Canadian Tire third quarter net earnings rise 10.8% to $105.7 million
Adjusted net earnings up 12.4%--------------------------------------------
Consolidated 2007 2006
Highlights(1): 3rd Quarter 3rd Quarter Change
-------------------------------------------------------------------------
Retail sales $2.43 billion $2.43 billion (0.2)%
Gross operating revenue $2.05 billion $2.02 billion 1.5%
Earnings before income taxes
and minority interest $158.2 million $149.1 million 6.1%
Net earnings $105.7 million $95.4 million 10.8%
Net earnings excluding
non-operating gains
and losses(2) $106.0 million $94.4 million 12.4%
Basic earnings per share $1.30 $1.17 11.0%
Adjusted basic earnings
per share excluding
non-operating gains
and losses(2) $1.30 $1.16 12.5%
(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, Nov. 8 /CNW/ - Canadian Tire Corporation, Limited (CTC, CTC.a)
today reported third quarter net earnings of $105.7 million, an increase of
10.8 percent compared to $95.4 million in the third quarter of 2006. Net
earnings, excluding non-operating gains and losses, were $106.0 million, an
increase of 12.4 percent compared to $94.4 million last year.
Basic earnings per share were $1.30, an increase of 11.0 percent compared
to $1.17 for the previous year. Adjusted basic earnings per share, excluding
non-operating gains and losses, increased 12.5 percent to $1.30 compared to
$1.16 for the same period last year.
"The growth in earnings during the quarter reflects our continuing focus
on cost reductions and productivity improvements, as well as stronger than
expected performance from our Petroleum and Financial Services businesses,"
said Tom Gauld, president and CEO. "The sales results from both Canadian Tire
Retail and Mark's Work Wearhouse are a result of a softening retail
environment in Ontario and Quebec, and unseasonable weather patterns in
September. Retail sales in the rest of the country remained strong. We remain
confident in our business strategies and in our ability to generate long-term
growth."
For the first nine months, net earnings were $292.5 million, up 18.8
percent from $246.3 million for the comparable period in 2006. Net earnings,
excluding non-operating gains and losses, were $282.5 million, a 13.6 percent
increase from $248.7 million last year. Basic earnings per share for the first
nine months of 2007 rose 18.9 percent, to $3.59 from $3.02 in the comparable
2006 period. Adjusted basic earnings per share, excluding non-operating gains
and losses for the first nine months of 2007, were $3.47, a 13.7 percent
increase from $3.05 last year.Business Overview
CANADIAN TIRE RETAIL (CTR)
YTD YTD
($ in millions) Q3 2007 Q3 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Retail sales(1) $1,787.4 $1,800.6 (0.7)% $5,171.9 $5,070.1 2.0%
Same store
sales(2) (year-
over-year
% change) (2.7)% 5.6% 0.0% 4.0%
Gross operating
revenue $1,307.1 $1,290.6 1.3% $3,899.3 $3,778.6 3.2%
Net shipments
(year-over-year
% change) 1.4% 4.2% 3.1% 5.3%
Earnings before
income taxes
and minority
interest $94.4 $98.2 (3.9)% $223.0 $234.6 (4.9)%
-------------------------------------------------------------------------
Less adjustment
for:
Gain on disposals
of property and
equipment(3) 6.6 7.0 10.3 11.7
Former CEO
retirement
obligations 0.2 - (6.5) -
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes and minority
interest(4) $87.6 $91.2 (4.0)% $219.2 $222.9 (1.6)%
-------------------------------------------------------------------------
(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 all stores that have been open
for more than 53 consecutive weeks in the same location.
(3) Includes fair market value adjustments and impairments on property
and equipment.
(4) Non-GAAP measure. Please refer to section 12.0 in Management's
Discussion and Analysis in our 2006 Financial Report.CTR's third quarter retail sales declined by 0.7 percent and same store
sales decreased 2.7 percent from the prior year, due in part to the impact of
a shift in buying, related to the Canada Day holiday, that resulted in
approximately $20 million in sales occurring in June. Without this impact,
sales in the third quarter of 2007 would have increased 0.4 percent over the
previous year.
CTR's sales results during the quarter were affected by regional
variations in performance, as weak overall sales in Ontario and Quebec, which
represent approximately 65 percent of CTR's business, offset continued growth
in the rest of Canada. At the category level, strong sales in outdoor décor,
lawn and garden, and electronics only partially offset weakness in
weather-related categories and home repair.
CTR continued its Concept 20/20 store-build program and during the
quarter, opened two new Concept 20/20 stores, including one Canadian
Tire-Mark's Work Wearhouse combination store. During the construction and
remerchandising of stores undergoing conversion to the Concept 20/20 format,
sales are negatively impacted. Same store sales during the third quarter
remained flat at the Concept 20/20 stores due to the factors noted above.
CTR's third quarter earnings before taxes were $94.4 million, a
3.9 percent decrease over the $98.2 million recorded a year ago. Adjusted
pre-tax earnings decreased to $87.6 million from $91.2 million in the previous
year. The decrease in earnings was partially attributable to soft sales during
the quarter, the impact of which was partially offset by cost reductions and
supply chain efficiencies. Results for the quarter also include a one time
expense of $4.6 million related to the settlement of past claims by Canadian
Tire Associate Dealers as part of the revised Associate Dealer agreement
signed in September.
Net shipments growth is proportionately stronger than CTR's sales growth
on a year-to-date basis as Associate Dealers meet initial inventory fill
requirements due to the increase in square footage from new stores as well as
Associate Dealers rebalancing inventory levels.
PartSource achieved double-digit total sales growth in the quarter,
driven mainly by commercial sales. PartSource opened one new store and
converted two franchise stores to corporate stores during the quarter,
bringing the network total to 68 locations.CANADIAN TIRE PETROLEUM (Petroleum)
YTD YTD
($ in millions) Q3 2007 Q3 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Sales volume
(millions of litres) 434.3 441.0 (1.5)% 1,287.0 1,243.8 3.5%
Retail sales $451.3 $451.3 0.0% $1,308.6 $1,235.6 5.9%
Gross operating
revenue $424.0 $427.0 (0.7)% $1,232.4 $1,170.2 5.3%
Earnings before
income taxes $7.9 $0.1 6,989.3% $16.8 $0.6 2,784.2%
-------------------------------------------------------------------------
Less adjustment
for:
Loss on disposals
of property and
equipment(1) (0.7) - (2.0) (0.3)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(2) $8.6 $0.1 6,231.9% $18.8 $0.9 1,989.0%
-------------------------------------------------------------------------
(1) Includes asset impairment losses.
(2) Non-GAAP measure. Please refer to section 12.0 in Management's
Discussion and Analysis in our 2006 Financial Report.Petroleum's gasoline volumes decreased 1.5 percent during the quarter to
434.3 million litres from 441.0 million litres a year ago. The decrease was
primarily attributable to a decrease in the magnitude of promotional programs
over the comparable 2006 period. The volume decline was partially offset by
the cumulative effect of new site openings in 2007. Car wash sales increased
by 29.2 percent over the weather-related soft sales experienced in the
comparable 2006 period, while convenience store sales increased 12.2 percent,
attributable to growth in the network.
Petroleum recorded earnings before taxes of $7.9 million compared to
$0.1 million a year ago. Adjusted pre-tax earnings, which exclude the impact
of disposals of property and equipment, increased to $8.6 million from
$0.1 million one year ago. The strong earnings reflect stabilized gasoline
prices, which resulted in improved gasoline margins during the period.
Petroleum opened one gas station and one convenience store during the
quarter. The business also refurbished seven gas stations and rebuilt two
existing locations during the period.MARK'S WORK WEARHOUSE (Mark's)
YTD YTD
($ in millions) Q3 2007 Q3 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Total retail
sales(1) $189.5 $182.2 3.9% $589.1 $535.8 9.9%
Same store sales(2)
(% increase over
prior year) 0.6% 18.1% 7.2% 14.8%
Gross operating
revenue(3) $159.8 $154.0 3.8% $499.1 $452.8 10.2%
-------------------------------------------------------------------------
Earnings before
income taxes $12.2 $11.4 7.7% $48.0 $40.1 19.9%
-------------------------------------------------------------------------
Less adjustment for:
Loss on disposal
of property and
equipment (0.2) (0.6) (0.8) (0.7)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(4) $12.4 $12.0 4.2% $48.8 $40.8 19.7%
-------------------------------------------------------------------------
(1) Includes retail sales from corporate and franchise stores.
(2) Mark's same store sales exclude new stores, stores not open for the
full period in each year and store closures.
(3) Gross operating revenue includes retail sales at corporate stores
only.
(4) Non-GAAP measure. Please refer to section 12.0 in Management's
Discussion and Analysis in our 2006 Financial Report.Mark's third quarter total retail sales grew to $189.5 million, a modest
increase of 3.9 percent from the $182.2 million recorded a year ago. Retail
sales growth reflected a softening retail environment in central Canada,
particularly in Ontario. Retail sales in other regions of the country remained
stronger during the quarter.
While sales were challenging during the quarter, Mark's mature industrial
wear business led corporate store sales growth, posting an 8.1 percent
increase over last year with the largest dollar increase occurring in
industrial footwear and work wear.
Mark's third quarter earnings before taxes were $12.2 million, a
7.7 percent increase over the $11.4 million recorded a year ago. Adjusted
pre-tax earnings increased 4.2 percent to $12.4 million compared to $12.0
million in the same 2006 period. The modest growth in earnings, relative to
last year, reflects the softer sales environment, offset by stronger margins
related to on-going global sourcing initiatives and lower markdowns.
During the quarter, Mark's opened seven new stores, expanded two stores
and relocated three stores.CANADIAN TIRE FINANCIAL SERVICES (Financial Services)
YTD YTD
($ in millions) Q3 2007 Q3 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Total managed
portfolio end
of period $3,717.4 $3,461.5 7.4%
Gross operating
revenue $193.3 $182.4 6.0% $573.1 $523.7 9.4%
Earnings before
income taxes $43.7 $39.4 11.0% $157.8 $113.3 39.2%
-------------------------------------------------------------------------
Less adjustment for:
Gain on disposal/
redemption of
shares - - 18.4 6.9
Loss on sales of
loans receivable (6.3) (4.8) (3.8) (20.9)
Loss on disposals
of property and
equipment (0.1) - (0.2) (0.3)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(1) $50.1 $44.2 13.3% $143.4 $127.6 12.4%
-------------------------------------------------------------------------
(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
$3.7 billion at the end of the third quarter, a 7.4 percent increase over the
$3.5 billion portfolio at the end of the comparable 2006 period. Personal loan
receivables represent approximately five percent of the total portfolio.
Ending credit card loans receivable grew 10.1 percent to $3.5 billion. The
increase was primarily a result of an 11.4 percent increase in the average
account balance compared to the third quarter of 2006.
The net write-off rate for the total managed portfolio on a rolling
12-month basis was 5.87 percent, an improvement from 5.94 percent in the
comparable 2006 period. The net write-off rate on a rolling 12-month basis for
the credit card portfolio improved during the quarter to 5.77 percent from
5.95 percent in the comparable 2006 period, reflecting the benefits of a
number of initiatives to improve the overall quality of the portfolio.
Financial Services' third quarter earnings before taxes of $43.7 million
increased 11.0 percent over the $39.4 million recorded in the same period last
year. Adjusted pre-tax earnings were $50.1 million or 13.3 percent higher than
the third quarter of 2006. Earnings in the third quarter were impacted by
ongoing net expenses of $8.1 million related to the retail banking initiative,
compared to $2.4 million in the third quarter of 2006. The $8.1 million in
retail banking expenses in the third quarter includes a $1.3 million provision
taken on the $8.9 million asset-backed commercial paper investments held by
Financial Services to account for the uncertainty in valuing these assets.
During the quarter, Financial Services launched its innovative Canadian
Tire One-and-Only account in the three pilot markets of Kitchener-Waterloo and
London, Ontario and Calgary, Alberta. The Canadian Tire One-and-Only account
allows Canadians to combine their mortgage, chequing and savings accounts,
plus loans and credit card balances, into one easy-to-use account. Funds
deposited in the account go immediately toward the outstanding mortgage
balance. This product is the newest addition to the suite of retail banking
products currently being tested in the three pilot markets. The pilot will
continue through 2008.
EARNINGS GUIDANCE
The Company confirms its expectation that earnings per share in 2007 will
be in the range of $4.65 to $4.85, excluding non-operating items. The fourth
quarter of the fiscal year is typically the Corporation's largest selling
period and is subject to a number of factors, including unseasonable weather
patterns, which may have a positive or negative impact on the forecasted
earnings of the Corporation.
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, obtain municipal and other required
government approvals, access construction labour and materials at
reasonable prices, lease suitable properties, access sufficient funds
from capital markets to finance the development of 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, 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;
- fluctuating foreign exchange currency rates could impact cross-border
shopping patterns and employment levels in the manufacturing and
export sector and, consequently, negatively impact consumer spending
practices;
- the earnings of Financial Services could be affected by customers'
inability to repay their Canadian Tire credit card, mortgage 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, November 8, 2007. The conference call will be available
simultaneously and in its entirety to all interested investors and the news
media through a webcast at http://investor.relations.canadiantire.ca, and will
be available through replay at this website for 12 months.
Canadian Tire Corporation, Limited (TSX: CTC.a, CTC), 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 68 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, 257 convenience stores and
kiosks, and 75 car washes. Mark's Work Wearhouse is one of the country's
leading apparel retailers operating 348 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 November 8, 2007.
Quarterly and annual comparisons in this MD&A
Unless otherwise indicated, all comparisons of results for the third
quarter (13 weeks ended September 29, 2007) are against results for the third
quarter of 2006 (13 weeks ended September 30, 2006).
Restated figures
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 September 29, 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 the MD&A contained in 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 and materials at
reasonable prices, lease suitable properties, access sufficient funds
from capital markets to finance the development of 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;
- fluctuating foreign exchange currency rates could impact cross-border
shopping patterns and employment levels in the manufacturing and
export sector and, consequently, negatively impact consumer spending
practices;
- 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 and has subsequently extended these offerings in a third
pilot market.
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.
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 68
specialty automotive hard parts stores that cater to serious
"do-it-yourselfers" and professional installers of automotive parts. The
PartSource network consists of 43 franchise stores and 25 corporate stores.
Mark's is one of Canada's leading clothing and footwear retailers,
operating 348 stores nationwide, including 297 corporate and 51 franchise
stores that offer men's wear, women's wear and industrial wear. Mark's
operates under the banner "Mark's", and in Quebec, "L'Equipeur". 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, 257 convenience stores and kiosks, 75 car washes,
13 Pit Stops and 88 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, Gas Advantage MasterCard and
Commercial Link 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 and has extended these
offerings to a third test market in 2007.
2.0 Our Strategic Plan
2.1 New Strategic Plan to 2012 (2012 Plan)
In October 2007, Canadian Tire announced the 2012 Plan and outlined its
plans to build a bigger and better Canadian Tire through a continued focus on
growth and productivity. The key initiatives of the 2012 Plan include network
expansion across all of our retail chains (CTR, PartSource and Mark's),
upgrading our Automotive supply chain and technology infrastructure and
continued testing of our new retail banking products. Other initiatives
designed to improve productivity at CTR include a renewal of our information
technology infrastructure, improvements in our Canadian Tire Associate Dealer
contract and related processes and a more streamlined organization design.
Specific objectives related to these programs will be included in our
2007 Annual Report.
2.2 Financial Aspirations
The 2012 Plan includes financial aspirations for the Company for the
period ending 2012. These aspirations are not to be construed as guidance or
forecasts for any individual year within the 2012 Plan, but rather as
long-term targets that we aspire to achieve over the life of the 2012 Plan,
based on the successful execution of our various initiatives.
This third quarter MD&A will report our 2007 progress on the 2005-2009
Strategic Plan for the final time. In the table below, we have also presented
our new 2012 Plan financial aspirations.2005-2009 YTD 2012
Financial Aspirations Strategic Plan 2007 Plan
-------------------------------------------------------------------------
Same store sales (see below)
(simple average of annual percentage
growth, CTR stores only) 3% to 4% (0.1)% 3% to 4%
Gross operating revenue
(compound annual growth rate) 7% to 9% 4.6% 6% to 8%
Retail sales (POS)
(compound annual growth rate) N/A 3.3% 6%+
Operating earnings per share
(compound annual growth rate) N/A 13.7% 10%+
After-tax return on invested capital
(annual simple average) 10% 10.6% 10%+
-------------------------------------------------------------------------
3.0 Our performance in 2007
3.1 Consolidated results
Consolidated financial results
($ in millions
except per share 2007 2006
amounts) Q3 2007 Q3 2006 Change YTD YTD Change
-------------------------------------------------------------------------
Retail sales(1) $2,428.2 $2,434.1 (0.2%) $7,069.6 $6,841.5 3.3%
Gross operating
revenue 2,053.4 2,023.3 1.5% 6,113.5 5,843.0 4.6%
EBITDA(2) and
minority interest 227.8 212.9 6.9% 646.2 586.4 10.2%
Earnings before
income taxes
and minority
interest 158.2 149.1 6.1% 445.6 388.6 14.7%
Effective tax rate 33.2% 36.0% 283 bps 34.4% 36.0% 165 bps
Net earnings 105.7 95.4 10.8% 292.5 246.3 18.8%
Basic earnings
per share $1.30 $ 1.17 11.0% $ 3.59 $3.02 18.9%
Adjusted basic
earnings per
share(2) $1.30 $1.16 12.5% $3.47 $3.05 13.7%
-------------------------------------------------------------------------
(1) Represents sales at CTR stores (which includes PartSource stores),
Mark's corporate and franchise stores and Petroleum's sites.
(2) See section 12.0 for non-GAAP measures.
Highlights of top-line performance by business
(year-over-year percentage change) Q3 2007 Q3 2006
-------------------------------------------------------------------------
CTR retail sales(1) (0.7%) 7.3%
CTR gross operating revenue 1.3% 5.2%
CTR net shipments 1.4% 4.2%
Mark's retail sales(2) 3.9% 18.4%
Petroleum retail sales 0.0% 12.7%
Petroleum gasoline volume (1.5%) 9.8%
Financial Services' credit card sales 10.9% 9.0%
Financial Services' gross average receivables 7.2% 9.8%
-------------------------------------------------------------------------
(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.
(2) Includes retail sales from Mark's corporate and franchise stores.Third quarter
Consolidated gross operating revenue increased marginally in the third
quarter due to higher sales at Mark's, growth in loans receivable at Financial
Services and an increase in net shipments at CTR. Net shipments growth is
proportionately stronger than CTR's sales growth on a year-to-date basis as
Associate Dealers meet initial inventory fill requirements due to the increase
in square footage from new stores as well as Associate Dealers rebalancing
inventory levels.
Higher operating revenue, margin improvements through effective expense
control and a lower effective tax rate contributed to the 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 disposal of
shares, sales of loans receivable, disposals of property and equipment and
former chief executive officer (CEO) retirement obligation adjustments that
occurred in the current and previous quarters of 2007.
Adjusted consolidated earnings before income taxes and minority interest2007 2006
($ in millions) Q3 2007 Q3 2006 Change YTD YTD Change
-------------------------------------------------------------------------
Earnings before
income taxes and
minority interest $158.2 $149.1 6.1% $445.6 $388.6 14.7%
Less pre-tax
adjustment for:
Gain on disposal/
redemption of
shares(1) - - 18.4 6.9
Former CEO
retirement
obligations 0.2 - (6.5) -
Loss on sales of
loans
receivable(1) (6.3) (4.8) (3.8) (20.9)
Gain on disposals
of property and
equipment(2,3) 5.6 6.4 7.3 10.4
-------------------------------------------------------------------------
Adjusted earnings
before income taxes
and minority
interest(4) $158.7 $147.5 7.6% $430.2 $392.2 9.7%
-------------------------------------------------------------------------
(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) Gain on disposals of property and equipment includes fair market
value adjustments and impairments on property and equipment.
(4) See section 12.0 on non-GAAP measures.The share unit and retirement obligation for the former CEO and Vice
Chairman (included in the table above) was marked to market at the end of the
third quarter of 2007 to reflect a lower share price on September 29, 2007.
For further details, see section 5.4 below.
In addition, while not considered a non-operating item and accordingly
included in normal operating earnings, the third quarter also includes a one
time expense of $4.6 million related to the settlement of past claims by
Canadian Tire Associate Dealers as part of the revised Associate Dealer
agreement signed in September. For additional information on the renewal of
our Canadian Tire Associate Dealer contract, please refer to section 4.1.1
below.Adjusted consolidated net earnings
($ in millions
except per share 2007 2006
amounts) Q3 2007 Q3 2006 Change YTD YTD Change
-------------------------------------------------------------------------
Net earnings $105.7 $95.4 10.8% $292.5 $246.3 18.8%
Less after-tax
adjustment for:
Gain on disposal/
redemption of
shares - - 12.0 4.4
Former CEO
retirement
obligations 0.2 - (4.2) -
Loss on sales of
loans receivable (4.1) (3.1) (2.5) (13.4)
Gain on disposals
of property and
equipment(1) 3.6 4.1 4.7 6.6
-------------------------------------------------------------------------
Adjusted net
earnings(2) $106.0 $94.4 12.4% $282.5 $248.7 13.6%
Basic earnings
per share $1.30 $1.17 11.0% $3.59 $3.02 18.9%
Adjusted basic
earnings per
share(2) $1.30 $1.16 12.5% $3.47 $3.05 13.7%
-------------------------------------------------------------------------
(1) Includes fair market value adjustments and impairments on property
and equipment.
(2) See section 12.0 on non-GAAP measures.Seasonal impact
We traditionally experience stronger revenues and earnings in the second
and fourth quarters of each year because of the seasonal nature of some
merchandise at CTR and Mark's and the timing of marketing programs. The
following table shows our financial performance by quarter for the last two
years.Consolidated quarterly results
($ in millions except Q3 Q2 Q1 Q4
per share amounts) 2007 2007 2007 2006
-------------------------------------------------------------------------
Gross operating revenue(1) $2,053.4 $2,316.7 $1,743.4 $2,426.1
Net earnings 105.7 122.3 64.5 108.3
Basic earnings per share 1.30 1.50 0.79 1.33
Fully diluted earnings per
share 1.30 1.50 0.79 1.32
-------------------------------------------------------------------------
($ in millions except Q3 Q2 Q1 Q4
per share amounts) 2006 2006 2006 2005
-------------------------------------------------------------------------
Gross operating revenue(1) $2,023.3 $2,247.6 $1,572.1 $2,304.3
Net earnings 95.4 103.3 47.6 118.2
Basic earnings per share 1.17 1.27 0.58 1.44
Fully diluted earnings per
share 1.16 1.25 0.58 1.43
-------------------------------------------------------------------------
(1) Quarterly gross operating revenue for 2005 had been restated in 2006
for the impact of EIC-156 as required by the CICA. See section 11.3
in our 2006 Financial Report MD&A for additional information.
4.0 Business segment performance
4.1 Canadian Tire Retail
4.1.1 CTR's financial results
2007 2006
($ in millions) Q3 2007 Q3 2006 Change YTD YTD Change
-------------------------------------------------------------------------
Retail sales $1,787.4 $1,800.6 (0.7%) $5,171.9 $5,070.1 2.0%
Net shipments
(year-over-year
% change) 1.4% 4.2% 3.1% 5.3%
Gross operating
revenue $1,307.1 $1,290.6 1.3% $3,899.3 $3,778.6 3.2%
EBITDA(1) and
minority interest 159.6 157.7 1.1% 409.0 416.6 (1.8%)
Earnings before
income taxes and
minority interest 94.4 98.2 (3.9)% 223.0 234.6 (4.9%)
-------------------------------------------------------------------------
Less adjustment for:
Former CEO
retirement
obligations(2) 0.2 - (6.5) -
Gain on disposals
of property and
equipment(3) 6.6 7.0 10.3 11.7
-------------------------------------------------------------------------
Adjusted earnings
before income taxes
and minority
interest(1) $87.6 $91.2 (4.0)% $219.2 $222.9 (1.6)%
-------------------------------------------------------------------------
(1) See section 12.0 on non-GAAP measures.
(2) As described in Section 3.1 above.
(3) Includes fair market value adjustments and impairments on property
and equipment.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
CTR's third quarter earnings before taxes were $94.4 million, a
3.9 percent decrease over the $98.2 million recorded a year ago. Adjusted
pre-tax earnings decreased slightly to $87.6 million from $91.2 million in the
previous year. The decrease in earnings was partially attributable to soft
sales during the quarter, the impact of which was partially offset by cost
reductions and supply chain efficiencies. Results for the quarter also include
a one time expense of $4.6 million related to the settlement of past claims by
Canadian Tire Associate Dealers as part of the revised Associate Dealer
agreement signed in September.
Net shipments growth is proportionately stronger than CTR's sales growth
on a year-to-date basis as Associate Dealers meet initial inventory fill
requirements due to the increase in square footage from new stores as well as
Associate Dealers rebalancing inventory levels.
PartSource achieved double-digit total sales growth in the quarter,
driven mainly by commercial sales. PartSource opened one new store and
converted two franchise stores to corporate stores during the quarter,
bringing the network total to 68 locations.
Canadian Tire Associate Dealer contract
During the third quarter, the Company re-negotiated and amended its
agreement with the Canadian Tire Associate Dealers. The revised Associate
Dealer contract includes cost-sharing arrangements on marketing expenses,
shared savings from store-based energy initiatives and participation of the
Company in the growth of future Associate Dealer profits over a prescribed
base level while reconfirming the alignment of the Company and the Associate
Dealers behind their common goals of growing sales, improving productivity and
service.
The ongoing growth of CTR's sales, Associate Dealer profitability and
effective execution of the various changes will be key to ensuring the success
of the revised contract.
4.1.2 Strategic Plan update and outlook
The following information reports on our progress to the end of the third
quarter of 2007 on the key initiatives outlined in the 2005-2009 Strategic
Plan. This is our final update on the old Strategic Plan and in the future, we
will report our progress on our new 2012 Plan.-------------------------------------------------------------------------
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 remained flat in the third quarter of 2007, but are up 3.1%
on a year-to-date basis. 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.
-------------------------------------------------------------------------
Q3 2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
Third quarter
CTR opened two new Concept 20/20 CTR plans to open approximately 270
stores in the quarter, and has Concept 20/20 stores between 2005
opened nine new Concept 20/20 and 2009.
stores, including six replacement
stores, on a year-to-date basis. In 2007 CTR originally planned to
One of the new stores opened open approximately 70 Concept 20/20
during the third quarter was a stores, adding 1.6 million retail
Canadian Tire-Mark's Work square feet as follows:
Wearhouse combination store. - 19 new Concept 20/20 stores,
including 10 replacement stores
CTR did not expand or retrofit - 51 expansions and retrofits
any stores during the quarter but
has expanded or retrofitted 33 CTR currently anticipates opening
stores during 2007. approximately 67 stores in 2007 and
will add 1.5 million retail square
At the end of Q3 2007, CTR had feet as follows:
468 stores, including 167 Concept - 18 new Concept 20/20 stores,
20/20 stores (22 of which are including 10 replacement stores
Concept 20/20 Canadian - 49 expansions and retrofits
Tire-Mark's Work Wearhouse
combination stores). CTR added
approximately 100,000 retail
square feet to the network for
a total of 17.1 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
wireless rearview cameras, steam mops and pre-lit miracle fresh-cut
trees.
-------------------------------------------------------------------------
2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
In the third quarter, retail CTR planned to increase sales of
sales of ENE products decreased ENE products by approximately 10
by 3.6 percent compared to the percent by the end of the year but
third quarter of 2006. will fall short of that goal in 2007.
-------------------------------------------------------------------------
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.
-------------------------------------------------------------------------
Q3 2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
In the third quarter, 34.4 CTR plans to increase the
percent of products sold in percentage of products sourced
CTR's retail stores were from suppliers outside of North
purchased from suppliers outside America to approximately 50 percent
North America compared to 32.5 by the end of 2009.
in the third quarter of 2006
(based on landed cost).
-------------------------------------------------------------------------
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.
-------------------------------------------------------------------------
Q3 2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
Third quarter PartSource opened PartSource plans to increase its
one new corporate store during network to at least 100 stores
the quarter and has opened four by the end of 2009.
new corporate stores and one new
franchise store on a year-to-date In 2007, PartSource plans to add
basis. During the third quarter eight new stores through a
of 2007, PartSource also combination of new store openings
converted two franchise stores and small-scale acquisitions of
to corporate stores (four on a which five have been opened to
year-to-date basis). date.
PartSource had a total of 68 PartSource and CTR will also
stores at the end of the third undertake enhancements to the
quarter of 2007, including automotive parts supply chain
25 corporate stores and to support continued growth and
43 franchise stores. 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.
-------------------------------------------------------------------------
Q3 2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
In the third quarter of 2007, CTR originally targeted
the percentage of products 13 inventory turns by the end of
shipped on-time to stores 2009, but due to changes to
increased marginally, to Associate Dealer ordering
90.2 percent compared to practices and buying patterns,
89.8 percent in the third this target is being re-evaluated.
quarter of 2006.
Inventory turns for the third
quarter of 2007, based on cubic
volume, increased to 10.7 from
9.7 in the third quarter of 2006.
-------------------------------------------------------------------------Automotive Infrastructure initiative
During the third quarter of 2007, the Company officially launched its new
Automotive Infrastructure (AI) initiative. The AI is a cross-enterprise
initiative which will involve Canadian Tire's Automotive and PartSource
businesses along with Canadian Tire Associate Dealers. The main objective of
the AI initiative is to support the Company's interrelated automotive strategy
that will meet the needs of the Company, Canadian Tire Associate Dealers,
PartSource stores and our collective customers, delivering a broader inventory
assortment and improved customer service through the use of an enhanced supply
chain and upgraded technology. For additional information on the AI
initiative, please refer to the press release we issued on October 3, 2007
which is located on our investor website at
http://investor.relations.canadiantire.ca
4.1.3 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) Q3 2007 Q3 2006 2007 YTD 2006 YTD
-------------------------------------------------------------------------
Total retail sales(1) (0.7%) 7.3% 2.0% 5.8%
Same store sales (2.7%) 5.6% 0.0% 4.0%
-------------------------------------------------------------------------
(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.
-------------------------------------------------------------------------
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 sales at CTR's online web store and PartSource.
-------------------------------------------------------------------------
CTR's same store sales
Same store sales include sales from all stores that have been open for
more than 53 consecutive weeks in the same location.
-------------------------------------------------------------------------
CTR same store sales(1) by store format
(year-over-year percentage change) Q3 2007 2007 YTD
-------------------------------------------------------------------------
Same store sales
Concept 20/20 stores 0.0% 3.1%
New-format stores (4.8%) (2.1%)
Traditional stores (5.0%) (2.3%)
-------------------------------------------------------------------------
(1) Same store sales excludes PartSource
Same store sales at the new Concept 20/20 stores remained flat versus the
same quarter of 2006 reflecting a soft retail environment in Ontario and
Quebec. Sales in the month of July were down 4.2 percent, followed by slightly
stronger August and September retail sales which were up 1.2 percent. For a
further discussion of our retail sales results, please refer to the section on
retail sales below.
Historically, Concept 20/20 stores were classified as "new-format" stores
in our financial disclosures. Since Q4 2006, we have been reporting three
separate classes of stores, defined as follows:
-------------------------------------------------------------------------
Concept 20/20 store New-format store format Traditional store
format (mid 2003 to (1994 to mid 2003) format (1994 and
2007) Average retail Average retail square prior) Average retail
square footage: 53,000 footage: 33,000 square footage: 16,000
-------------------------------------------------------------------------
Larger format launched Large format, including Smaller than either
in September 2003, "Class Of" and "Next the new-format or
ranging in size from Generation" stores, Concept 20/20 stores
24,000 to 89,000 square ranging in size from on average.
feet. Concept 20/20 16,000 to 66,000 Traditional stores
stores make up square feet, most of are characterized by
approximately 50 percent which were opened varied sizes and
of the retail square between 1994 and mid layouts. Traditional
footage of the network. 2003. New-format stores stores make up
See section 4.1.2, make up approximately 40 approximately 10
Strategic Plan update percent of the retail percent of the
and outlook, for more square footage in the retail square footage
information on the network. This format in the network.
Concept 20/20 rollout. immediately preceded the
Concept 20/20 format.
-------------------------------------------------------------------------
CTR store count
Q3 2007 2006 2005 2004 2003
-------------------------------------------------------------------------
Concept 20/20 stores 167 126 53 25 4
New-format stores 205 237 292 302 305
Traditional stores 96 105 117 130 143
-------------------------------------------------------------------------
Total new-format, traditional
and Concept 20/20 stores 468 468 462 457 452
PartSource stores 68 63 57 47 39
-------------------------------------------------------------------------
CTR continues to expand and retrofit its Concept 20/20 store network,
consistent with the goals embodied in the Company's Strategic Plans and
consumer preference for this store format, as evidenced by historic same store
sales trends. Retail sales in Concept 20/20 stores accounted for approximately
45 percent of total retail sales in the third quarter of 2007.
While we are currently continuing with the Concept 20/20 rollout we are
testing and refining new concepts including placement of a full-sized Mark's
store inside a Canadian Tire store, the first two of which will be introduced
in the fourth quarter of 2007.
Average retail sales per Canadian Tire store(1,2)
For the For the
12 months 12 months
ended ended
September September
($ in millions) 29, 2007 30, 2006
-------------------------------------------------------------------------
Concept 20/20 stores $ 19.7 $ 19.9
New-format stores 14.6 14.7
Traditional stores 7.8 8.0
-------------------------------------------------------------------------
(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 transaction at new-format and Concept 20/20 stores continues to increase
partly because they allow for larger displays of promotional and seasonal
products, which are key sales drivers. With the increasing number of larger
Concept 20/20 stores, this overall trend is continuing.
Average sales per square foot of Canadian Tire retail space(1,2,3)
For the For the
12 months 12 months
ended, ended,
September September
29, 2007 30, 2006
-------------------------------------------------------------------------
Retail square footage(1) (millions of square feet) 17.1 15.6
Concept 20/20 stores(2) ($) $ 380 $ 383
New-format stores(2) ($) 446 449
Traditional stores(2) ($) 503 511
-------------------------------------------------------------------------
(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, offer a more compelling shopping experience and are more efficient to
build and operate. For further information regarding the sales at our retail
stores, please see explanation below.
Retail sales
CTR's third quarter retail sales declined by 0.7 percent and same store
sales decreased 2.7 percent from the prior year, due in part to the impact of
a shift in buying, related to the Canada Day holiday, that resulted in
approximately $20 million in sales occurring in June. Without this impact,
sales in the third quarter of 2007 would have increased 0.4 percent over the
previous year.
CTR's sales results during the quarter were affected by regional
variations in performance, as weak overall sales in Ontario and Quebec, which
represent approximately 65 percent of CTR's business, offset continued strong
growth in the rest of Canada. At the category level, strong sales in outdoor
décor, lawn and garden, and electronics only partially offset weakness in
weather-related categories and home repair.
During the construction and remerchandising of stores undergoing
conversion to the Concept 20/20 format, sales are negatively impacted.
Excluding the impact of the stores undergoing conversion, same store sales
were 2.2 percent lower in the third quarter of 2007 compared with the third
quarter of 2006.
4.1.4 Business risks
CTR is exposed to a number of risks in the normal course of its business
that have the potential to affect its operating performance. These risks
include, but are not limited to, supply chain disruption risk, seasonality
risk and environmental risk. These specific risks and management's mitigation
strategies are explained in more detail in Section 4.2.1.5 of our 2006
Financial Report.
Please also refer to section 8.0 of this MD&A for a discussion of some
other industry-wide and Company-wide risks affecting the business.
4.2 Mark's Work Wearhouse
4.2.1 Mark's financial results
($ millions) Q3 2007 Q3 2006 Change 2007 YTD 2006 YTD Change
-------------------------------------------------------------------------
Retail sales(1) $ 189.5 $ 182.2 3.9% $ 589.1 $ 535.8 9.9%
Gross operating
revenue(2) 159.8 154.0 3.8% 499.1 452.8 10.2%
EBITDA(3) 17.7 16.2 9.3% 63.4 54.0 17.5%
Earnings before
income taxes 12.2 11.4 7.7% 48.0 40.1 19.9%
-------------------------------------------------------------------------
Less adjustment for:
Loss on disposals
of property and
equipment (0.2) (0.6) (0.8) (0.7)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(3) $ 12.4 $ 12.0 4.2% $ 48.8 $ 40.8 19.7%
-------------------------------------------------------------------------
(1) Includes retail sales from corporate and franchise stores.
(2) Gross operating revenue includes retail sales at corporate stores
only.
(3) See section 12.0 on non-GAAP measures.
Explanation of Mark's third quarter financial results
Mark's third quarter earnings before taxes were $12.2 million, a
7.7 percent increase over the $11.4 million recorded a year ago. Adjusted pre-
tax earnings increased 4.2 percent to $12.4 million compared to $12.0 million
in the same 2006 period. The modest growth in earnings, relative to last year,
reflects the softer sales environment, offset by stronger margins related to
on-going global sourcing initiatives and lower markdowns.
4.2.2 Strategic Plan update and outlook
The following information reports on our progress to the end of the third
quarter of 2007 on the key initiatives outlined in the 2005-2009 Strategic
Plan. This is our final update on the old Strategic Plan and in the future, we
will report our progress on our new 2012 Plan.
-------------------------------------------------------------------------
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.
-------------------------------------------------------------------------
Q3 2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
Third quarter Mark's planned to expand the
network to approximately 400
- opened six new corporate stores by the end of 2009.
stores (including one This has recently been
CTR-Mark's Work Wearhouse revised to approximately 394
Concept 20/20 combination stores by the end of 2009.
store) and one new franchise
store, bringing the 2007 Outlook
year-to-date total of new
corporate and franchise store In 2007, Mark's now expects
openings to ten and one to open only 21 (including
respectively one franchise store) of its
- relocated three corporate 29 planned new stores due to
stores during the quarter for the timing of the
a total of 12 relocated availability of new store
corporate stores during the sites. In addition, Mark's is
year on target to expand, relocate
- expanded two corporate stores or renovate 27 stores
during the quarter, for a (including six franchise
total of two corporate and stores) and now expects to
one franchise store increase its total retail
expansions during 2007. square feet by approximately
12 percent in 2007.
Mark's total retail square
footage at the end of the
third quarter of 2007 was
2.9 million square feet.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Category expansion
Mark's plans to grow through continued expansion of its three major
categories: women's wear, men's casual and dress 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 product integrity by designing and
marketing new, innovative "Clothes That Work" items.
-------------------------------------------------------------------------
Q3 2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
Third quarter Mark's will continue to develop
- total corporate store sales and expand high-potential product
of industrial wear increased categories.
by 8.1 percent
- total corporate store sales
of women's wear increased
by 2.0 percent
- total corporate store sales
of men's wear increased by
0.8 percent
-------------------------------------------------------------------------
4.2.3 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) Q3 2007 Q3 2006 2007 YTD 2006 YTD
-------------------------------------------------------------------------
Total retail sales(1) 3.9% 18.4% 9.9% 15.5%
Same store sales(2) 0.6% 18.1% 7.2% 14.8%
-------------------------------------------------------------------------
(1) Includes retail sales from Mark's corporate and franchise stores.
(2) 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, including Mark's on-line web store, recorded at retail
prices.
-------------------------------------------------------------------------
Mark's third quarter total retail sales grew to $189.5 million, a modest
increase of 3.9 percent from the $182.2 million recorded a year ago. Retail
sales growth reflected a softening retail environment in central Canada,
particularly in Ontario. Retail sales in other regions of the country remained
stronger during the quarter.
While sales were challenging during the quarter, Mark's mature industrial
wear business led corporate store sales growth, posting an 8.1 percent
increase over last year with the largest dollar increase occurring in
industrial footwear and work wear.
Average corporate store sales(1)
For the For the For the
12 months 12 months 12 months
ended, ended, ended,
September September October
29, 2007 30, 2006 1, 2005
-------------------------------------------------------------------------
Average retail sales per store
($ thousands)(2) $ 2,862 $ 2,623 $ 2,280
Average sales per square foot ($)(3) 341 331 296
-------------------------------------------------------------------------
(1) Calculated on a rolling 12-month basis.
(2) Average retail sales per corporate store include corporate stores
that have been open for 12 months or more.
(3) Average sales per square foot is based on sales from corporate
stores. We have prorated square footage for corporate stores that
have been open for less than 12 months.
Mark's continues to improve the productivity of its stores, as
demonstrated by a 9.1 percent increase in average retail sales per corporate
store for the rolling 12 months ended September 29, 2007. The increases in
sales productivity are related to an attractive value proposition and a strong
product assortment.
4.2.4 Business risks
Mark's is exposed to a number of risks in the normal course of its
business that have the potential to affect its operating performance. These
include, but are not limited to, seasonality risk and market obsolescence
risk. These risks and management's mitigation strategy are explained in more
detail in Section 4.2.2.5 of the MD&A contained in our 2006 Financial Report.
Please also refer to section 8.0 of this MD&A for a discussion of some
other industry and Company-wide risks affecting the business.
4.3 Canadian Tire Petroleum
4.3.1 Petroleum's financial results
($ in millions) Q3 2007 Q3 2006 Change 2007 YTD 2006 YTD Change
-------------------------------------------------------------------------
Retail sales $ 451.3 $ 451.3 0.0% $1,308.6 $1,235.6 5.9%
Gross operating
revenue 424.0 427.0 (0.7) 1,232.4 1,170.2 5.3%
EBITDA(1) 12.1 3.9 204.5% 29.1 11.7 147.7%
Earnings before
income taxes 7.9 0.1 6,989.3% 16.8 0.6 2,784.2%
-------------------------------------------------------------------------
Less adjustment
for: Loss on
disposals of
property and
equipment(2) (0.7) - (2.0) (0.3)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(1) $ 8.6 $ 0.1 6,231.9% $ 18.8 $ 0.9 1,989.0%
-------------------------------------------------------------------------
(1) See section 12.0 on non-GAAP measures.
(2) Including asset impairment losses.
-------------------------------------------------------------------------
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, at competitive rates, the
majority of its gasoline requirements.
-------------------------------------------------------------------------
Explanation of Petroleum's financial results
Petroleum recorded earnings before taxes of $7.9 million compared to
$0.1 million a year ago. Adjusted pre-tax earnings, which excludes the impact
of disposals of property and equipment, increased to $8.6 million from
$0.1 million one year ago. The strong earnings reflect stabilized gasoline
prices, which resulted in improved gasoline margins during the period.
Petroleum incurred $0.8 million in environmental expenses for site
remediation during the quarter compared to $1.0 million in the third quarter
of 2006.
4.3.2 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 and ancillary purchases paid for in cash or by
Canadian Tire's Options MasterCard. Petroleum also supports other interrelated
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 purchase gas at Petroleum and have a Canadian Tire
MasterCard are Canadian Tire's most loyal and profitable customers.
The following information reports on our progress to the end of the third
quarter of 2007 on the key initiatives outlined in the 2005-2009 Strategic
Plan. This is our final update on the old Strategic Plan and in the future,
we will report our progress on our new 2012 Plan.
-------------------------------------------------------------------------
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.
-------------------------------------------------------------------------
Q3 2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
Third quarter
In the third quarter, Petroleum Management will continue to
opened one new gas station evaluate the appropriate level
(six on a year-to-date basis), of investment in Petroleum on an
refurbished seven locations annual basis.
(13 on a year-to-date basis)
and rebuilt two existing 2007 Outlook
locations (two on a year-to-date
basis). In 2007, Petroleum planned to
open nine new petroleum sites
Petroleum opened one new in strategic locations and
convenience store (seven on invest in the modernization of
a year-to-date basis) during approximately 25 existing sites.
the quarter and there was no
change in the number of car To date in 2007, Petroleum has
wash locations during the opened six new locations,
quarter, however one location refurbished 13 sites and rebuilt
was opened earlier in the year. two existing locations. Petroleum
still plans to open nine new
At the end of the quarter, petroleum sites, to refurbish
Petroleum had 265 gas stations, approximately 25 sites and replace
including 42 re-branded sites, five existing sites by the end
and 257 convenience stores. of 2007.
-------------------------------------------------------------------------
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 interrelated programs with Mark's to extend Petroleum's
marketing leverage across the Company.
-------------------------------------------------------------------------
Q3 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 the enterprise.
or 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
- car wash vouchers available
for purchase at Canadian Tire
retail stores which began
rollout in Q1 2007
The Gas Advantage MasterCard has
been very successful in Ontario
and is being tested in the
Quebec market in 2007.
-------------------------------------------------------------------------
4.3.3 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
Q3 2007 Q3 2006 Change YTD 2007 YTD 2006 Change
-------------------------------------------------------------------------
Sales volume
(millions of
litres) 434.3 441.0 (1.5%) 1,287.0 1,243.8 3.5%
-------------------------------------------------------------------------
Petroleum's gasoline volumes decreased 1.5 percent during the quarter to
434.3 million litres from 441.0 million litres a year ago. The decrease was
primarily attributable to the magnitude of promotional programs over the
comparable 2006 period. The volume decline was partially offset by the
cumulative effect of new site openings in 2007.
Petroleum's convenience and car wash sales
(year-over-year
percentage change) Q3 2007 Q3 2006 2007 YTD 2006 YTD
-------------------------------------------------------------------------
Total retail sales
Convenience store sales 12.2% 18.8% 15.5% 14.2%
Car wash sales 29.2% 1.6% 22.9% (3.5%)
-------------------------------------------------------------------------
Comparable sales
Convenience(1) 7.7% 12.3% 10.6% 8.3%
Car wash 26.9% (12.0%) 19.8% (15.1%)
-------------------------------------------------------------------------
(1) Comparable convenience sales excludes three "Q" convenience stores.
-------------------------------------------------------------------------
Petroleum's retail sales
Retail sales include the sales of gasoline at Petroleum's 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 sales and PitStop
sales, all of which we record at retail selling prices.
-------------------------------------------------------------------------
Car wash sales increased by 29.2 percent over the weather-related soft
sales experienced in the comparable 2006 period, while convenience store sales
increased 12.2 percent, attributable to growth in the network.
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
remediation risk. These risks and management's mitigation strategy are
explained in more detail in Section 4.2.3.5 of the MD&A contained in 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 Financial Services' financial results
($ in millions) Q3 2007 Q3 2006 Change 2007 YTD 2006 YTD Change
-------------------------------------------------------------------------
Gross operating
revenue $ 193.3 $ 182.4 6.0% $ 573.1 $ 523.7 9.4%
EBITDA(1) 51.8 48.2 7.6% 180.3 137.8 30.8%
Earnings before
income taxes 43.7 39.4 11.0% 157.8 113.3 39.2%
-------------------------------------------------------------------------
Less adjustment for:
Gain on disposal/
redemption of
shares - - 18.4 6.9
Loss on disposals
of property and
equipment (0.1) - (0.2) (0.3)
Loss on sales of
loans receivable (6.3) (4.8) (3.8) (20.9)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(1) $ 50.1 $ 44.2 13.3% $ 143.4 $ 127.6 12.4%
-------------------------------------------------------------------------
(1) See section 12.0 on non-GAAP measures.
Explanation of Financial Services' financial results
Financial Services' third quarter earnings before taxes of $43.7 million
increased 11.0 percent over the $39.4 million recorded in the same period last
year. Adjusted pre-tax earnings were $50.1 million or 13.3 percent higher than
the third quarter of 2006. Earnings in the third quarter were impacted by
ongoing net expenses of $8.1 million related to the retail banking initiative,
compared to $2.4 million in the third quarter of 2006. The $8.1 million in
retail banking expenses in the third quarter includes a $1.3 million provision
taken on the $8.9 million asset-backed commercial paper investments held by
Financial Services to account for the uncertainty in valuing these assets
(please refer to sections 5.1 and 5.2.5 for additional information).
-------------------------------------------------------------------------
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 consideration that includes 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.
-------------------------------------------------------------------------
4.4.2 Strategic Plan update and outlook
The following information reports on our progress to the end of the third
quarter of 2007 on the key initiatives outlined in the 2005-2009 Strategic
Plan. This is our final update on the old Strategic Plan and in the future, we
will report our progress on our new 2012 Plan.
-------------------------------------------------------------------------
Strategic Plan update and outlook
-------------------------------------------------------------------------
Total managed portfolio of loans receivable (credit card, personal 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 and retail banking
products. 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 at the end of
the third quarter is $1,934, well below the industry average of
approximately $2,700, which translates into a substantial long-term
growth opportunity.
-------------------------------------------------------------------------
Q3 2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
Third quarter
Gross average loans Over the 2005-2009 Plan period,
receivable were $3.7 billion Financial Services plans to
in the third quarter, up increase the number of accounts
7.2 percent from the third with balances by three to four
quarter of 2006 (6.7 percent percent annually.
on a year-to-date basis). This
growth reflects an 8.8 percent 2007 Outlook
increase in the average account
balance during the quarter and Financial Services planned to
a total of 6.3 percent increase total portfolio gross
year-to-date. average loans receivable to
$3.7 billion in 2007 and is on
Credit card gross average loans target to achieve that goal.
receivable were $3.5 billion
in the third quarter, up Financial Services planned to
10.1 percent from the third introduce at least one new
quarter of 2006 and up credit card product in 2007.
9.2 percent for the year. During the third quarter of
The growth reflects primarily 2007, the Vacation Advantage
an 11.4 percent increase in MasterCard was launched in
average account balances for three pilot markets.
the quarter and 8.7 percent on
a year-to-date basis. Financial Services also planned
to expand the Gas Advantage
MasterCard from Ontario into
other regions of the country.
The Gas Advantage MasterCard is
currently being tested in Quebec.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
-------------------------------------------------------------------------
Q3 2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
Revenues from insurance and Financial Services plans to
warranty products increased increase revenues from insurance
9.7 percent in the third and warranty products by
quarter of 2007 year-over-year. approximately six percent on a
compound annual basis over the
2005-2009 Plan period.
2007 Outlook
Financial Services planned to
increase revenues from insurance
and warranty products by
approximately nine percent in
2007 and has exceeded this
target on a year-to-date basis.
-------------------------------------------------------------------------
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 by providing financial services to millions
of customers.
-------------------------------------------------------------------------
Q3 2007 Performance 2005-2009 Plan
-------------------------------------------------------------------------
Financial Services launched its The retail banking pilot will run
retail banking products in two for approximately 24 months.
pilot markets in October 2006 During this time its future potential
and since then has added a third will be assessed.
test market to expand the trial
of new marketing approaches. 2007 Outlook
Financial Services is supporting Financial Services planned to
the launch with a multi-faceted introduce additional retail
marketing program including flyer banking products in 2007.
inserts, direct mail, television During the third quarter of 2007
and radio advertisements, the Canadian Tire One and Only
billboards and in-store Account was launched in three pilot
advertising to increase markets. Management continues to
customer awareness. Customers can monitor performance of the
sign up for Canadian Tire's piloted products.
retail banking products online,
by phone or in-store in the Financial Services planned to incur
pilot markets. approximately $25 million in
expenses associated with the
The investment in retail banking marketing and operations of the
pilot programs impacted Financial retail banking initiative in 2007.
Services' earnings before income
taxes by $8.1 million during the
quarter compared to $2.4 million
during the same period in 2006.
The $8.1 million in retail
banking expenses in the third
quarter includes a $1.3 million
provision taken on the
asset-backed commercial paper
investment held by Financial
Services to account for
the uncertainty in valuing these
assets (please refer to sections
5.1 and 5.2.5 for additional
information).
On a year-to-date basis,
Financial Services' earnings
before income taxes have been
impacted by $18.6 million
for the costs associated with
the retail banking pilot
programs.
-------------------------------------------------------------------------
4.4.3 Key performance indicators
The following are key indicators of Financial Services' performance:
- size of the total managed portfolio
- profitability of the portfolio
- quality of the portfolio
Financial Services' total managed portfolio of loans receivable
($ in millions,
except where
noted) Q3 2007 Q3 2006 Change 2007 YTD 2006 YTD Change
-------------------------------------------------------------------------
Average number of
accounts with a
balance
(thousands) 1,854 1,882 (1.5%) 1,851 1,846 0.3%
Average account
balance ($) $ 2,001 $ 1,839 8.8% $ 1,950 $ 1,833 6.3%
Gross average
receivables
(GAR) 3,709.8 3,460.8 7.2% 3,609.1 3,383.6 6.7%
Total managed
portfolio (end
of period) 3,717.4 3,461.5 7.4%
Net managed
portfolio (end of
period) 3,675.8 3,420.9 7.5%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net managed portfolio
Financial Services' net managed portfolio is the total value, after
allowances, of loans receivable including credit card, personal and
residential mortgage loans.
-------------------------------------------------------------------------
Financial Services' portfolio of credit card loans receivable
($ in millions,
except where
noted) Q3 2007 Q3 2006 Change 2007 YTD 2006 YTD Change
-------------------------------------------------------------------------
Average number of
accounts with a
balance
(thousands) 1,817 1,838 (1.2%) 1,812 1,803 0.5%
Average account
balance ($) $ 1,934 $ 1,736 11.4% $ 1,878 $ 1,729 8.7%
Gross average
receivables (GAR) 3,513 3,191 10.1% 3,404 3,117 9.2%
Total managed
portfolio (end
of period) 3,525 3,202 10.1%
-------------------------------------------------------------------------
Financial Services' total managed portfolio of loans receivable was
$3.7 billion at the end of the third quarter, a 7.4 percent increase over the
$3.5 billion portfolio at the end of the comparable 2006 period. Personal loan
receivables represent approximately five percent of the total portfolio.
Ending credit card loans receivable grew 10.1 percent to $3.5 billion. The
increase was primarily a result of an 11.4 percent increase in the average
account balance compared to the third quarter of 2006.
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)
Q3 2007 Q3 2006 Q3 2005
-------------------------------------------------------------------------
Total revenue as a % of GAR(2) 24.88% 25.01% 25.81%
Gross margin as a % of GAR(2) 13.19% 13.06% 13.30%
Operating expenses as a % of GAR(3) 7.77% 7.98% 8.69%
Return on average total managed
portfolio(2,3,4) 5.43% 5.08% 4.61%
-------------------------------------------------------------------------
(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
disposal/redemption of shares.
(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.
Portfolio quality
-------------------------------------------------------------------------
Q3 2007 Q3 2006 Q3 2005
-------------------------------------------------------------------------
Net write-off rate (rolling
12-month basis) 5.87% 5.94% 5.95%
Account balances less than 30 days
overdue at end of period 96.26% 96.14% 96.31%
Allowance rate 2.44% 2.60% 2.56%
-------------------------------------------------------------------------
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 net write-off rate for the total managed portfolio on a rolling 12-
month basis was 5.87 percent, an improvement from 5.94 percent in the
comparable 2006 period. The net write-off rate on a rolling 12-month basis for
the credit card portfolio improved during the quarter to 5.77 percent from
5.95 percent in the comparable 2006 period, 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.
4.4.4 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 the MD&A
contained in 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. For
additional information on Canadian Tire's liquidity and capital market
activity, please refer to section 5.1 below.
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 and 2012 Strategic Plans.
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 and 2012 Strategic Plans.
As at the dates indicated, our capital structure was as follows:
At At At
September September December
(composition of total structure) 29, 2007 30, 2006 30, 2006
-------------------------------------------------------------------------
Shareholders' equity 65.2% 64.6% 67.2%
Short-term debt 4.8% 2.7% -
Long-term debt(1) 25.5% 28.0% 28.3%
Other long-term liabilities 2.8% 2.7% 2.7%
Future income taxes 1.7% 2.0% 1.8%
-------------------------------------------------------------------------
100.0% 100.0% 100.0%
-------------------------------------------------------------------------
(1) Includes the current portion of long-term debt.
Equity
The book value of Common Shares and Class A Non-Voting Shares at the end
of the quarter was $36.51 per share compared to $33.14 at the end of the third
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. We have purchased approximately 0.3 million shares under
this bid on a year-to-date basis.
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 since April 3, 2006.
Shares outstanding
At September At September
29, 2007 30, 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) 372,463 1,124,699
Shares purchased under NCIB (287,000) (918,400)
-------------------------------------------------------------------------
Shares outstanding at end of period 78,132,919 78,239,023
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 Shares and Class A
Non- Voting Shares in the third quarter of 2007 compared to dividends of
$13.4 million in the third 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 third quarterly dividend at the 2007 rate was declared on
August 9, 2007 in the amount of $0.185 per share payable on December 3, 2007
to shareholders of record as of October 31, 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 sales 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 $135 million in commercial
paper outstanding at September 29, 2007, $113 million outstanding at
September 30, 2006 and none outstanding at 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 September 29, 2007, September 30, 2006 and December 30, 2006 we had
$645 million in committed lines of credit of which $50 million was drawn on as
at September 29, 2007. As credit markets were unsettled at the end of the
quarter and other methods of financing had become more expensive, the Company
used this drawdown as a cost-effective way of obtaining financing. The
drawdown has subsequently been repaid.
We have successfully negotiated an increase of $500 million in these
committed lines of credit. Legal documentation is in process and it is
expected that the increase will be effective by November 15, 2007, bringing
our total committed lines of credit to $1.145 billion.
Long-term debt
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.
The Company's long-term debt is currently rated A(low) by DBRS and BBB+
by S&P. Subsequent to the end of the third quarter of 2007, our credit ratings
were reconfirmed by both DBRS and S&P.
Subsequent to the end of the third quarter and pursuant to this shelf
prospectus, we completed a public offering of $300 million in three-year MTNs
which have an interest rate of 5.22 percent and mature on October 1, 2010.
As of the end of the third quarter of 2007, long-term debt included
$1.4 million of capital leases.
Debt market conditions
In August and September of the third quarter, global debt markets
experienced a credit crisis linked to problems in the U.S. sub-prime mortgage
market. This caused a worldwide reassessment of the financial risks involved
with asset-backed securities and led to market disruptions, constrictions and
increased interest rates for borrowers looking to refinance their short-term
debt.
Canadian Tire participates in the asset-backed security markets through
the use of commercial paper and issuance of MTNs. Through this period, Glacier
Credit Card Trust (GCCT) has been able to refinance its maturing commercial
paper, although at a higher rate of interest. As evidenced through the recent
completion of our public offering referred to above, our ability to increase
our existing committed bank lines of credit and our success in rolling over
both the Company's and GCCT's commercial paper, Canadian Tire has demonstrated
that these market challenges have not affected our ability to access funding
albeit at higher rates than what we have previously experienced.
Like most borrowers, we provide covenants to our lenders. We are in
compliance with all of our debt covenants.
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
third quarter of 2007, the primary sources of funding were:- $226 million of cash flow from operations, before working capital
requirements
- $185 million of cash generated from the issuance of commercial paper
and increased bank loans
5.2.2 Third quarter 2007 capital program
Canadian Tire's capital expenditures totaled $156 million in the third
quarter on a cash basis, ($194 million on an accrual basis as disclosed in the
Unaudited Consolidated Financial Statements, Note 11 - Supplementary Cash Flow
Information), a 7.5 percent increase from the $145 million spent on a cash
basis in the third quarter of 2006 ($153 million on an accrual basis as
disclosed in the Unaudited Consolidated Financial Statements, Note 11 -
Supplementary Cash Flow Information). Those capital expenditures were
comprised of:
- $104 million for real estate projects, including $93 million
associated with the rollout of CTR's Concept 20/20 stores
- $31 million for the Eastern Canada distribution centre in the
province of Quebec
- $12 million for information technology
- $9 million for other purposes
Overall, capital investments for real estate projects were up
significantly year-over-year in the third quarter, primarily due to the
acceleration of the Concept 20/20 store rollout, investment in the
construction of the Eastern Canada distribution centre and other capital
required for some larger urban store developments.
5.2.3 2007 Annual capital plan
The 2007 capital plan is for expenditures to be in the range of $580
million to $620 million on an accrual basis. The 2007 annual 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
- $ 75 million for information technology
- $ 63 million for other purposes
5.2.4 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 third quarter of 2007 and 2006.
Comparable working capital components
Increase/
(decrease)
At September At September in working
($ in millions) 29, 2007 30, 2006 capital
-------------------------------------------------------------------------
Accounts receivable 519.4 562.0 (42.6)
Merchandise inventories 1,072.1 1,000.3 71.8
Prepaid expenses and deposits 54.3 63.2 (8.9)
Income taxes recoverable/(payable) 116.4 (52.7) 169.1
Accounts payable and other (1,565.6) (1,262.2) (303.4)
-------------------------------------------------------------------------
(114.0)
-------------------------------------------------------------------------The change in the balance of income taxes from an amount payable to an
amount receivable is attributable to amounts the Company has paid related to
prior year reassessments, as explained in Section 6.0 below.
The increase in accounts payable includes higher merchandise payables due
to early execution of a financing arrangement for Petroleum, increased
consumer deposits at Financial Services for retail banking deposit accounts,
increased tenant allowances related to the increase in real estate projects
and the recording of the fair value of foreign exchange derivatives as a
result of the new financial instrument accounting standard as required by the
CICA (see section 11.2).
5.2.5 Cash and cash equivalents
At September 29, 2007, the Company was in a net bank indebtedness
position of $84.2 million in cash and cash equivalents compared to positive
net cash positions of $1.9 million at September 30, 2006 and $741.3 million at
December 30, 2006. These changes partly reflect seasonal fluctuations in cash
balances but also reflect increased level of investment associated with cash
used primarily during the quarter for the following:- $170 million to fund further net growth in loans receivable
- $156 million for the addition of property and equipmentAs of September 29, 2007, the Company held third-party asset-backed
commercial paper (ABCP) with an original cost of $8.9 million. These ABCP were
rated by DBRS as R-1 (High), the highest credit rating for commercial paper
since the ABCP are backed by R-1 (High) rated assets. A global disruption in
the market for such commercial paper during the quarter resulted in a sudden
constraint on the liquidity of ABCP. DBRS placed certain of the ABCP "Under
Review with Developing Implications" following an announcement on August 16,
2007 that a consortium representing banks, asset providers and major investors
had agreed in principle to a long-term proposal and interim agreement
regarding the ABCP (commonly referred to as "the Montreal Proposal"). Under
this proposal, the affected ABCP would be converted into term floating rate
notes maturing no earlier than the scheduled termination dates of the
underlying assets. The Montreal Proposal called for the investors to continue
to roll their ABCP during the standstill period. On September 6, 2007, a
committee was formed to oversee the proposed restructuring process of the
ABCP. On October 16, 2007, it was announced that the committee expected that
the restructuring would be completed on or before December 14, 2007. As of
September 29, 2007, all of the ABCP held by the Company were part of the
Montreal Proposal. The Company has classified its ABCP as long-term
investments, which were previously classified as "Cash and cash equivalents"
on the balance sheet as management anticipates that this investment may mature
beyond a 365-day period.
During the three and nine months ended September 29, 2007, the Company
recorded a $1.3 million before tax provision for impairment of the ABCP in the
consolidated statement of earnings. Continuing uncertainties regarding the
value of the assets which underlie the ABCP, the amount and timing of cash
flows and the outcome of the restructuring process could give rise to a
further change in the value of the Company's investment in ABCP which would
impact the Company's future earnings.
As referenced in section 5.1, due to the recent increase in the amount of
funds we expect to have available through committed lines of credit and
various other forms of funding, the Company has sufficient credit facilities
to satisfy its financial obligations as they come due and does not expect
there will be a material adverse impact on its business as a result of this
current third-party asset backed commercial paper liquidity issue.
5.2.6 Loans receivable
Our loans receivable securitization program is designed to provide a
cost- effective source of funding for Financial Services. Loans receivable
were as follows at the indicated dates:At September At September At December
($ in millions) 29, 2007 30, 2006 30, 2006
-------------------------------------------------------------------------
Securitized 2,743.4 $ 2,525.4 $ 2,827.4
Unsecuritized 932.4 895.6 771.8
-------------------------------------------------------------------------
Net managed loans receivable $ 3,675.8 $ 3,421.0 $ 3,599.2
-------------------------------------------------------------------------Net managed loans receivable continued to increase over the last
12 months as customers' use of the Canadian Tire MasterCard grew and account
balances increased. At the end of the third quarter of 2007, net managed loans
receivable were 7.5 percent higher than at the end of the third 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 the 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 September 29, 2007, we recognized a pre-tax loss
of $6.3 million (2006 - $4.8 million pre-tax loss) on securitization
transactions resulting in a higher level of unsecuritized receivables than at
the end of the third quarter of 2006.
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
September 29, 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.
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 September At September
29, 2007 30, 2006
-------------------------------------------------------------------------
Ratio of long-term debt to total
capitalization(1) 26.0% 28.0%
Ratio of current assets to current liabilities 1.4:1 1.7:1
Interest coverage(2) 9.9 times 8.2 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 Incentive programs
On June 30, 2007, the Company's former CEO retired from his position as
Vice-Chairman and, as a result, the Company included a charge of $6.7 million
in the second quarter to reflect the cost of previously unvested share units
he was entitled to under the Company's share incentive programs (valued at the
prevailing stock price on June 30, 2007) in addition to other retirement
obligations. The ultimate cost to the Company of a significant portion of this
compensation, and the value provided to the former CEO, will be based on the
future performance of the Company over the next three year period, as the
share units will be marked to market until they are fully paid. The mark to
market adjustments will be reflected in the Company's financial results each
quarter until that time. The impact of the mark to market adjustment in the
third quarter was a gain of $0.2 million which brings the total charge
recorded in the financial statements to $6.5 million on a year-to-date basis.
For a full description of stock based compensation plans, please refer to
Note 10 to the Consolidated Financial Statements contained in our 2006
Financial Report.
5.5 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
provide 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. During the year
several representative offices of the Company were created to perform
the activities formerly provided by the subsidiaries due to changes
in local regulations and the need to enhance operational
efficiencies.
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 $265 million. Although the Company will appeal these
reassessments, current tax legislation requires the Company to remit to the
CRA and its provincial counterparts approximately $165 million, of which $158
million had been remitted by the end of the quarter.
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.
Income tax expense has been reduced by $2.9 million due to settlements of
various minor issues with the Canadian tax authorities and a slight reduction
in statutory tax rates during the year.
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. Please
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. Please 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 way for
Associate Dealers to access the majority of the financing they require for
their store operations. Please 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. Please 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. Please 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 principal 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 third quarter of 2007. While not regarded as a
principal risk itself the unstable market conditions for asset backed
commercial paper has the potential to impact the Company's ability to raise
sufficient cost-effective capital to finance its expansion plans. As noted in
section 5.1 above, however, these market conditions have not significantly
impacted our ability to do so to date.9.0 Contractual obligations
Contractual obligations due by period
In the
remaining
three In years In years
months 2008 2010 After
($ in millions) Total of 2007 - 2009 - 2011 2011
-------------------------------------------------------------------------
Long-term debt(1) $1,169.4 $ 0.3 $ 153.7 $ 164.8 $ 850.6
Capital lease
obligations 1.4 0.2 1.2 - -
Operating leases 1,883.5 48.3 390.7 331.4 1,113.1
Purchase obligations 829.9 566.5 243.1 14.2 6.1
Other obligations 26.2 1.0 16.3 3.0 5.9
-------------------------------------------------------------------------
Total contractual
obligations $3,910.4 $ 616.3 $ 805.0 $ 513.4 $1,975.7
-------------------------------------------------------------------------
(1) The long-term debt number in the Consolidated Balance Sheet has been
adjusted by $4.0 million due to the implementation of the new
Financial Instrument standard.10.0 Related party transactions
During the quarter ended September 29, 2007, the Company purchased the
shares of a corporation, one of the owners of which is an Associate Dealer and
also a director of the Company. The purchase price was $3.7 million. The
purchased corporation owns the real estate for a Canadian Tire store. The
purchase price is considered to be fair market value, based on independent
appraisals. At the end of the quarter, the land and building so acquired
related to the purchase is included in "Property and equipment". As the
purchase price has not yet been fully paid by the Company, $3.0 million is
included in "Accounts payable and accrued liabilities".
Separately, the Company has provided to the same Associate Dealer, a loss
mitigation agreement for the first two years of operation in respect of a new
Canadian Tire Associate store, as it does, in various forms, for Associate
Dealers from time to time, to help mitigate some of the financial risk
inherent in the new store. Losses, if any, that the Company shares with the
Associate Dealer pursuant to the agreement would not be material to the
Company and may be partially recoverable by the Company over the following
three years from the Associate Dealer.
11.0 Changes in accounting policies
11.1 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 of the MD&A contained in our 2006 Financial Report. Consequently, we
were not required to include the financial results of the trusts in our
Consolidated Financial Statements for the period ended September 29, 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.
11.2 Financial instruments, comprehensive income, hedging and equity
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 applied to the Company as of the
first day of our 2007 fiscal year. These were: 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 required 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 10 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 September 29, 2007.
The impact of adopting the new standards on the 2007 third 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.
11.3 Capital Disclosures and Financial Instruments - Disclosures and
Presentation
In December 2006, the CICA issued CICA Handbook Section 3862 - Financial
Instruments - Disclosures, CICA Handbook Section 3863 - Financial Instruments
- Presentation, and CICA Handbook Section 1535 - Capital Disclosures. These
standards replace the existing CICA Handbook Section 3861 - Financial
Instruments - Disclosure and Presentation. These new standards are harmonized
with International Financial Reporting Standards.
CICA Handbook Section 3862 requires increased disclosures regarding the
risks associated with financial instruments and how these risks are managed.
CICA Handbook Section 3863 carries forward the presentation standards for
financial instruments and non-financial derivatives and provides additional
guidance for the classification of financial instruments, from the perspective
of the issuer, between liabilities and equity.
CICA Handbook Section 1535 requires entities to disclose information
about its objectives, policies and processes for managing capital, as well as
its compliance with any externally imposed capital requirements. While the
standard does provide a definition of capital, the standard requires entities
to describe and provided quantitative data about what they manage as capital.
As these standards are effective for fiscal years beginning on or after
October 1, 2007, we will implement them in the first quarter of 2008.
11.4 Inventories
In June 2007, the CICA issued CICA Handbook Section 3031 - Inventories,
which replaces CICA Handbook Section 3030 - Inventories. The new standard is
harmonized with International Financial Reporting Standard IAS 2.
The new standard provides guidance on the determination of cost and
requires inventories to be measured at the lower of cost and net realizable
value. The cost of inventories includes the cost of purchase and other costs
incurred in bringing the inventories to their present location and condition.
Costs such as storage costs, administrative overheads that do not contribute
to bringing the inventories to their present location and condition, and
selling costs are specifically excluded from the cost of inventories and are
expensed in the period incurred. Reversals of previous write-downs to net
realizable value is now required when there is a subsequent increase in the
value of inventories. The cost of inventories should be determined using
either a first-in, first-out or weighted average cost formula. Techniques for
the measurement of cost of inventories, such as the retail method or standard
cost method, may be used for convenience if the results approximate cost. The
new standard also requires additional disclosures including the accounting
policies adopted in measuring inventories, the carrying amount of inventories,
amount of inventories recognized as an expense during the period, the amount
of write-downs during the period and the amount of any reversal of any write-
down that is recognized as a reduction of expenses.
As this standard applies to interim and annual financial statements for
fiscal years beginning on or after January 1, 2008, we will implement it at
the beginning of our 2008 fiscal year. Opening inventory will be reported in
accordance with new standard with the difference adjusting opening retained
earnings with no prior periods restated, or retrospectively with a restatement
of prior periods in accordance with CICA Handbook Section 1506 - Accounting
Changes.
We are currently evaluating the potential impact of this new standard on
our Consolidated Financial Statements for 2008 and adjusting our systems and
processes as necessary to comply with this new standard.
11.5 International Financial Reporting Standards
The Accounting Standards Board of the CICA has announced that Canadian
generally accepted accounting for publicly accountable enterprises will be
replaced with International Financial Reporting Standards (IFRS) over a
transition period. While the Accounting Standards Board intends to announce
the exact IFRS changeover date by March 31, 2008, the expected changeover date
is January 1, 2011.
Implementing IFRS will have an impact on accounting, financial reporting
and supporting IT systems and processes. It may also have an impact on taxes,
contractual commitments involving GAAP based clauses (including debt
covenants), long-term employee compensation plans and performance metrics.
Accordingly the Company's implementation plan includes measures to provide
extensive training to key finance personnel, to review relevant contracts and
agreements and to increase the level of awareness and knowledge amongst
management, the Board and Audit Committee and investor relations. It is
anticipated that additional resources will be engaged to ensure the timely
conversion to IFRS.
12.0 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, adjusted EPS basic, adjusted EPS net, EBITDA -
adjusted
- same store sales
- comparable sales for Petroleum sitesFor further information on our non-GAAP measures, please refer to
Management's Discussion and Analysis in the MD&A contained in our 2006
Financial Report.
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) Q3 2007 Q3 2006 YTD 2007 YTD 2006
-------------------------------------------------------------------------
EBITDA and minority interest
CTR $ 159.6 $ 157.7 $ 409.0 $ 416.6
Financial Services 51.8 48.2 180.3 137.8
Petroleum 12.1 3.9 29.1 11.7
Mark's 17.7 16.2 63.4 54.0
Eliminations (13.4) (13.1) (35.6) (33.7)
-------------------------------------------
Total EBITDA and minority
interest $ 227.8 $ 212.9 $ 646.2 $ 586.4
-------------------------------------------
Less: Depreciation and
amortization expense
CTR $ 39.5 $ 36.5 $ 114.9 $ 109.0
Financial Services 3.1 2.8 9.4 9.1
Petroleum 4.2 3.8 12.3 11.1
Mark's 4.4 3.8 13.2 11.5
-------------------------------------------
Total depreciation and
amortization expense $ 51.2 $ 46.9 $ 149.8 $ 140.7
-------------------------------------------
Interest expense
CTR $ 25.7 $ 23.0 $ 71.1 $ 73.0
Financial Services 5.0 6.0 13.1 15.4
Mark's 1.1 1.0 2.2 2.4
Eliminations (13.4) (13.1) (35.6) (33.7)
-------------------------------------------
Total interest expense $ 18.4 $ 16.9 $ 50.8 $ 57.1
-------------------------------------------------------------------------
Earnings before income taxes
and minority interest
CTR $ 94.4 $ 98.2 $ 223.0 $ 234.6
Financial Services 43.7 39.4 157.8 113.3
Petroleum 7.9 0.1 16.8 0.6
Mark's 12.2 11.4 48.0 40.1
-------------------------------------------
Total earnings before income
taxes and minority interest $ 158.2 $ 149.1 $ 445.6 $ 388.6
-------------------------------------------------------------------------
(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 certain items. Historically, non-operating
items have included gains and losses on the sales of loans receivable and
dispositions of surplus property and equipment. Occasionally, other items such
as the retirement obligations of our former CEO are also included. 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.
13.0 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.
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.
Management has evaluated whether there were changes in our internal
controls over financial reporting during the interim period ended September
29, 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 third 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 Karen Meagher (416) 480-8058 or email investor.relations@cantire.com.2007 THIRD QUARTER INTERIM REPORT FINANCIALS
Consolidated Statements of Earnings (Unaudited)
-------------------------------------------------------------------------
(Dollars in
millions except 13 weeks ended, 39 weeks ended,
per share September 29, September 30, September 29, September 30,
amounts) 2007 2006 2007 2006
-------------------------------------------------------------------------
Gross operating
revenue $ 2,053.4 $ 2,023.3 $ 6,113.5 $ 5,843.0
-------------------------------------------------------------------------
Operating expenses
Cost of
merchandise sold
and all other
operating
expenses except
for the
undernoted items 1,816.4 1,802.2 5,443.1 5,235.2
Interest
Long-term
debt 16.6 16.8 46.6 55.0
Short-term
debt 1.8 0.1 4.2 2.1
Depreciation and
amortization 51.2 46.9 149.8 140.7
Employee Profit
Sharing Plan 9.2 8.2 24.2 21.4
-------------------------------------------------------------------------
Total operating
expenses 1,895.2 1,874.2 5,667.9 5,454.4
-------------------------------------------------------------------------
Earnings before
income taxes and
minority interest 158.2 149.1 445.6 388.6
Income taxes
Current 44.3 56.5 144.9 142.7
Future 8.2 (2.8) 8.2 (2.8)
-------------------------------------------------------------------------
Income taxes 52.5 53.7 153.1 139.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings
before minority
interest 105.7 95.4 292.5 248.7
-------------------------------------------------------------------------
Minority interest
(Note 7) - - - 2.4
-------------------------------------------------------------------------
Net earnings $ 105.7 $ 95.4 $ 292.5 $ 246.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings
per share $ 1.30 $ 1.17 $ 3.59 $ 3.02
Diluted earnings
per share
(Note 5) $ 1.30 $ 1.16 $ 3.59 $ 2.99
-------------------------------------------------------------------------
Weighted average
number of Common and
Class A Non-Voting
Shares outstanding
(Note 5) 81,519,870 81,613,136 81,498,943 81,561,963
-------------------------------------------------------------------------
Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------------------------------------------
13 weeks ended, 39 weeks ended,
(Dollars in September 29, September 30, September 29, September 30,
millions) 2007 2006 2007 2006
-------------------------------------------------------------------------
Cash generated
from (used for):
Operating
activities
Net earnings $ 105.7 $ 95.4 $ 292.5 $ 246.3
Items not
affecting cash
Net provision
for loans
receivable 56.9 54.9 158.8 155.8
Depreciation
and
amortization
of property
and equipment 50.6 46.5 148.0 139.0
Future income
taxes 8.2 (2.8) 8.2 (2.8)
Employee future
benefits expense
(Note 4) 1.6 1.8 4.9 5.4
Loss on sales
of loans
receivable
(Note 3) 6.3 4.8 3.8 20.9
Fair market value
adjustment and
impairments on
property and
equipment 0.4 - 2.8 -
Other 0.7 0.7 2.5 (1.7)
Amortization of
other assets 0.5 0.6 1.8 3.8
Impairment of
other long-
term
investments
(Note 10) 1.3 - 1.3 -
Gain on disposals
of property and
equipment (6.0) (6.4) (10.1) (10.4)
Gain on disposals/
redemptions of
shares - - (18.4) (6.9)
-------------------------------------------------------------------------
226.2 195.5 596.1 549.4
-------------------------------------------------------------------------
Changes in other
working capital
components (30.7) (104.9) (824.6) (529.0)
-------------------------------------------------------------------------
Cash generated from
(used for) operating
activities 195.5 90.6 (228.5) 20.4
-------------------------------------------------------------------------
Investing activities
Additions to
property and
equipment (155.9) (145.0) (420.0) (305.6)
Investment in
loans receivable (65.4) (81.8) (244.9) (217.6)
Securitization of
loans receivable (169.6) (49.0) (66.0) (139.0)
Reclassification
of other
long-term
investments
(Note 10) (8.9) - (8.9) -
Purchases of
stores (2.6) (2.2) (6.8) (5.5)
Asset retirement
obligations (0.9) (1.8) (1.7) (1.1)
Employee future
benefits (0.5) (0.5) (1.4) (1.4)
Proceeds on
disposals/
redemptions of
shares - - 18.4 6.9
Proceeds on
disposition of
property and
equipment 10.6 9.8 19.1 253.3
Long-term
receivables and
other assets 4.9 (4.0) 21.2 (6.7)
-------------------------------------------------------------------------
Cash used for
investing
activities (388.3) (274.5) (691.0) (416.7)
-------------------------------------------------------------------------
Financing activities
Commercial paper 135.4 113.0 135.4 113.0
Class A Non-Voting
Share transactions 6.0 (5.3) 4.4 (10.9)
Issuance of
long-term debt 0.2 - 0.2 0.9
Repayment of
limited partnership
interest (Note 7) - - - (300.0)
Repayment of
long-term debt (1.0) (1.4) (2.4) (204.1)
Dividends (15.1) (13.4) (43.6) (38.7)
-------------------------------------------------------------------------
Cash generated from
(used for) financing
activities 125.5 92.9 94.0 (439.8)
-------------------------------------------------------------------------
Cash used in the
period (67.3) (91.0) (825.5) (836.1)
Cash and cash
equivalents,
beginning of period (16.9) 92.9 741.3 838.0
-------------------------------------------------------------------------
Cash and cash
equivalents, end
of period
(Note 9) $ (84.2) $ 1.9 $ (84.2) $ 1.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income (Unaudited)
-------------------------------------------------------------------------
13 weeks 39 weeks
ended, ended,
September 29, September 29,
(Dollars in millions) 2007 2007
-------------------------------------------------------------------------
Net earnings $ 105.7 292.5
Other comprehensive income (loss),
net of taxes
Losses on derivatives designated as cash
flow hedges (net of tax of $22.0 and $45.0) (41.2) (83.5)
Reclassification to non-financial asset of
loss on derivatives designated as cash flow
hedges (net of tax of $12.3 and $8.2) 22.8 15.3
Reclassification to earnings of loss (gain)
on derivatives designated as cash flow hedges
(net of tax of $0.2 and $1.4) 0.4 (2.6)
-------------------------------------------------------------------------
Other comprehensive income (loss) (18.0) (70.8)
-------------------------------------------------------------------------
Comprehensive income $ 87.7 221.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
-------------------------------------------------------------------------
39 weeks ended,
September 29, September 30,
(Dollars in millions) 2007 2006
-------------------------------------------------------------------------
Share capital
Balance, beginning of period $ 702.7 $ 702.7
Transactions, net 4.4 14.3
-------------------------------------------------------------------------
Balance, end of period $ 707.1 $ 717.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contributed surplus
Balance, beginning of period $ 0.1 $ 1.5
Transactions, net 1.8 (0.2)
-------------------------------------------------------------------------
Balance, end of period $ 1.9 $ 1.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 (Note 2) (4.4) -
-------------------------------------------------------------------------
Balance, beginning of period as restated 2,083.7 1,812.6
Net earnings for the period 292.5 246.3
Dividends (45.2) (40.3)
Repurchase of Class A Non-Voting Shares - (25.2)
-------------------------------------------------------------------------
Balance, end of period $ 2,331.0 $ 1,993.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 (Note 2) 14.3 -
Other comprehensive income (loss) for the
period (70.8) -
-------------------------------------------------------------------------
Balance, end of period $ (62.2) $ (5.7)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings and accumulated other
comprehensive income (loss) $ 2,268.8 1,987.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Balance Sheets (Unaudited)
(Dollars in millions) September 29, September 30, December 30,
As at 2007 2006 2006
-------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents
(Note 9) $ - $ 1.9 $ 741.3
Accounts receivable 519.4 562.0 340.5
Loans receivable (Note 3) 847.2 808.0 694.2
Merchandise inventories 1,072.1 1,000.3 667.3
Income taxes recoverable 116.4 - -
Prepaid expenses and deposits 54.3 63.2 46.2
Future income taxes 41.8 42.5 51.5
-------------------------------------------------------------------------
Total current assets 2,651.2 2,477.9 2,541.0
-------------------------------------------------------------------------
Long-term receivables and other
assets (Note 3) 254.8 233.2 283.5
Other long-term investments,
net (Note 10) 7.6 - -
Goodwill 50.0 46.4 46.4
Intangible assets 52.4 52.4 52.4
Property and equipment 3,119.6 2,692.7 2,881.3
-------------------------------------------------------------------------
Total assets $ 6,135.6 $ 5,502.6 $ 5,804.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Bank indebtedness (Note 9) $ 84.2 $ - $ -
Commercial paper 135.4 113.0 -
Accounts payable and other 1,565.6 1,262.2 1,579.5
Income taxes payable - 52.7 81.1
Current portion of long-term
debt 153.1 3.3 3.0
-------------------------------------------------------------------------
Total current liabilities 1,938.3 1,431.2 1,663.6
-------------------------------------------------------------------------
Long-term debt 1,013.8 1,169.4 1,168.4
Future income taxes 78.8 85.1 75.0
Other long-term liabilities 126.9 110.9 112.4
-------------------------------------------------------------------------
Total liabilities 3,157.8 2,796.6 3,019.4
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 6) 707.1 717.0 702.7
Contributed surplus 1.9 1.3 0.1
Accumulated other comprehensive
loss (62.2) (5.7) (5.7)
Retained earnings 2,331.0 1,993.4 2,088.1
-------------------------------------------------------------------------
Total shareholders' equity 2,977.8 2,706.0 2,785.2
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 6,135.6 $ 5,502.6 $ 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 contained in our 2006 Financial Report.
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 recently prepared annual
financial statements for the 52 weeks ended December 30, 2006, except
as noted below.
Financial Instruments/Comprehensive Income/Hedges
-------------------------------------------------
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
other assets Loans and receivables Amortized cost
Other long-term investments Held for trading Fair value
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
Statements 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 loss of approximately
$50.0 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 is 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 September 29,
2007, the Company recognized a pre-tax loss of $6.3 million (2006 -
$4.8 million pre-tax loss) on the securitization of the Loans. For
the 39 weeks ended September 29, 2007, the Company recognized a pre-
tax loss of $3.8 million (2006 - $20.9 million pre-tax loss).
As the Company does not control the Trusts, they have not been
consolidated in these financial statements.
Quantitative information about loans managed and securitized by the
Company is as follows:
(Dollars in Total principal amount Average balances
millions) of receivables as at(1) for the 39 weeks ended
--------------------------------- ----------------------
September September December September September
29, 2007 30, 2006 30, 2006 29, 2007 30, 2006
----------- ---------- ---------- ----------- ----------
Total net managed
credit card
loans $ 3,486.8 $ 3,164.5 $ 3,372.3 $ 3,373.2 $ 3,084.7
Credit card loans
sold (2,670.6) (2,381.4) (2,702.9) (2,732.6) (2,370.8)
----------- ---------- ---------- ----------- ----------
Credit card loans
held 816.2 783.1 669.4 640.6 713.9
Net managed
personal and
mortgage loans(2) 189.1 256.5 226.9 202.0 261.9
Loans sold (72.9) (144.0) (124.5) (97.4) (174.8)
----------- ---------- ---------- ----------- ----------
Loans held 116.2 112.5 102.4 104.6 87.1
----------- ---------- ---------- ----------- ----------
Total loans
receivable 932.4 895.6 771.8 $ 745.2 $ 801.0
----------- ----------
Less: long-term ----------- ----------
portion(3) 85.2 87.6 77.6
----------- ---------- ----------
Current portion
of loans
receivable $ 847.2 $ 808.0 $ 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 September 29, 2007 were
$52.3 million (2006 - $49.4 million). Net credit losses for the 39
weeks ended September 29, 2007 were $156.3 million (2006 -
$151.1 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 and 39 weeks
ended September 29, 2007 was $1.6 million (2006 - $1.8 million) and
$4.9 million (2006 - $5.4 million), respectively.
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 13 weeks 39 weeks 39 weeks
ended ended ended ended
September 29, September 30, September 29, September 30,
2007 2006 2007 2006
------------- ------------- ------------- -------------
Average number of
shares for basic
earnings per share
calculations 81,519,870 81,613,136 81,498,943 81,561,963
Dilutive options - 642,583 - 770,343
------------- ------------- ------------- -------------
Average number of
shares for dilutive
earnings per share
calculations 81,519,870 82,255,719 81,498,943 82,332,306
------------- ------------- ------------- -------------
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 recently prepared
annual financial statements for the 52 weeks ended December 30, 2006.
6. Share Capital
(Dollars in millions) September 29, September 30, 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
(September 30, 2006 and
December 30, 2006 -
3,423,366) $ 0.2 $ 0.2 $ 0.2
78,132,919 Class A
Non-Voting Shares
(September 30, 2006 -
78,239,023 and December
30, 2006 - 78,047,456) 706.9 716.8 702.5
------------- ------------- -------------
$ 707.1 $ 717.0 $ 702.7
------------- ------------- -------------
The Company issues and repurchases Class A Non-Voting Shares. The net
excess of the issue price over the repurchase price results in
contributed surplus. The net excess of the repurchase price over the
issue price is allocated first to contributed surplus, to the extent
of any previous net excess from the issue of share with any remainder
allocated to retained earnings.
The following transactions occurred with respect to Class A Non-
Voting Shares:
(Dollars in 39 weeks ended 39 weeks ended
millions) September 29, 2007 September 30, 2006
--------------------------- ---------------------------
Number $ Number $
------------- ------------- ------------- -------------
Shares outstanding
at the beginning
of the period 78,047,456 702.5 78,032,724 702.5
Issued 372,463 28.5 1,124,699 50.6
Repurchased (287,000) (22.3) (918,400) (61.5)
Excess of repurchase
price over issue
price (issue price
over repurchase
price) - (1.8) - 25.2
------------- ------------- ------------- -------------
Shares outstanding
at the end of the
period 78,132,919 706.9 78,239,023 716.8
------------- ------------- ------------- -------------
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 13 weeks 39 weeks 39 weeks
ended ended ended ended
(Dollars in September 29, September 30, September 29, September 30,
millions) 2007 2006 2007 2006
-------------------------------------------------------------------------
Gross operating
revenue(1)
CTR $ 1,307.1 $ 1,290.6 $ 3,899.3 $ 3,778.6
Financial
Services 193.3 182.4 573.1 523.7
Petroleum 424.0 427.0 1,232.4 1,170.2
Mark's 159.8 154.0 499.1 452.8
Eliminations (30.8) (30.7) (90.4) (82.3)
-------------------------------------------------------
Total gross
operating
revenue $ 2,053.4 $ 2,023.3 $ 6,113.5 $ 5,843.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss)
before income
taxes and
minority interest
CTR $ 94.4 $ 98.2 $ 223.0 $ 234.6
Financial
Services 43.7 39.4 157.8 113.3
Petroleum 7.9 0.1 16.8 0.6
Mark's 12.2 11.4 48.0 40.1
-------------------------------------------------------
Total earnings
before income
taxes and minority
interest 158.2 149.1 445.6 388.6
Income taxes 52.5 53.7 153.1 139.9
Minority interest - - - 2.4
-------------------------------------------------------
Net earnings $ 105.7 $ 95.4 $ 292.5 $ 246.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expense
CTR $ 25.7 $ 23.0 $ 71.1 $ 73.0
Financial
Services 5.0 6.0 13.1 15.4
Petroleum - - - -
Mark's 1.1 1.0 2.2 2.4
Eliminations (13.4) (13.1) (35.6) (33.7)
-------------------------------------------------------
Total interest
expense $ 18.4 $ 16.9 $ 50.8 $ 57.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization
expense
CTR $ 39.5 $ 36.5 $ 114.9 $ 109.0
Financial
Services 3.1 2.8 9.4 9.1
Petroleum 4.2 3.8 12.3 11.1
Mark's 4.4 3.8 13.2 11.5
-------------------------------------------------------
Total
depreciation and
amortization
expense $ 51.2 $ 46.9 $ 149.8 $ 140.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Gross operating revenue includes dividend and interest income.
Segmented Information - Total Assets
---------------------------------------------------------------------
As at As at As at
September 29, September 30, December 30,
(Dollars in millions) 2007 2006 2006
----------------------------------------------------------------------
CTR $ 5,260.8 $ 4,355.5 $ 4,502.5
Financial Services 1,504.0 1,580.2 1,476.0
Petroleum 290.0 234.3 477.9
Mark's 528.8 453.4 406.7
Eliminations (1,448.0) (1,120.8) (1,058.5)
---------------------------------------------------------------------
Total $ 6,135.6 $ 5,502.6 $ 5,804.6
---------------------------------------------------------------------
9. Cash and Cash Equivalents (Bank Indebtedness)
The components of cash and cash equivalents are:
September 29, September 30, December 30,
(Dollars in millions) 2007 2006 2006
------------- ------------- -------------
Cash $ (108.9) $ (81.8) $ (52.3)
Bank indebtedness (49.8) - -
Short-term investments 74.5 83.7 793.6
------------- ------------- -------------
Cash and cash equivalents
(bank indebtedness) $ (84.2) $ 1.9 $ 741.3
------------- ------------- -------------
------------- ------------- -------------
As at September 29, 2007, the balance of ($84.2) million has been
classified as bank indebtedness. The negative cash balance is
primarily due to outstanding cheques. The bank indebtedness
represents line of credit borrowings.
10. Other Long-Term Investments
As of September 29, 2007, the Company held third-party asset-backed
commercial paper ("ABCP") with an original cost of $8.9 million.
These ABCP were rated by the Dominion Bond Rating Service ("DBRS") as
R-1 (High), the highest credit rating for commercial paper since the
ABCP are backed by R-1 (High) rated assets. A global disruption in
the market for such commercial paper during the quarter resulted in a
sudden constraint on the liquidity of ABCP. DBRS placed certain of
the ABCP "Under Review with Developing Implications" following an
announcement on August 16, 2007 that a consortium representing banks,
asset providers and major investors had agreed in principle to a
long-term proposal and interim agreement regarding the ABCP (commonly
referred to as "the Montreal Proposal"). Under this proposal, the
affected ABCP would be converted into term floating rate notes
maturing no earlier than the scheduled termination dates of the
underlying assets. The Montreal Proposal called for the investors to
continue to roll their ABCP during the standstill period. On
September 6, 2007, a committee was formed to oversee the proposed
restructuring process of the ABCP. On October 16, 2007, it was
announced that the committee expected that the restructuring would be
completed on or before December 14, 2007. As of September 29, 2007,
all of the ABCP held by the Company were part of the Montreal
Proposal. The Company has classified its ABCP, previously classified
as "Cash and cash equivalents", as long-term investments on the
balance sheet, as management anticipates that this investment may
mature beyond a 365-day period.
During the three and nine months ended September 29, 2007, the
Company recorded a $1.3 million before tax provision for impairment
of the ABCP in the consolidated statement of earnings, based on
management's best estimate at the time of the likely impairment.
Continuing uncertainties regarding the value of the assets which
underlie the ABCP, the amount and timing of cash flows and the
outcome of the restructuring process could give rise to a further
change in the value of the Company's investment in ABCP which would
impact the Company's future earnings.
11. Supplementary Cash Flow Information
The Company paid income taxes during the 13 weeks ended September 29,
2007, amounting to $47.8 million (2006 - $33.1 million) and made
interest payments of $13.9 million (2006 - $12.4 million). For the 39
weeks ended September 29, 2007, the Company paid income taxes
amounting to $304.0 million (2006 - $160.9 million) and made interest
payments of $57.1 million (2006 - $60.2 million).
During the 13 weeks ended September 29, 2007, property and equipment
were acquired at an aggregate cost of $194.1 million (2006 -
$152.9 million), of which $38.0 million (2006 - $7.9 million) was
included in accounts payable and other. During the 39 weeks ended
September 29, 2007, property and equipment were acquired at an
aggregate cost of $458.6 million (2006 - $313.5 million), of which
$38.0 million (2006 - $7.9 million) was included in accounts payable
and other.
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 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 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 $265.0 million. Although the Company
will appeal these reassessments, current tax legislation requires the
Company to remit to the CRA and its provincial counterparts
approximately $165.0 million, of which $158.0 million had been
remitted by the end of the quarter. 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. Related Party Transactions
During the quarter ended September 29, 2007, the Company purchased
the shares of a corporation, one of the owners of which is an
Associate Dealer and also a director of the Company. The purchase
price was $3.7 million. The purchased corporation owns the real
estate for a Canadian Tire store. The purchase price is considered to
be fair market value, based on independent appraisals. At the end of
the quarter, the land and building so acquired related to the
purchase is included in "Property and equipment". As the purchase
price has not yet been fully paid by the Company, $3.0 million is
included in "Accounts payable and accrued liabilities".
Separately, subsequent to the quarter ended September 29, 2007, the
Company has provided to the same Associate Dealer a loss mitigation
agreement for the first two years of operation in respect of a new
Canadian Tire Associate store, as it does, in various forms, for
Associate Dealers from time to time, to help mitigate some of the
financial risk inherent in the new store. Losses, if any, that the
Company shares with the Associate Dealer pursuant to the agreement
would not be material to the Company and may be partially recoverable
by the Company over the following three years from the Associate
Dealer.
14. Subsequent Event
On October 1, 2007, the Company issued medium term notes totaling
$300 million. The medium term notes bear interest at 5.22% per annum
and mature on October 1, 2010.
15. 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
September 29, 2007, after annualizing interest on long-term debt issued and
retired during this period, amounted to $77.2 million. The Company's earnings
before interest on long-term debt, income taxes and minority interest for the
52 weeks then ended were $677.3 million, which is 8.8 times the Company's
long-term interest requirements for this period.
For further information:
For further information: Media: Caroline Casselman, Director, Community & Public Affairs, (416) 480-8159 caroline.casselman@cantire.com; Investors: Huw Thomas, EVP, Chief Financial Officer, (416) 480-3568, huw.thomas@cantire.com