and other ancillary products
Financial Services plans to enhance its insurance and warranty product
offerings to credit card customers. Revenues from insurance and warranty
products have increased significantly in the last four years through
direct marketing to Canadian Tire's growing base of customers.
-------------------------------------------------------------------------
Q1 2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
Revenues from insurance and Financial Services plans to
warranty products increased increase revenues from insurance and
9.4 percent in the first quarter warranty products by approximately
of 2007 year-over-year. six percent on a compound annual
basis over the 2005- 2009 Plan
In 2006, Financial Services period.
launched a new service called
"Identity Watch", which provides 2007 Outlook
customers with services to
protect them against identity Financial Services plans to increase
theft if their wallets are lost revenues from insurance and warranty
or stolen. The Identity Watch products by approximately
program is on track to meet its nine percent in 2007.
target enrollment for 2007.
-------------------------------------------------------------------------
Retail banking
Financial Services began offering retail banking products including high
interest savings accounts, guaranteed investment certificates and
residential mortgages in two pilot markets in October 2006. The retail
banking business leverages the trust and credibility Canadian Tire has
earned over the last 40 years providing financial services to millions of
customers.
-------------------------------------------------------------------------
Q1 2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
Financial Services launched its The retail banking pilot will run
retail banking products in two for approximately 24 months. During
pilot markets in October 2006. this time its future potential will
Financial Services is supporting be assessed.
the launch with a multi-faceted
marketing program including flyer 2007 Outlook
inserts, direct mail, television
and radio advertisements, Financial Services plans to
billboards and in-store introduce additional retail banking
advertising to increase customer products in 2007.
awareness. Customers can sign up
for Canadian Tire's retail Financial Services will incur
banking products online, by phone approximately $25 million in
or in-store in the pilot markets. expenses associated with the
The investment in retail banking marketing and operations of the
impacted Financial Services EBT retail banking initiative in 2007.
by $4.8 million during the
quarter.
-------------------------------------------------------------------------
4.4.2 Key performance indicators
The following are key indicators of Financial Services' performance:
- size of the total managed portfolio
- profitability of the portfolio
- quality of the portfolio
Financial Services' total managed portfolio of loans receivable
($ in millions, except where noted) Q1 2007 Q1 2006 Change
-------------------------------------------------------------------------
Average number of accounts with
a balance (thousands) 1,845 1,808 2.0%
Average account balance ($) $ 1,907 $ 1,832 4.1%
Gross average receivables (GAR) 3,517.9 3,313.3 6.2%
Total managed portfolio (end of period) 3,473.5 3,294.2 5.4%
-------------------------------------------------------------------------
Net managed portfolio (end of period) 3,438.0 3,260.0 5.5%
--------------------------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------
Net managed portfolio
Financial Services' net managed portfolio is the total value, after
allowances, of loans receivable including credit card loans, personal
loans and residential mortgage loans.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial Services' total managed portfolio of loans receivable reached
$3.5 billion at the end of the first quarter, consisting of $3.3 billion of
credit card loans receivable and $0.2 billion of personal loans receivable.
The successful rollout of the Gas Advantage MasterCard in Ontario in the
second quarter of 2006 combined with an increase in average account balances
resulted in an 8.7 percent increase in credit card loans receivable over the
first quarter of 2006. The personal loan product continues to be tested and
represents approximately six percent of the total managed portfolio.
In prior periods, Financial Services experienced a period of accelerated
growth during the conversion of its existing proprietary card portfolio to a
MasterCard portfolio. Now that the conversion is complete, Financial Services'
growth will be driven by increases in average account balances, modest
increases in new accounts and the introduction of new credit card and
insurance products. Management regards new retail banking products as another
high-potential channel for growth in the longer term.
Financial Services' profitability
Financial Services' profitability measures are tracked as a percentage of
GAR, shown in the table below.Profitability of total managed portfolio(1)
Q1 2007 Q1 2006 Q1 2005
-------------------------------------------------------------------------
Total revenue as a % of GAR(2) 24.96% 25.22% 26.55%
Gross margin as a % of GAR(2) 13.12% 13.31% 13.78%
Operating expenses as a % of GAR(3) 7.78% 8.27% 9.06%
Return on average total managed
portfolio(2),(3),(4) 5.34% 5.03% 4.72%
-------------------------------------------------------------------------
(1) Figures are calculated on a rolling 12-month basis and comprise the
total managed portfolio of loans receivable.
(2) Excludes gains (losses) on sales of loans receivable and gain on
redemption of investment.
(3) Excludes the impact of the modification to the stock option
agreements in the fourth quarter of 2006.
(4) Return is calculated as earnings before taxes as a percentage of GAR.-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin
Gross margin is Financial Services' total revenue less direct expenses
associated with credit card, personal and mortgage loans, insurance and
warranty products. The most significant direct expenses are the provision
for credit losses associated with the credit card and personal loan
portfolios, the loyalty program and interest expense.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The transformation of Financial Services' portfolio over the last few
years from a proprietary store credit card portfolio to a MasterCard portfolio
has resulted in lower revenue and margins as a percentage of GAR as MasterCard
accounts carry a lower interest rate compared to the proprietary accounts. The
industry average balance for MasterCards is, however, substantially higher,
which provides increased earnings potential through cross-selling of
balance-based insurance products. Management expects that continued growth in
loans receivable, higher sales of insurance and warranty products and ongoing
improvements in the operating expense ratio will offset the reduction in
revenue and gross margin as a percentage of gross average receivables, as
reflected in the table above.
Operating expenses as a percentage of GAR have continued to decline due
to ongoing expense management efforts and growth in the size of the total
managed portfolio.
As part of the strategic planning process, management set a long-term
goal of managing Financial Services' pre-tax return on the total managed
portfolio in the target range of 4.5 to 5.0 percent. As shown in the table
above, Financial Services exceeded this target in the first quarter of the
last two years.Portfolio quality
Q1 2007 Q1 2006 Q1 2005
-------------------------------------------------------------------------
Net write-off rate (rolling 12-month basis) 5.95% 5.98% 5.96%
Account balances less than 30 days overdue
at end of period 96.29% 96.31% 96.01%
Allowance rate 2.48% 2.55% 2.67%Net write-offs
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net write-offs is the sum of account balances that are written off, less
monies collected against account balances that were previously written
off. Net write-off rate is the net write-offs, expressed as a percentage
of gross average receivables in a given period.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The credit card portfolio net write-off rate improved from 6.19 percent
in the first quarter of 2006 to 5.82 percent during the first quarter of 2007,
reflecting the benefits of a number of initiatives to improve the overall
quality of the portfolio.
Periodic fluctuations in write-offs, aging and allowances occur as a
result of a variety of economic influences such as job growth or losses,
personal debt levels and personal bankruptcy rates.4.4.3 Financial Services' financial results
($ in millions) Q1 2007 Q1 2006 Change
-------------------------------------------------------------------------
Gross operating revenue $ 182.3 $ 161.7 12.7%
EBITDA(1) 52.2 35.6 46.8%
Earnings before income taxes 45.4 29.4 54.5%
-------------------------------------------------------------------------
Less adjustment for:
Loss on disposals of property
and equipment (0.1) (0.1)
Loss on sales of loans receivable (3.0) (12.7)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(1) $ 48.5 $ 42.2 15.1%
-------------------------------------------------------------------------
(1) See section 11.0 on non-GAAP measures.Explanation of Financial Services' financial results
Increases in the number of accounts with a balance and in average account
balances were the key drivers of gross operating revenue in the first quarter.
Revenues from balance-based insurance products, warranties and other
ancillary products were also higher in the quarter.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Securitization of loans receivable
Securitization is the process by which interests in financial assets are
sold to a third party. Financial Services routinely securitizes credit
card loans receivable by selling a co-ownership interest to Glacier
Credit Card Trust (GCCT). Personal loans are sold to a third party trust
for considerations that include cash and a retained interest in the
assets. We record these transactions as a sale, and as a result, these
assets are not included on our Consolidated Balance Sheets. Financial
Services securitizes between 70 percent and 80 percent of loans
receivable on an ongoing basis.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial Services' adjusted earnings before income taxes were up 15.1
percent due to higher gross operating revenue, combined with reductions in the
operating expense ratio and the allowance rate. First quarter 2007 results
include an investment of $4.8 million in the retail banking initiative
compared to $0.2 million in the first quarter of 2006.
4.4.4 Business risks
Financial Services is exposed to a number of risks in the normal course
of its business that have the potential to affect its operating performance.
These include, but are not limited to, consumer credit risk, interest rate
risk and securitization funding risk. These risks and management's mitigation
strategies are explained in more detail in Section 4.2.4.5 of our 2006
Financial Report.
Please also refer to section 8.0 of this MD&A for a discussion of some
other industry-wide and company-wide risks affecting the business.
Most of Financial Services' revenue is not interest rate sensitive as it
is generated primarily from Canadian Tire MasterCards, which carry a fixed
interest rate appropriate to customer segments with common credit ratings.
Canadian Tire constantly monitors the potential impact of interest rate
fluctuations on its fixed versus floating rate exposure and manages its
overall balance to reduce the magnitude of this exposure.
As the success of Financial Services is partially dependent upon its
ability to access capital markets at favourable rates, and given the rapid
growth of the total managed portfolio, maintaining the quality of the
securitized loans receivable is a key priority of Financial Services.
5.0 Capital structure and financing
5.1 Capital structure
Improving our financial flexibility is one of our long-term goals and one
of the imperatives of our 2005-2009 Strategic Plan.
We regularly review our funding plan and capital structure to ensure that
we have sufficient funding options to provide us with the financial
flexibility to implement our growth initiatives and meet the targets of our
2005-2009 Strategic Plan.
As at the dates indicated, our capital structure was as follows:At At At
March 31, April 1, December
(composition of total structure) 2007 2006 30, 2006
-------------------------------------------------------------------------
Shareholders' equity 67.0% 60.3% 67.2%
Minority interest(1) - 7.1% -
Short-term debt 0.5% - -
Long-term debt(2) 27.8% 27.9% 28.3%
Other long-term liabilities 3.0% 2.6% 2.7%
Future income taxes 1.7% 2.1% 1.8%
-------------------------------------------------------------------------
100.0% 100.0% 100.0%
-------------------------------------------------------------------------
(1) Refer to Note 7 of the Notes to the Consolidated Financial
Statements.
(2) Includes the current portion of long-term debt.Equity
The book value of Common and Class A Non-Voting Shares at the end of the
quarter was $34.75 per share compared to $31.20 at the end of the first
quarter of 2006.
We have a policy of repurchasing Class A Non-Voting Shares to offset the
dilutive effect of shares issued to fulfill the Company's obligations under
various employee profit sharing, stock option and share purchase plans and the
dividend reinvestment plan. In the long term, these repurchases are expected
to offset the issuance of new Class A Non-Voting Shares.
On February 8, 2007, we announced our intention to initiate a normal
course issuer bid (NCIB) to purchase a maximum of 1.4 million of the issued
and outstanding Class A Non-Voting Shares over the 12-month period ending
February 18, 2008.
A NCIB is a bid by a listed company to buy back its shares, up to a
prescribed number, on a stock exchange, subject to certain rules that protect
investors. A total of approximately 1.2 million Class A Non-Voting Shares were
purchased in 2006 under the previous NCIB.
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 for a limited partnership
interest with preferential rights to distribution of income and capital. On
April 3, 2006, 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.Shares outstanding
At At
March 31, April 1,
2007 2006
-------------------------------------------------------------------------
Class A Non-Voting Shares (CTC.a)
Shares outstanding at beginning of period 78,047,456 78,032,724
Shares issued under plans(1) 91,765 187,091
Shares purchased under NCIB (90,000) (211,300)
-------------------------------------------------------------------------
Shares outstanding at end of period 78,049,221 78,008,515
Common Shares (CTC)
Shares outstanding at beginning and
end of the period 3,423,366 3,423,366
-------------------------------------------------------------------------
(1) We issue shares under various employee profit sharing, stock option
and share purchase plans, and the dividend reinvestment plan.Dividends
Dividends of $15.1 million were declared on Common and Class A Non-Voting
Shares in the first quarter of 2007 compared to dividends of $13.4 million in
the first quarter of 2006. The increase in dividends declared reflected the
Board of Directors' decision in February 2007 to increase the annual dividend
rate by 12 percent from $0.66 per share to $0.74 per share. The first
quarterly dividend at the 2007 rate was declared on March 8, 2007 in the
amount of $0.185 per share payable on June 1, 2007 to shareholders of record
as of April 30, 2007.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Dividend policy
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 earnings per share for this purpose exclude gains and losses
on the sale of credit card receivables and non-recurring items but
include gains and losses on the ordinary course disposition of property
and equipment.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Short-term debt
We have a program in place that allows us to issue commercial paper to a
maximum authorized limit of $800 million. We had $21.5 million in commercial
paper outstanding at March 31, 2007. There was no commercial paper outstanding
at April 1, 2006 and December 30, 2006.
Credit ratings for the Company's commercial paper are R-1(low) from
Dominion Bond Rating Service Limited (DBRS) and A-1(low) from Standard &
Poor's (S&P).
At March 31, 2007, April 1, 2006 and December 30, 2006 we had
$645 million in committed lines of credit. The committed lines were not drawn
upon at the end of any of these periods.
Long-term debt
On January 16, 2006, we repaid $200 million of medium term notes (MTNs)
that had matured.
To allow for timely access to debt markets, we filed a shelf prospectus
with provincial and territorial securities commissions on March 9, 2007 for
the issuance of a maximum of $750 million of MTNs over a 25 month period.
As of the end of the first quarter of 2007, long-term debt included
$1.8 million of capital leases.
Like most borrowers, we provide covenants to our lenders. We are in
compliance with all of our debt covenants.
The Company's long-term debt is currently rated A(low) by DBRS and BBB+
by S&P.
5.2 Funding program
5.2.1 Funding requirements
We fund our capital expenditures, working capital needs, dividend
payments and other financing needs, such as debt repayments and Class A
Non-Voting Share purchases under the NCIB, from a combination of sources. In
the first quarter of 2007, the primary sources of funding were:- $741 million of cash on hand at the beginning of the quarter
- $168 million of cash flow from operations, before working capital
requirements
- $103 million of cash generated from the drawdown in loans receivable
- $22 million of cash generated from the issuance of commercial paper5.2.2 2007 Capital program
Canadian Tire's capital expenditures totaled $93 million in the first
quarter on an accrual basis, ($126 million on a cash-basis as disclosed in the
Consolidated Financial Statements of Cash Flows, see Note 10), a 55 percent
increase from the $60 million spent on an accrual basis in the first quarter
of 2006 ($84 million on a cash-basis as disclosed in the Consolidated
Financial Statements of Cash Flows, see Note 10). Those capital expenditures
were comprised of:- $49 million for real estate projects, including $41 million associated
with the rollout of CTR's Concept 20/20 stores
- $24 million for the Eastern Canada distribution centre in the province
of Quebec
- $11 million for information technology
- $9 million for other purposesOverall, capital investments for real estate projects were up
significantly year-over-year in the first quarter, primarily due to the
acceleration of the Concept 20/20 store rollout, investment in the
construction of an Eastern Canada distribution centre and other capital
required for some larger urban store developments.
5.2.3 2007 Capital plan
The 2007 capital plan is for expenditures in the range of $580 million to
$620 million. The 2007 capital plan is comprised of the following investments,
which total $600 million:- $352 million for real estate projects, including $269 million
associated with the rollout of CTR's Concept 20/20 stores
- $110 million for the Eastern Canada distribution centre in the
province of Quebec
- $75 million for information technology
- $63 million for other purposes5.2.4 Working capital
Reducing our working capital requirements continues to be a long-term
priority. The table below shows the change in the value of our working capital
components at the end of the first quarter of 2007 and 2006.Comparable working capital components
Increase/
(decrease)
At At in
March 31, April 1, working
($ in millions) 2007 2006 capital
-------------------------------------------------------------------------
Accounts receivable $ 576.8 $ 571.4 $ 5.4
Merchandise inventories 886.3 898.0 11.7
Prepaid expenses and deposits 61.5 58.4 3.1
Income taxes payable (3.0) (21.3) 18.3
Accounts payable and other (1,185.6) (1,035.5) (150.1)
-------------------------------------------------------------------------
$ (111.6)
-------------------------------------------------------------------------
The most significant change in working capital components was an increase
in accounts payable that was due to timing differences in payments to
suppliers.
5.2.5 Cash and cash equivalents
At March 31, 2007, the Company was in a negative cash position of
$20 million in cash and cash equivalents compared to a positive cash position
of $741 million at December 30, 2006 and $256 million at April 1, 2006. This
change from the year end position reflects seasonal fluctuations in cash
balances, as cash balances are historically high at year end, post the
Christmas selling season. During the first quarter of 2007, we used cash
primarily for the following:
- $356 million reduction in accounts payable, primarily related to the
payment of trade payables for merchandise purchased prior to the end
of the preceding year
- $219 million to fund growth in accounts receivable
- $231 million to fund growth in merchandise inventories
- $126 million for the addition of property and equipment
- $36 million to fund further growth in loans receivable
The unusually large cash balance at the end of the first quarter of 2006
was due to the sale and leaseback of two distribution centres in that period.
5.2.6 Loans receivable
Our loans receivable securitization program is designed to provide a
cost-effective source of funding for Financial Services. Loans receivable were
as follows at the indicated dates:
At At At
March 31, April 1, December
($ in millions) 2007 2006 30, 2006
-------------------------------------------------------------------------
Securitized $2,784.8 $2,608.7 $2,827.4
Unsecuritized 653.3 651.3 771.8
-------------------------------------------------------------------------
Net managed loans receivable $3,438.1 $3,260.0 $3,599.2
-------------------------------------------------------------------------Net managed loans receivable continued to increase over the last twelve
months as customers' use of the Canadian Tire MasterCard grew and new personal
loans were granted. At the end of the first quarter of 2007, net managed loans
receivable were 5.5 percent higher than at the end of the first quarter of
2006.
Canadian Tire Bank (CTB) sells co-ownership interests in credit card
loans to GCCT. The Company does not have a controlling interest in GCCT, so we
do not include financial results of GCCT in our Consolidated Financial
Statements.
We record the sale of loans receivable in accordance with CICA's
Accounting Guideline 12 "Transfers of Receivables". Please see Note 2 to the
Consolidated Financial Statements found in the 2006 Financial Report.
For the 13 weeks ended March 31, 2007, we recognized a pre-tax loss of
$3.0 million (2006 - $12.7 million pre-tax loss) on securitization
transactions.
We expect the growth in the number and average balances of Canadian Tire
MasterCard credit card accounts to lead to an increase in total loans
receivable in 2007. Financial Services expects to continue to fund most of
this increase from the sale of co-ownership interests in credit card loans to
GCCT. GCCT is a third party trust that was formed to buy our credit card loans
and also issues debt to third party investors to fund its credit card loans
purchases. See section 7.1 below for further information. The success of the
securitization program is mainly due to GCCT's ability to obtain funds from
third parties by issuing debt instruments with high credit ratings. As of
March 31, 2007 GCCT had the following ratings:- a rating of R-1(high) from DBRS for the asset-backed commercial paper
program
- ratings of AAA from DBRS and S&P for the asset-backed senior notes
- ratings of A from DBRS and S&P for the asset-backed subordinated notesThe trustee and custodian for GCCT, The Canada Trust Company, manages the
co-ownership interest and acts as agent for, and on behalf of, Canadian Tire
Bank and GCCT, as the owners of the co-ownership interests. BNY Trust Company
of Canada acts as indenture trustee with respect to GCCT and manages the
security interests of the holders of the senior and subordinated notes issued
by GCCT. We are currently not aware of any events, commitments, trends or
uncertainties that may have a negative impact on our arrangement with GCCT.
5.3 Financial ratios
We have ready access to funding from the financial markets because of our
relatively strong balance sheet and healthy financial ratios. We have a
long-standing policy of keeping our ratio of long-term debt to total
capitalization below 50 percent.
The following table shows the changes in financial ratios over the past
year.At At
March 31, April 1,
2007 2006
-------------------------------------------------------------------------
Ratio of long-term debt to total capitalization(1) 27.8% 27.9%
Ratio of current assets to current liabilities 1.74:1 2.26:1
Interest coverage(2) 9.0 times 8.0 times
-------------------------------------------------------------------------
(1) Long-term debt includes current portion.
(2) We calculate interest coverage on a rolling 12-month basis using
earnings before interest, income taxes and minority interest.
5.4 Foreign operations
Since the late 1970s, the Company has established operations outside
Canada for a variety of business purposes. This has resulted in a portion of
the Company's capital and accumulated earnings being in wholly owned foreign
subsidiaries. As there are currently no plans to repatriate the capital and
earnings, Canadian and foreign taxes that might arise upon such repatriation
have not been provided for. These funds have been accumulated in the following
international operations:
a) U.S. based subsidiaries hold highly rated short-term securities and
loans to the Company and its wholly owned Canadian subsidiaries. The
capital and earnings of these U.S. based subsidiaries arose from
investments made to offset net operating losses incurred by U.S.
retail operations closed in the 1980s and 1990s and from the
reinsurance of risks relating to certain insurance products marketed
to customers of Financial Services and other reinsurance activities.
b) subsidiaries operating in the Pacific rim have provided the Company
with a variety of important services related to product sourcing,
logistics and vendor management. These subsidiaries have earned
commissions for such services for over 20 years.
c) a Bermuda-based reinsurance company was established in 2004 to
reinsure the risk of certain insurance products marketed to customers
of Financial Services. In addition to its reinsurance activities,
this company invests in highly rated short-term securities and makes
loans to the Company.6.0 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
issue further reassessments 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 were expected to (and, as noted below,
subsequently did) reassess for the corresponding periods. The Company does not
have a significant exposure on these matters subsequent to the 2003 taxation
year. The reassessments 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 $261 million. Although the Company will appeal these
reassessments, current tax legislation requires the Company to remit to the
CRA and its provincial counterparts approximately $163 million, of which
$110 million had been remitted by the end of the quarter.
Subsequent to the end of the quarter, the Company paid on account an
additional $45 million to provincial tax authorities. 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 tax liability 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.
7.0 Off-balance sheet arrangements
7.1 Glacier Credit Card Trust
As noted earlier, GCCT was formed to buy our credit card loans and issues
debt to third party investors to fund its credit card loans purchases. Refer
to sections 4.4.3 and 5.2.6 of this MD&A for additional information on GCCT.
7.2 Personal loan securitization
As previously discussed in section 5.2.6 of this MD&A, we sold a portion
of our personal loan receivables to a third party trust. Refer to MD&A section
8.2 of our 2006 Financial Report for additional information.
7.3 Trust financing for Associate Dealers
A financing program has been established to provide an efficient and
cost-effective way for Associate Dealers to access the majority of the
financing they require for their store operations. Refer to MD&A section 8.3
of our 2006 Financial Report for additional information on this program.
7.4 Bank financing for Associate Dealers and PartSource franchisees
We have guaranteed the bank debt of some Associate Dealers and some
PartSource franchisees. Refer to MD&A section 8.4 of our 2006 Financial Report
for additional information on these guarantees.
7.5 Derivative financial instruments
We use derivative financial instruments to manage our exposure to changes
in interest rates and foreign currency exchange rates. We also use equity
derivative contracts to hedge certain future stock-based compensation
expenses. We do not use hedging to speculate, but rather as a risk management
tool. Refer to MD&A section 8.5 in our 2006 Financial Report for additional
information on derivative financial instruments.
8.0 Enterprise risk management
To preserve and enhance shareholder value, the Company approaches the
management of risk strategically through its Enterprise Risk Management (ERM)
framework. Introduced in 2003, the ERM framework sets out principles and tools
for identifying, evaluating, prioritizing and managing risk effectively and
consistently across the Company.
The ERM framework and the identification of principle risks that the
Company manages on an ongoing basis is described in detail in section 9.0 of
the MD&A in our 2006 Financial Report.
Management reviews risks on an ongoing basis and did not identify any new
principal risks during the first quarter of 2007
9.0 Contractual obligationsContractual obligations due by period
In the
remaining
nine In years In years
months 2008 2010 After
($ in millions) Total of 2007 - 2009 - 2011 2011
-------------------------------------------------------------------------
Long-term debt(1) $1,170.5 $ 1.4 $ 153.6 $ 164.8 $ 850.7
Capital lease
obligations 1.8 0.8 1.0 - -
Operating leases 1,879.8 142.8 367.2 308.6 1,061.2
Purchase obligations 892.4 766.0 109.6 11.5 5.3
Other obligations 24.6 3.5 11.8 3.1 6.2
-------------------------------------------------------------------------
Total contractual
obligations $3,969.1 $ 914.5 $ 643.2 $ 488.0 $1,923.4
-------------------------------------------------------------------------
(1) The long-term debt number in the Consolidated Balance Sheet has been
adjusted by $2.9 million due to the implementation of the new
Financial Instrument standard.10.0 Changes in accounting policies
10.1 Consolidation of variable interest entities
In June 2003, the CICA issued Accounting Guideline 15, "Consolidation of
Variable Interest Entities" (AcG-15). This guideline was amended in September
2004 to harmonize with the related U.S. accounting standard, which had been
revised in December 2003. AcG-15 requires companies to include certain
variable interest entities in their annual or interim consolidated financial
statements beginning on or after November 1, 2004.
In the fourth quarter of 2004, we made structural changes to the
arrangements involving the independent trusts described in sections 8.1, 8.2
and 8.3. Consequently, we were not required to include the financial results
of the trusts in our Consolidated Financial Statements for the period ended
March 31, 2007.
A number of the corporations owned and operated by independent Associate
Dealers and by Mark's and PartSource franchisees are variable interest
entities. Although a few of these corporations required some subordinated
financial support from us during the year, none of these corporations have
been included in our Consolidated Financial Statements as the impact of
consolidating these corporations was not material.
10.2 Financial instruments, hedging, equity and comprehensive income
As part of Canada's move toward harmonization with International
Accounting Standards (currently expected to be completed by 2011), the CICA
issued five new accounting standards that apply to the Company as of the first
day of our 2007 fiscal year. These are: a) CICA Handbook Section 3855 -
Financial Instruments, Recognition and Measurement b) CICA Handbook Section
3861 - Financial Instruments - Disclosure and Presentation c) CICA Handbook
Section 3865 - Hedges d) CICA Handbook Section 3251 Equity and e) CICA
Handbook Section 1530 - Comprehensive Income.
Financial instruments
The standards related to financial instruments require us to classify
financial assets and liabilities according to their characteristics and
management's choices and intentions related thereto for the purposes of
ongoing measurement. Classification choices for financial assets include: a)
Held for Trading; b) Held to Maturity; c) Available for Sale and d) Loans and
Receivables. Classification choices for financial liabilities include: a) Held
for Trading and b) Other. Subsequent measurement for these assets and
liabilities are based on either fair value or amortized cost using the
effective interest method, depending upon their classification.
Comprehensive income
Under the new comprehensive income standard, we are required to report in
a new financial statement entitled "Statement of Comprehensive Income" changes
in the fair value of certain of these financial assets and liabilities (e.g.
the effective portion of changes in the fair value of a derivative designated
in a cash flow hedging relationship). The "Accumulated Other Comprehensive
Income" (i.e. the portion of comprehensive income not already included in net
earnings) is being presented as a separate line in shareholders' equity.
Hedging
With respect to the new standard related to hedging, the Company enters
into various cash flow hedges, including foreign currency contracts and equity
derivatives (used to hedge employee stock-based compensation plans). In cash
flow hedges, the effective portion of the change in fair value of the hedging
item is recorded in other comprehensive income. To the extent the change in
fair value of the derivative is not completely offset by the change in the
fair value of the hedged item, the ineffective portion of the hedging
relationship is recorded immediately in net earnings. The Company also enters
into various fair value hedges, including interest rate swaps. In fair value
hedges the change in fair value of both the hedged item attributable to the
risk being hedged and the entire hedging item are recorded in the net earnings
on a quarterly basis.
The maximum length of time over which the Company is hedging its exposure
to future cash flow variability for anticipated transactions is ten years.
Equity
This new CICA Handbook section describes standards for the presentation
of equity and changes in equity in the period, with specific reference to the
new Comprehensive Income standard.
For a detailed description of the new accounting standards and their
impact on the opening balances of Retained Earnings, Accumulated Comprehensive
Income and other Balance Sheet Components please see Note 2 to the
Consolidated Financial Statements for the period ended March 31, 2007.
The impact of adopting the new standards on the 2007 first quarter net
earnings was not significant.
While the new standards have resulted in changes to our financial
results, revised accounting procedures and additional disclosures, they are
not expected to have a material impact on the Company's cash flows, business
strategy or risk management processes in the foreseeable future.
11.0 Non-GAAP measures
The following measures included in this MD&A do not have a standardized
meaning under Canadian generally accepted accounting principles (GAAP):- EBITDA (earnings before interest, income taxes, depreciation and
amortization) and minority interest
- adjusted earnings
- same store sales
- comparable sales for Petroleum sitesPlease refer to Management's Discussion and Analysis in our 2006 Annual
and Financial Reports for additional information on non-GAAP measures.
EBITDA and minority interest
With the exception of Financial Services, we consider EBITDA and minority
interest to be an effective measure of the contribution of each of our
businesses to our profitability on an operational basis, before allocating the
cost of income taxes and capital investments. EBITDA and minority interest is
also commonly regarded as an indirect measure of operating cash flow, a
significant indicator of success for many businesses.
A reconciliation of EBITDA and minority interest to the most comparable
GAAP measure (earnings before income taxes and minority interest) is provided
as follows:Reconciliation of EBITDA to GAAP measures(1)
($ in millions) Q1 2007 Q1 2006
-------------------------------------------------------------------------
EBITDA and minority interest
CTR $ 99.0 $ 97.5
Financial Services 52.2 35.6
Petroleum 6.5 5.3
Mark's 16.0 12.8
Eliminations (10.1) (7.5)
-------------------
Total EBITDA and minority interest $ 163.6 $ 143.7
-------------------
Less: Depreciation and amortization expense
CTR $ 36.8 $ 35.9
Financial Services 3.3 3.2
Petroleum 4.0 3.6
Mark's 4.3 3.9
-------------------
Total depreciation and amortization expense $ 48.4 $ 46.6
-------------------
Interest expense
CTR $ 22.2 $ 23.1
Financial Services 3.5 3.0
Mark's 0.4 0.5
Eliminations (10.1) (7.5)
-------------------
Total interest expense $ 16.0 $ 19.1
-------------------------------------------------------------------------
Earnings before income taxes and minority interest
CTR $ 40.0 $ 38.5
Financial Services 45.4 29.4
Petroleum 2.5 1.7
Mark's 11.3 8.4
-------------------
Total earnings before income taxes and
minority interest $ 99.2 $ 78.0
-------------------------------------------------------------------------
(1) Differences may occur due to rounding.References to adjusted earnings
In several places in this MD&A, we refer to adjusted pre-tax and
after-tax earnings before the impact of non-operating items. Historically,
non-operating items have included gains and losses on the sales of loans
receivable and dispositions of surplus property and equipment. The timing and
amount of gains and losses from these items are not consistent from quarter to
quarter. We believe the adjusted figures allow for a clearer assessment of
earnings for each of our businesses, and provide a more meaningful measure of
our consolidated and segmented operating results.
12.0 Controls and procedures
Disclosure controls and procedures
Management is responsible for establishing and maintaining a system of
controls and procedures over the public disclosure of financial and
non-financial information regarding the Company. Such controls and procedures
are designed to provide reasonable assurance that all relevant information is
gathered and reported, on a timely basis, to senior management, including the
Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), so that
appropriate decisions can be made by them regarding public disclosure.
Our system of disclosure controls and procedures includes, but is not
limited to, our Disclosure Policy, our Code of Business Conduct, the effective
functioning of our Disclosure Committee, procedures in place to systematically
identify matters warranting consideration of disclosure by the Disclosure
Committee, verification processes for individual financial and non-financial
metrics and information contained in annual and interim filings, including the
consolidated financial statements, MD&As, Annual Information Forms and other
documents and external communications.
As required by CSA Multilateral Instrument 52-109, Certification of
Disclosure in Issuers' Annual and Interim Filings, an evaluation of the
effectiveness of the design of our disclosure controls and procedures was
conducted, under the supervision of management, including the CEO and CFO, as
of March 31, 2007. The evaluation included documentation review, enquiries and
other procedures considered by management to be appropriate in the
circumstances. Based on that evaluation, the CEO and the CFO have concluded
that the design of the system of disclosure controls and procedures remained
effective as of March 31, 2007.
Internal control over financial reporting
Management is also responsible for establishing and maintaining
appropriate internal controls over financial reporting. Our internal controls
over financial reporting include, but are not limited to, detailed policies
and procedures related to financial accounting and reporting, and controls
over systems that process and summarize transactions. Our procedures for
financial reporting also include the active involvement of qualified financial
professionals, senior management and our Audit Committee.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
As required by CSA Multilateral Instrument 52-109, Certification of
Disclosure in Issuers' Annual and Interim Filings, an evaluation of the design
of our internal controls over financial reporting was conducted, under the
supervision of management, including the CEO and CFO, as of March 31, 2007.
Based on that evaluation, the CEO and the CFO have concluded that the design
of internal controls over financial reporting continued to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with GAAP as of
March 31, 2007.
Management has evaluated whether there were changes in our internal
controls over financial reporting during the interim period ended March 31,
2007 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting. Management has
determined that no material changes occurred in the first quarter of 2007.
Commitment to disclosure and investor communication
Canadian Tire strives to maintain a high standard of disclosure and
investor communication. Reflecting our commitment to full and transparent
disclosure, the Investor Relations section of the Company's web site includes
the following documents and information of interest to investors:- Annual Information Form
- Management Information Circular
- Quarterly reports
- Quarterly fact sheets
- Conference call webcasts (archived for one year)The Company's Annual Information Form, Management Information Circular
and quarterly reports are also available on the SEDAR (System for Electronic
Disclosure and Retrieval) web site at www.sedar.com.
If you would like to contact the Investor Relations department directly,
call (416) 480-8570 or email investor.relations@cantire.com.2007 FIRST QUARTER
INTERIM REPORT FINANCIALS
Consolidated Statements of Earnings (Unaudited)
-------------------------------------------------------------------------
(Dollars in millions except 13 weeks ended,
per share amounts) March 31, 2007 April 1, 2006
-------------------------------------------------------------------------
Gross operating revenue $ 1,743.4 $ 1,572.1
-------------------------------------------------------------------------
Operating expenses
Cost of merchandise sold and all other
operating expenses except for the
undernoted items 1,574.0 1,424.5
Interest
Long-term debt 15.7 18.7
Short-term debt 0.3 0.4
Depreciation and amortization 48.4 46.6
Employee Profit Sharing Plan 5.8 3.9
-------------------------------------------------------------------------
Total operating expenses 1,644.2 1,494.1
-------------------------------------------------------------------------
Earnings before income taxes and minority
interest 99.2 78.0
Income taxes 34.7 28.1
-------------------------------------------------------------------------
Net earnings before minority interest 64.5 49.9
-------------------------------------------------------------------------
Minority interest (Note 7) - 2.3
-------------------------------------------------------------------------
Net earnings $ 64.5 $ 47.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings per share $ 0.79 $ 0.58
Diluted earnings per share (Note 5) $ 0.79 $ 0.58
-------------------------------------------------------------------------
Weighted average number of Common and
Class A Non-Voting Shares outstanding
(Note 5) 81,503,488 81,483,869
-------------------------------------------------------------------------
Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------------------------------------------
13 weeks ended,
(Dollars in millions) March 31, 2007 April 1, 2006
-------------------------------------------------------------------------
Cash generated from (used for):
Operating activities
Net earnings $ 64.5 $ 47.6
Items not affecting cash
Net provision for loans receivable 50.3 49.4
Depreciation and amortization of
property and equipment 47.7 45.9
Loss on sales of loans receivable (Note 3) 3.0 12.7
Employee future benefits expense (Note 4) 1.7 1.8
Amortization of other assets 0.8 1.3
Loss (gain) on disposals of property
and equipment 0.6 (3.1)
Other (0.5) (1.1)
-------------------------------------------------------------------------
168.1 154.5
-------------------------------------------------------------------------
Changes in other working capital components (892.2) (694.0)
-------------------------------------------------------------------------
Cash used for operating activities (724.1) (539.5)
-------------------------------------------------------------------------
Investing activities
Additions to property and equipment (125.6) (83.6)
Securitization of loans receivable (36.3) (21.8)
Purchases of stores (3.2) (0.9)
Employee future benefits (0.4) (0.4)
Asset retirement obligations (0.2) (0.2)
Proceeds on disposition of property and equipment 0.6 237.3
Long-term receivables and other assets 17.6 (5.3)
Investment in loans receivable 103.2 49.9
-------------------------------------------------------------------------
Cash generated from (used for) investing activities (44.3) 175.0
-------------------------------------------------------------------------
Financing activities
Commercial paper 21.5 -
Repayment of long-term debt (0.8) (201.5)
Dividends (13.5) (11.8)
Class A Non-Voting Share transactions (Note 6) - (4.7)
-------------------------------------------------------------------------
Cash generated from (used for) financing activities 7.2 (218.0)
-------------------------------------------------------------------------
Cash used in the period (761.2) (582.5)
Cash and cash equivalents, beginning of period 741.3 838.0
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period (Note 9) $ (19.9) $ 255.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statement of Comprehensive Income (Unaudited)
-------------------------------------------------------------------------
13 weeks ended,
(Dollars in millions) March 31, 2007
-----------------------------------------------------------
Net earnings $ 64.5
Other comprehensive income (loss), net of taxes
Losses on derivatives designated as
cash flow hedges (net of tax of $1.8) (3.4)
Reclassification to non-financial asset of
gains on derivatives designated as cash
flow hedges (net of tax of $4.8) (9.0)
Reclassification to earnings of gains on
derivatives designated as cash flow hedges
(net of tax of $0.7) (1.4)
-----------------------------------------------------------
Other comprehensive income (loss) (13.8)
-----------------------------------------------------------
Comprehensive income $ 50.7
-----------------------------------------------------------
-----------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
-------------------------------------------------------------------------
13 weeks ended,
(Dollars in millions) March 31, 2007 April 1, 2006
-------------------------------------------------------------------------
Share capital
Balance, beginning of period $ 702.7 $ 702.7
Transactions, net - (0.9)
-------------------------------------------------------------------------
Balance, end of period $ 702.7 $ 701.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contributed surplus
Balance, beginning of period $ 0.1 $ 1.5
Transactions, net 0.1 0.1
-------------------------------------------------------------------------
Balance, end of period $ 0.2 $ 1.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Foreign currency translation adjustment
Balance, beginning of period as
previously reported $ (5.7) $ (5.7)
Reclassification to accumulated other
comprehensive income 5.7 5.7
-------------------------------------------------------------------------
Balance, beginning of period as restated
and end of period $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings
Balance, beginning of period as previously
reported $ 2,088.1 $ 1,812.6
Transitional adjustment on adoption of
new accounting policies (4.4) -
-------------------------------------------------------------------------
Balance, beginning of period as restated 2,083.7 1,812.6
Net earnings for the period 64.5 47.6
Dividends (15.1) (13.4)
Repurchase of Class A Non-Voting Shares - (3.8)
-------------------------------------------------------------------------
Balance, end of period $ 2,133.1 $ 1,843.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Balance, beginning of period as previously
reported $ - $ -
Reclassification from foreign currency
translation adjustment (5.7) (5.7)
-------------------------------------------------------------------------
Balance, beginning of period as restated (5.7) (5.7)
Transitional adjustment on adoption of
new accounting policies 14.3 -
Other comprehensive income (loss)
for the period (13.8) -
-------------------------------------------------------------------------
Balance, end of period $ (5.2) $ (5.7)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Balance Sheets (Unaudited)
-------------------------------------------------------------------------
(Dollars in millions) March 31, April 1, December 30,
As at 2007 2006 2006
-------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents
(Note 9) $ - $ 255.5 $ 741.3
Accounts receivable 576.8 571.4 340.5
Loans receivable (Note 3) 577.2 572.0 694.2
Merchandise inventories 886.3 898.0 667.3
Prepaid expenses and deposits 61.5 58.4 46.2
Future income taxes 41.8 43.6 51.5
-------------------------------------------------------------------------
Total current assets 2,143.6 2,398.9 2,541.0
-------------------------------------------------------------------------
Long-term receivables and other
assets (Note 3) 255.6 200.2 283.5
Goodwill 49.6 46.2 46.4
Intangible assets 52.4 52.4 52.4
Property and equipment 2,925.3 2,572.4 2,881.3
-------------------------------------------------------------------------
Total assets $ 5,426.5 $ 5,270.1 $ 5,804.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Bank indebtedness (Note 9) $ 19.9 $ - $ -
Commercial paper 21.5 - -
Accounts payable and other 1,185.6 1,035.5 1,579.5
Income taxes payable 3.0 21.3 81.1
Current portion of long-term debt 2.9 4.1 3.0
-------------------------------------------------------------------------
Total current liabilities 1,232.9 1,060.9 1,663.6
-------------------------------------------------------------------------
Long-term debt 1,166.5 1,170.0 1,168.4
Future income taxes 70.6 89.0 75.0
Other long-term liabilities 125.7 109.5 112.4
-------------------------------------------------------------------------
Total liabilities 2,595.7 2,429.4 3,019.4
-------------------------------------------------------------------------
Minority interest (Note 7) - 300.0 -
SHAREHOLDERS' EQUITY
Share capital (Note 6) 702.7 701.8 702.7
Contributed surplus 0.2 1.6 0.1
Accumulated other comprehensive loss (5.2) (5.7) (5.7)
Retained earnings 2,133.1 1,843.0 2,088.1
-------------------------------------------------------------------------
Total shareholders' equity 2,830.8 2,540.7 2,785.2
-------------------------------------------------------------------------
Total liabilities, minority
interest and shareholders'
equity $ 5,426.5 $ 5,270.1 $ 5,804.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (Unaudited)
-------------------------------------------------------------------------
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 7), 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 30, 2006.
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, financial instruments, 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 30, 2006, except as noted
below.
Financial Instruments/Hedges/Comprehensive Income
-------------------------------------------------
The Canadian Institute of Chartered Accountants (CICA) issued the
following new accounting standards that apply to the Company as of
the first day of the Company's 2007 fiscal year: a) CICA Handbook
Section 3855 "Financial Instruments, Recognition and Measurement";
b) CICA Handbook Section 3861 "Financial Instruments - Disclosure and
Presentation"; c) CICA Handbook Section 3865 "Hedges"; d) CICA
Handbook Section 1530 "Comprehensive Income"; and e) CICA Handbook
Section 3251 "Equity".
Financial instruments
This new standard requires the Company to revalue certain of its
financial assets and liabilities, including derivatives designated in
qualifying hedging relationships and embedded derivatives in certain
contracts, at fair value on the initial date of implementation and at
each subsequent financial reporting date.
This standard also requires the Company to classify financial assets
and liabilities according to their characteristics and management's
choices and intentions related thereto for the purposes of ongoing
measurement. Classification choices for financial assets include:
a) held for trading - measured at fair value with changes in fair
value recorded in net earnings; b) held to maturity - recorded at
amortized cost with gains and losses recognized in net earnings in
the period that the asset is derecognized or impaired; c) available
for sale - measured at fair value with changes in fair value
recognized in other comprehensive income for the current period until
realized through disposal or impairment; and d) loans and receivables
- recorded at amortized cost with gains and losses recognized in net
earnings in the period that the asset is derecognized or impaired.
Classification choices for financial liabilities include: a) held for
trading - measured at fair value with changes in fair value recorded
in net earnings and b) other - measured at amortized cost with gains
and losses recognized in net earnings in the period that the
liability is derecognized. Subsequent measurement for these assets
and liabilities are based on either fair value or amortized cost
using the effective interest method, depending upon their
classification. Any financial asset or liability can be classified as
held for trading as long as its fair value is reliably determinable.
In accordance with the new standard, the Company's financial assets
and liabilities are generally classified and measured as follows:
Asset/Liability Category Measurement
--------------- -------- -----------
Cash and cash equivalents Held for trading Fair value
Accounts receivable Loans and receivables Amortized cost
Loans receivable Loans and receivables Amortized cost
Long-term receivables and Loans and receivables Amortized cost
other assets
Bank indebtedness Held for trading Fair value
Commercial paper Other liabilities Amortized cost
Accounts payable and other Other liabilities Amortized cost
Long-term debt Other liabilities Amortized cost
Other long-term liabilities Other liabilities Amortized cost
Included in the above financial statement captions are the following:
- interest-only strip related to the sale of loans receivable,
which is included in long-term receivables and other assets,
has been classified as held for trading and measured at fair
value, and
- an equity investment included in long-term receivables and other
assets, has been classified as available for sale and measured
at cost (nominal value) because this equity investment does not
have a quoted price in an active market.
Other balance sheet accounts, such as merchandise inventories,
prepaid expenses, current and future income taxes, goodwill,
intangible assets and property and equipment are not within the scope
of the new accounting standards as they are not financial
instruments.
Transaction costs related to all financial instruments are now
expensed as incurred. Upon transition to the new standards on
December 31, 2006, the Company elected to charge the remaining
unamortized transaction costs related to debt financing in the amount
of $2.9 million (net of tax) to retained earnings.
Credit card balance transfer promotions offered by the Company at
rates not equal to market value are now measured at fair value at
date of acquisition and then subsequently accounted for at amortized
cost using the effective interest method. The difference between the
promotional rates offered and market rates are recorded as an expense
under the new standards. This resulted in a $3.7 million decrease in
loans receivable and $2.4 million decrease (net of tax) to opening
retained earnings on transition.
Embedded derivatives (elements of contracts whose cash flows move
independently from the host contract) are required to be separated
and measured at fair values if certain criteria are met. Under an
election permitted by the new standard, management reviewed contracts
entered into or modified subsequent to December 28, 2002 and
determined that the Company does not currently have any significant
embedded derivatives in these contracts that require separate
accounting and disclosure.
Comprehensive income
In accordance with the new comprehensive income standard, the Company
has chosen to report a new financial statement entitled "Consolidated
Statement of Comprehensive Income" for changes in the fair value of
certain of these financial assets and liabilities (e.g. the effective
portion of changes in the fair value of a derivative designated in a
cash flow hedging relationship). The "accumulated other comprehensive
income" (i.e. the portion of comprehensive income not already
included in net earnings) is being presented as a separate line in
shareholders' equity.
In accordance with the new standards, management has estimated the
net amount of gains and losses reported in accumulated other
comprehensive income, which are currently expected to be reclassified
to net earnings within the next 12 months, as a gain of approximately
$7.1 million (net of tax).
Hedges
With respect to the new standard related to hedging, the Company
enters into various cash flow hedges. The Company enters into foreign
exchange contracts to hedge the exposure to foreign currency risk on
the future payment of foreign currency denominated inventory
purchases. The fair value of these contracts is included in accounts
receivable. The changes in fair value of these contracts are included
in other comprehensive income to the extent the hedges continue to be
effective. Once the inventory has been recognized, the Company has
elected to reclassify the related accumulated other comprehensive
income amount to merchandise inventories. Subsequent changes in the
fair value of the foreign exchange contracts are recorded in net
earnings for the period. The Company enters into equity derivative
contracts to hedge certain future stock-based compensation expenses.
The fair value of these contracts is included in accounts receivable
and long-term receivables and other assets depending on the
derivative's maturity. The changes in fair value of these contracts
is included in other comprehensive income to the extent the hedges
continue to be effective. The related other comprehensive income
amounts are reclassified to net earnings based on vesting of the
respective stock-based share units. The Company also enters into
certain interest rate swap contracts to manage its exposure to
interest rate risks. The fair value of these contracts is included in
other long-term liabilities. The changes in fair value of these
contracts is included in other comprehensive income to the extent the
hedges continue to be effective. The related other comprehensive
income amounts are allocated to net earnings in the same period in
which the hedged item affects net earnings. For all cash flow hedges,
to the extent the change in fair value of the derivative is not
completely offset by the change in the fair value of the hedged item,
the ineffective portion of the hedging relationship is recorded
immediately in net earnings.
The Company also enters into fair value hedges, including certain
interest rate swap contracts. The fair value of these hedges is
included in other long-term liabilities. In fair value hedges the
change in fair value of both the hedged item attributable to the risk
being hedged and the entire hedging item are recorded in the net
earnings for the respective period.
The maximum length of time over which the Company is hedging its
exposure to future cash flow variability for anticipated transactions
is ten years.
Equity
Handbook Section 3251 describes standards for the presentation of
equity and changes in equity during the period with reference to the
new comprehensive income standard.
The new standards were applied retrospectively without restatement of
prior periods on December 31, 2006 (the first day of the Company's
2007 fiscal year), and thus prior periods presented have not been
restated with the exception of accumulated foreign currency
translation adjustment. The opening balance of retained earnings, net
of income taxes, has been adjusted by the following:
- the difference between the previous carrying amount and the fair
value of financial assets and liabilities designated as held for
trading;
- the cumulative ineffective portion of the gain or loss on the
hedging items in designated cash flow hedging relationships and
the total gain or loss on the hedging items in designated fair
value hedging relationships; and
- unamortized deferred debt issue expenses.
The opening balance of accumulated other comprehensive income, net of
income taxes, has been similarly adjusted by the following:
- the cumulative effective portion of the gain or loss on the
hedging items that are included in designated cash flow hedging
relationships; and
- restatement of current and prior periods to reflect the
accumulated foreign currency translation adjustment on the
translation of certain subsidiaries from a separate category of
shareholders' equity.
The transitional impact of the new standards on relevant items in the
Company's opening Balance Sheet for 2007 may be summarized as
follows:
1. Accounts receivable (derivative assets) - increase of
$37.0 million
2. Loans receivable - decrease of $3.7 million
3. Long-term receivables and other assets (debt issue expenses net
of derivative assets) - decrease of $0.9 million
4. Future income taxes (current asset) - decrease of $9.7 million
5. Future income taxes (long-term liability) - decrease of
$4.4 million
6. Accounts payable - increase of $6.8 million
7. Other long-term liabilities (derivative liabilities) - increase
of $12.9 million
8. Long-term debt - decrease of $2.5 million
9. Opening retained earnings - decrease of $4.4 million
10. Accumulated other comprehensive income - increase of
$14.3 million
3. 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 March 31,
2007, the Company recognized a pre-tax loss of $3.0 million
(2006 - $12.7 million pre-tax loss) on the securitization of the
Loans.
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 millions) Average balances
Total principal amount for the
of receivables as at(1) 13 weeks ended
------------------------------ -------------------
March 31, April 1, December 30, March 31, April 1,
2007 2006 2006 2007 2006
---------- --------- --------- --------- ---------
Total net managed
credit card loans $3,229.4 $2,970.8 $3,372.3 $3,268.1 $3,033.2
Credit card loans
sold (2,679.0) (2,423.4) (2,702.9) (2,691.0) (2,423.1)
---------- --------- --------- --------- ---------
Credit card loans
held 550.4 547.4 669.4 577.1 610.1
Net managed personal
and mortgage
loans(2) 208.7 289.2 226.9 216.1 244.7
Loans sold (105.8) (185.3) (124.5) (115.2) (196.0)
---------- --------- --------- --------- ---------
Loans held 102.9 103.9 102.4 100.9 48.7
---------- --------- --------- --------- ---------
Total loans
receivable 653.3 651.3 771.8 $ 678.0 $ 658.8
--------- ---------
--------- ---------
Less: long-term
portion(3) 76.1 79.3 77.6
---------- --------- ---------
Current portion of
loans receivable $ 577.2 $ 572.0 $ 694.2
---------- --------- ---------
(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 March 31, 2007 were
$52.2 million (2006 - $51.2 million). Net credit losses are charge-
offs net of recoveries and are based on the total managed portfolio
of loans receivable.
4. Employee Future Benefits
The net employee future benefit expense for the 13 weeks ended
March 31, 2007 was $1.7 million (2006 - $1.8 million).
5. Diluted Earnings Per Share
The reconciliation of the number of shares used in the diluted
earnings per share calculation is as follows:
13 weeks ended 13 weeks ended
March 31, 2007 April 1, 2006
--------------- ---------------
Average number of shares for basic
earnings per share calculations 81,503,488 81,483,869
Dilutive options - 908,872
--------------- ---------------
Average number of shares for dilutive
earnings per share calculations 81,503,488 82,392,741
--------------- ---------------
--------------- ---------------
Effective November 2006, all outstanding stock options have 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 request 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. Accordingly, outstanding stock options have no
dilutive impact on the average number of shares outstanding. For
further details of the terms of the stock option plans prior to
amendment, please refer to Note 10 to the most recent annual
financial statements for the 52 weeks ended December 30, 2006.
6. Share Capital
(Dollars in millions) March 31, April 1, December 30,
2007 2006 2006
--------- --------- ---------
Authorized
3,423,366 Common Shares
100,000,000 Class A Non-Voting Shares
Issued
3,423,366 Common Shares
(April 1, 2006 - 3,423,366) $ 0.2 $ 0.2 $ 0.2
78,049,221 Class A Non-Voting
Shares (April 1, 2006 -
78,008,515) 702.5 701.6 702.5
--------- --------- ---------
$ 702.7 $ 701.8 $ 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:
13 weeks ended 13 weeks ended
(Dollars in millions) March 31, 2007 April 1, 2006
--------------------- ---------------------
Number $ Number $
----------- --------- ----------- ---------
Shares outstanding at
the beginning of the
period 78,047,456 702.5 78,032,724 702.5
Issued 91,765 6.5 187,091 8.8
Repurchased (90,000) (6.5) (211,300) (13.5)
Excess of repurchase
price over issue price - - - 3.8
----------- --------- ----------- ---------
Shares outstanding at
the end of the period 78,049,221 702.5 78,008,515 701.6
----------- --------- ----------- ---------
----------- --------- ----------- ---------
7. Minority Interest
The Company was the general partner in a limited partnership for
purposes of raising $300 million of capital in relation to a
portfolio of its retail properties. 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. 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 $300 million 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.
8. Segmented Information - Statement of Earnings
---------------------------------------------------------------------
13 weeks ended 13 weeks ended
March 31, April 1,
(Dollars in millions) 2007 2006
---------------------------------------------------------------------
Gross operating revenue(1)
CTR $ 1,074.7 $ 969.2
Financial Services 182.3 161.7
Petroleum 362.8 335.1
Mark's 152.1 128.7
Eliminations (28.5) (22.6)
-----------------------------
Total gross operating revenue $ 1,743.4 $ 1,572.1
---------------------------------------------------------------------
Earnings before income taxes and
minority interest
CTR $ 40.0 $ 38.5
Financial Services 45.4 29.4
Petroleum 2.5 1.7
Mark's 11.3 8.4
-----------------------------
Total earnings before income taxes
and minority interest $ 99.2 $ 78.0
Income taxes 34.7 28.1
Minority interest - 2.3
-----------------------------
Net earnings $ 64.5 $ 47.6
---------------------------------------------------------------------
Interest expense
CTR $ 22.2 $ 23.1
Financial Services 3.5 3.0
Petroleum - -
Mark's 0.4 0.5
Eliminations (10.1) (7.5)
-----------------------------
Total interest expense $ 16.0 $ 19.1
---------------------------------------------------------------------
Depreciation and amortization expense
CTR $ 36.8 $ 35.9
Financial Services 3.3 3.2
Petroleum 4.0 3.6
Mark's 4.3 3.9
-----------------------------
Total depreciation and amortization
expense $ 48.4 $ 46.6
---------------------------------------------------------------------
(1) Gross operating revenue includes dividend and interest income.
Segmented Information - Total Assets
---------------------------------------------------------------------
(Dollars in millions) As at As at As at
March 31, April 1, December 30,
2007 2006 2006
---------------------------------------------------------------------
CTR $ 4,327.2 $ 4,107.5 $ 4,502.5
Financial Services 1,310.2 1,257.3 1,476.0
Petroleum 244.7 229.2 477.9
Mark's 435.9 370.6 406.7
Eliminations (891.5) (694.5) (1,058.5)
--------------------------------------
Total $ 5,426.5 $ 5,270.1 $ 5,804.6
---------------------------------------------------------------------
9. Cash and Cash Equivalents
The components of cash and cash equivalents are:
March 31, April 1, December 30,
(Dollars in millions) 2007 2006 2006
----------- ----------- -----------
Cash $ (103.9) $ (112.3) $ (47.4)
Short-term investments 84.0 367.8 788.7
----------- ----------- -----------
Cash and cash equivalents $ (19.9) $ 255.5 $ 741.3
----------- ----------- -----------
----------- ----------- -----------
For the quarter ended March 31, 2007, the balance of $(19.9) million
has been classified as bank indebtedness.
10. Supplementary Cash Flow Information
The Company paid income taxes during the 13 weeks ended March 31,
2007, amounting to $105.4 million (2006 - $76.5 million) and made
interest payments of $14.7 million (2006 - $20.3 million). During the
13 weeks ended March 31, 2007, property and equipment were acquired
at an aggregate cost of $153.1 million (2006 - $91.9 million), of
which $27.5 million (2006 - $8.3 million) was included in accounts
payable and other.
11. 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.
12. 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 $261 million. Although the Company
will appeal these reassessments, current tax legislation requires the
Company to remit to the CRA and its provincial counterparts
approximately $163 million, of which $110 million had been remitted
by the end of the quarter. Subsequent to the end of the quarter, the
Company paid on account an additional $45 million to the provincial
tax authorities. 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.
13. 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
March 31, 2007, after annualizing interest on long-term debt issued and
retired during this period, amounted to $77.1 million. The Company's earnings
before interest on long-term debt, income taxes and minority interest for the
52 weeks then ended were $645.7 million, which is 8.4 times the Company's
long-term interest requirements for this period.
%SEDAR: 00000534EF
For further information:
For further information: Media, Caroline Casselman, Director, Community & Public Affairs, (416) 480-8159, caroline.casselman@cantire.com; Investors, Scott Bonikowsky, Vice President, Corporate Affairs & Investor Relations, (416) 480-8570, bonikowsky@cantire.com