Canadian Tire first quarter gross operating revenue up 5.0%; net earnings rise 19.8%; adjusted net earnings down 4.9%
--------------------------------------
Year-
over
Consolidated 2008 2007(2) year
Highlights(1): 1st quarter 1st quarter change
-------------------------------------------------------------------------
Retail sales $1.84 billion $1.81 billion 1.9%
Gross operating revenue $1.83 billion $1.74 billion 5.0%
Earnings before income taxes $98.8 million $85.7 million 15.4%
Adjusted earnings before income
taxes (excludes non-operating
gains and losses)(3) $81.8 million $89.3 million (8.4)%
Net earnings $66.7 million $55.7 million 19.8%
Adjusted net earnings (excludes
non-operating gains and
losses)(3) $55.2 million $58.1 million (4.9)%
Basic earnings per share $0.82 $0.68 19.8%
Adjusted basic earnings per
share (excludes non-operating
gains and losses)(3) $0.68 $0.71 (4.9)%
(1) All dollar figures in this table are rounded.
(2) The 2007 earnings figures have been restated for adoption of CICA HB
3031 - Inventories as required by the CICA. Please refer to Note 2 in
the Notes to the Consolidated Financial Statements.
(3) Non-GAAP measure. Please refer to Section 12.0 of Management's
Discussion and Analysis contained in our 2007 Financial Report.TORONTO, May 8 /CNW/ - Canadian Tire Corporation, Limited (CTC.a, CTC)
today reported a 5.0 per cent increase in gross operating revenue for the
first quarter of 2008.
Net earnings were $66.7 million, an increase of 19.8 per cent compared to
$55.7 million for the corresponding 2007 period. Adjusted net earnings for the
quarter, which exclude non-operating gains and losses, were $55.2 million, a
4.9 per cent decrease compared to $58.1 million last year.
Basic earnings per share in the quarter were $0.82, a 19.8 per cent
increase from the $0.68 recorded in the same period last year. Adjusted basic
earnings per share, which exclude non-operating gains and losses, were down
4.9 per cent to $0.68 compared to $0.71 in the first quarter of 2007.
Consolidated retail sales, up 1.9 per cent over last year, were soft,
particularly in Ontario and Quebec, as customers reacted to news of slowing
economic growth and higher gasoline prices. The impact of a first quarter
Easter holiday period and Ontario's new Family Day holiday in February were
also factors affecting retail sales performance.
Incremental investments in the information technology renewal initiative,
slower retail sales and shipments, and an increase in the allowance on the
loan portfolio at Financial Services, partially offset by strong earnings at
Petroleum, were the key factors impacting the consolidated adjusted net
earnings.
Reported earnings in the first quarter and the 2007 comparable period
were restated as required by the adoption of a new accounting standard for
inventory issued by the Canadian Institute of Chartered Accountants.
The first quarter of the year traditionally accounts for the smallest
portion of the company's earnings, at 15 to 18 per cent of consolidated annual
earnings.
"First quarter earnings were in line with our expectations given the
investments we made in a number of longer term initiatives, the change in
Easter holiday timing and customer concerns over a slowing economy," said Tom
Gauld, president and CEO. "We are, however, encouraged by the strong customer
response to Canadian Tire Retail's spring seasonal product offerings, which
helped us post solid retail sales growth throughout April. We remain confident
in our long-term strategies and our financial plan for the year and we are
confirming our original forecast that 2008 operating earnings per share will
be in the range of $5.15 to $5.40."Business Overview
CANADIAN TIRE RETAIL (CTR)
($ in millions) Q1 2008 Q1 2007(1) Change
-------------------------------------------------------------------------
Retail sales(2) $1,218.8 $1,242.6 (1.9)%
Same store sales(3)
(year-over-year % change) (4.0)% 1.3%
Gross operating revenue $1,071.3 $1,070.9 0.0%
Net shipments (year-over-year % change) (0.2)% 11.1%
Earnings before income taxes $43.6 $38.0 15.1%
-------------------------------------------------------------------------
Less adjustment for:
Gain on disposals of property and
equipment(4) $3.9 -
Former CEO retirement obligation $0.4 -
-------------------------------------------------------------------------
Adjusted earnings before income taxes(5) $39.3 $38.0 3.7%
-------------------------------------------------------------------------
(1) The 2007 earnings figures have been restated for the adoption of CICA
HB 3031 - Inventories as required by the CICA. Please refer to Note 2
in the Notes to the Consolidated Financial Statements.
(2) Includes sales from Canadian Tire and PartSource stores, sales from
CTR's online web store and the labour portion of CTR's auto service
sales.
(3) Same store sales include sales from all stores that have been open
for more than 53 consecutive weeks in the same location.
(4) Includes fair market value adjustments and impairments on property
and equipment.
(5) Non-GAAP measure. Please refer to section 12.0 of Management's
Discussion and Analysis contained in our 2007 Financial Report.CTR's gross operating revenue for the quarter was equal to the prior
year, at $1.07 billion. Retail sales were $1.22 billion, a 1.9 per cent
decrease from $1.24 billion recorded last year. Same store sales were down
4.0 per cent in the quarter.
Retail sales in the quarter were impacted by approximately $18 million
due to the introduction of the new Family Day statutory holiday in Ontario and
the Good Friday and Easter Sunday holiday shift to March of 2008 from April of
2007. Sales trends in April have, however, significantly improved on the
strength of the new spring '08 seasonal programs, a more competitive pricing
strategy and the arrival of warmer weather in Eastern Canada.
CTR's first quarter earnings before taxes were $43.6 million, a 15.1 per
cent increase over the $38.0 million recorded in the comparable 2007 period.
Adjusted pre-tax earnings increased by 3.7 per cent to $39.3 million from
$38.0 million a year ago.
The increase in earnings reflects improved product margins and the
continued focus on productivity, which more than offset approximately
$3 million of incremental investments in long-term growth and productivity
initiatives.
For the year, CTR plans to open 36 Concept 20/20 stores, eight of which
will include a Mark's store. Two new store concepts will be tested in six
locations in the second half of the year.
The first new concept, designed specifically for small markets, is a
14,000-18,000 square foot Canadian Tire/Mark's store with an on-site Petroleum
outlet. CTR plans to open four of these "small market" concept stores in 2008
and 64 over the life of the current five year strategic plan.
The second concept, called the "smart" store, will be a pilot for the
next wave of renewal for existing stores. The "smart" store concept will be
significantly different from previous formats. It will be lower in cost to
retrofit and it will focus more of its square footage on better performing
product lines. It will also offer customers a very engaging and distinctive
shopping experience through in-store boutiques, easier navigation and
self-service checkouts. CTR plans to open two "smart" concept stores in 2008.
PartSource generated double-digit sales growth in the quarter, driven by
the ongoing expansion of the network and growth in the commercial customer
segment. PartSource acquired three stores during the quarter, bringing its
total store network to 74. PartSource plans to open up to 14 new stores during
2008, including six with expanded warehouses (hub stores), which will also
supply emergency parts to Canadian Tire stores.CANADIAN TIRE PETROLEUM (Petroleum)
($ in millions) Q1 2008 Q1 2007 Change
-------------------------------------------------------------------------
Sales volume (millions of litres) 413.8 415.3 (0.4)%
Retail sales $449.0 $385.4 16.5%
Gross operating revenue $422.8 $362.8 16.5%
Earnings before income taxes $5.0 $2.5 96.3%
-------------------------------------------------------------------------
Less adjustment for:
Loss on disposals of property and
equipment(1) $(0.2) $(0.2)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(2) $5.2 $2.7 84.5%
-------------------------------------------------------------------------
(1) Includes asset impairment losses.
(2) Non-GAAP measure. Please refer to section 12.0 in Management's
Discussion and Analysis in our 2007 Financial Report.Petroleum's gross operating revenue totaled $422.8 during the quarter, a
16.5 percent increase over the $362.8 million in the comparable 2007 period
reflecting higher pump prices. Gasoline sales volumes declined slightly during
the quarter to 413.8 million litres from 415.3 million litres a year ago,
reflecting consumer response to higher fuel prices.
Convenience store sales increased 11.6 per cent over the comparable 2007
period.
Petroleum recorded strong earnings before taxes of $5.0 million, compared
to the $2.5 million recorded in the comparable 2007 period. Adjusted pre-tax
earnings, which exclude the impact of disposals of property and equipment,
increased to $5.2 million from $2.7 million one year ago. The increase in
earnings was due to better margins during the quarter, as well as effective
expense management.
Petroleum opened two new gas bars and refurbished two existing gas bars
during the quarter. Plans for 2008 include opening approximately eight new
sites and refurbishing or rebuilding approximately 25 existing sites to
enhance the customer experience.MARK'S WORK WEARHOUSE (Mark's)
($ in millions) Q1 2008 Q1 2007(1) Change
-------------------------------------------------------------------------
Total retail sales(2) $172.5 $178.3 (3.2)%
Same store sales(3)
(year-over-year % change) (7.0)% 15.7%
Gross operating revenue(4) $147.5 $152.1 (3.0)%
-------------------------------------------------------------------------
Earnings before income taxes $(3.4) $(0.2) N/A
-------------------------------------------------------------------------
Less adjustment for:
Loss on disposals of property and
equipment - $(0.3)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(5) $(3.4) $0.1 N/A
-------------------------------------------------------------------------
(1) The 2007 earnings results have been restated for the adoption of CICA
HB 3031 - inventories as required by the CICA. Please refer to Note 2
in the Notes to the Consolidated Financial Statements.
(2) Includes retail sales from corporate and franchise stores.
(3) Mark's same store sales exclude new stores, stores not open for the
full period in each year and store closures.
(4) Gross operating revenue includes retail sales at corporate stores
only.
(5) Non-GAAP measure. Please refer to section 12.0 of Management's
Discussion and Analysis contained in our 2007 Financial Report.Mark's first quarter gross operating revenue was $147.5 million, a
3.0 per cent decline from the $152.1 million recorded a year ago. Total retail
sales were $172.5 million, a 3.2 per cent decrease against very strong sales
results (+17.6 per cent) in the comparable 2007 period. Sales were impacted by
the shift in timing of the Easter holidays, Family Day in Ontario and the
continued softening of retail and economic conditions.
Mark's recorded a first quarter loss of $3.4 million before taxes
compared to a loss of $0.2 million one year ago. Lower earnings were primarily
caused by the lower sales noted above, the impact of which was only partially
offset by stronger margins.
During the quarter, Mark's opened three new stores, including one
CTR-Mark's Concept 20/20 combination store, and renovated one store. In 2008,
Mark's expects to open 17 new stores and expand, relocate or renovate an
additional 24 stores.CANADIAN TIRE FINANCIAL SERVICES (Financial Services)
($ in millions) Q1 2008 Q1 2007 Change
-------------------------------------------------------------------------
Total managed portfolio end of period $3,783.9 $3,473.5 8.9%
Gross operating revenue $208.7 $176.1 18.5%
Earnings before income taxes $53.6 $ 45.4 18.1%
-------------------------------------------------------------------------
Less adjustment for:
Loss on disposals of property and
equipment $ - $(0.1)
Net effect of securitization
activities(1) $12.9 $(3.0)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(2) $40.7 $48.5 (16.0)%
-------------------------------------------------------------------------
(1) Includes initial gain/loss on the sale of loans receivable,
amortization of servicing liability, change in securitization reserve
and gain/loss on reinvestment.
(2) Non-GAAP measure. Please refer to section 12.0 in Management's
Discussion and Analysis in our 2007 Financial Report.Financial Services' gross operating revenue was $208.7 million in the
quarter, an 18.5 per cent increase over the $176.1 million recorded in the
prior year. The increase was a result of higher credit interest earned due to
an increase in receivables quarter over quarter, as well as a $12.9 million
gain on the net effect of securitization activities due to the securitization
deal completed in the quarter compared to a loss of $3.0 million in the same
quarter of 2007.
At the end of the first quarter, Financial Services' total managed
portfolio of loans receivable was $3.8 billion, an 8.9 per cent increase over
the $3.5 billion at the end of the comparable 2007 period. Credit card
receivables grew 9.5 per cent to $3.6 billion. The increase was a result of a
9.6 per cent increase in the first quarter average account balance compared to
the same quarter of 2007.
Financial Services' net write-off rate for the total managed portfolio on
a rolling 12-month basis was 5.83 per cent, an improvement from 5.95 per cent
in the comparable 2007 period. The net write-off rate on a rolling 12-month
basis for the credit card portfolio was 5.77 per cent compared to 5.89 per
cent in the 2007 period.
Financial Services' first quarter earnings before taxes were
$53.6 million, an 18.1 per cent increase from the $45.4 million recorded in
the corresponding 2007 period. The increase in earnings reflects a gain from
the net effect of securitization activities of $12.9 million compared to a
securitization loss of $3.0 million in the same period last year.
Adjusted pre-tax earnings for the quarter, which exclude the net effect
of securitization activities, declined 16.0 per cent to $40.7 million from
$48.5 million in the previous year. Adjusted earnings were impacted by a
13 basis point increase in the allowance rate for doubtful accounts
($4.9 million), incremental expenses related to the retail banking initiative
($2.6 million) and expenses related to the re-launch of the Canadian Tire
Options® Mastercard® ($1.0 million). The increase in the allowance rate
was due to slightly higher aging and the impact of changes to the collection
process, the benefits of which are expected to be realized over the long term.
Financial Services continued its retail banking pilot and at quarter-end
had over $147 million in deposits and approximately $48 million in mortgages.
Financial Services plans to continue testing and refining the retail banking
pilot and will invest approximately $28 million in the test during 2008,
$7.3 million of which was incurred in the first quarter.
EARNINGS GUIDANCE
The Company confirms its expectation that earnings per share for 2008
will be in the range of $5.15 to $5.40 per share, excluding non-operating
items. Due to the level of investments in revenue generating and productivity
initiatives, second quarter operating earnings are expected to be lower than
in 2007, but earnings performance in the second half of the year is expected
to be significantly stronger than the prior year.
FORWARD-LOOKING STATEMENTS
This disclosure contains statements that are forward-looking. Actual
results or events may differ materially from those forecasted in this
disclosure because of the risks and uncertainties associated with Canadian
Tire's business and the general economic environment. Risks and uncertainties
are disclosed in other public filings by the Company, such as Management's
Discussion and Analysis in the Annual Report and include, but are not limited
to: changes in interest, currency exchange and tax rates; the ability of
Canadian Tire to attract and retain quality employees, Associate Dealers,
Petroleum agents and PartSource and Mark's Work Wearhouse store operators and
franchisees; and the willingness of customers to purchase the Company's
merchandise, financial products and services.
Risk factors associated with the assumptions that underlie Canadian
Tire's forecasted performance in 2008, 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
("the retail businesses"), 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 and lease suitable properties, as well
as by weather conditions that could impact the timing of
construction;
- expansion activity planned for the retail businesses, as well as for
the associated supply chain infrastructure and Financial Services,
could be affected by the Company and CTR dealers' ability to access
sufficient funds in a cost effective manner, due to difficulties in
the capital markets;
- expansion activity planned for CTR could also be affected by the
dealers' ability to secure financing through the trusts referenced in
section 10.0 of management's discussion and analysis or through other
means;
- 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,
personal loan or line of credit 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 2008 forecast on the assumption that there
will not be a material deviation in the risks described in this disclosure
compared to the current operating environment. The Company cannot provide any
assurance that forecasted financial or operational performance will actually
be achieved, or if it is, that it will result in an increase in the price of
Canadian Tire shares.
REVIEW BY BOARD OF DIRECTORS
The Canadian Tire Board of Directors, on the recommendation of its Audit
Committee, has approved the contents of this disclosure.
CONFERENCE CALL
Canadian Tire will conduct a conference call to discuss information
included in this news release and related matters at 4:00 p.m. EDT on
Thursday, May 8, 2008. The conference call will be available simultaneously
and in its entirety to all interested investors and the news media through a
webcast at http://investor.relations.canadiantire.ca, and will be available
through replay at this website for 12 months.
Canadian Tire Corporation, Limited (TSX: CTC.a, CTC), operates more than
1,170 general merchandise and apparel retail stores and gas stations in an
inter-related network of businesses engaged in retail, financial services and
petroleum. Canadian Tire Retail, Canada's most shopped general merchandise
retailer, with 473 stores operated by dealers across Canada offers a unique
mix of products and services through three specialty categories in which the
organization is the market leader - Automotive, Sports and Leisure, and Home
Products. www.canadiantire.ca offers Canadians the opportunity to shop online.
PartSource is an automotive parts specialty chain with 74 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 266 gas bars, 259 convenience stores and kiosks, and 74 car washes.
Mark's Work Wearhouse is one of the country's leading apparel retailers
operating 360 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 for Mark's
products online. Canadian Tire Financial Services has issued over 5 million
Canadian Tire MasterCards and also markets related financial products and
services for retail and petroleum customers. Canadians can also access
Financial Services online at www.ctfs.com. Over 57,000 Canadians work across
Canadian Tire's organization from coast-to-coast in the enterprise's retail,
financial services, and petroleum businesses.
Management's discussion and analysis (MD&A)
-------------------------------------------------------------------------
Introduction
This Management's Discussion and Analysis (MD&A) provides management's
perspective on our Company, our performance and our strategy for the future.
We, us, our, Company and Canadian Tire
In this document, the terms "we", "us", "our", "Company" and "Canadian
Tire" refer to Canadian Tire Corporation, Limited and its business units and
subsidiaries.
Review and approval by the Board of Directors
The Board of Directors, on the recommendation of its Audit Committee,
approved the contents of this MD&A on May 8, 2008.
Quarterly and annual comparisons in this MD&A
Unless otherwise indicated, all comparisons of results for the first
quarter (13 weeks ended March 29, 2008) are against results for the first
quarter of 2007 (13 weeks ended March 31, 2007).
Restated figures
Certain of the prior period's figures have been reclassified or restated
to conform to the current year's presentation or to be in accordance with the
adoption of the Canadian Institute of Chartered Accountants (CICA) new
accounting standards. Please refer to notes 2 and 14 in the Notes to the
Consolidated Financial Statements for further information.
Accounting estimates and assumptions
The preparation of consolidated financial statements that conform with
Canadian generally accepted accounting principles (GAAP) requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent liabilities at the date of the
Consolidated Financial Statements and the reported amounts of revenue and
expenses during the reporting period. We calculate our estimates using
detailed financial models that are based on historical experience, current
trends and other assumptions that are believed to be reasonable under the
circumstances. Actual results could differ from those estimates. In our
judgment, none of the estimates detailed in note 1 in the Notes to the
Consolidated Financial Statements for the quarter ended March 29, 2008
requires us to make assumptions about matters that are highly uncertain. For
these reasons, none of the estimates is considered a "critical accounting
estimate" as defined in Form 51-102F1 published by the Ontario Securities
Commission.
Forward-looking statements
This MD&A contains statements that are forward-looking. Actual results or
events may differ materially from those forecasted in this disclosure because
of the risks and uncertainties associated with Canadian Tire's business and
the general economic environment. In addition to the principal risks
identified and discussed in detail in MD&A sections 9.0 to 9.3 of the 2007
Financial Report, there are other external factors that could affect our
results. These include, but are not limited to: changes in interest rates,
currency exchange rates and tax rates; the ability of Canadian Tire to attract
and retain quality employees, Dealers, Canadian Tire Petroleum™ (Petroleum)
agents and PartSource® and Mark's Work Wearhouse® (Mark's) store operators
and franchisees; and the willingness of customers to shop at our stores or
acquire our financial products and services. Please also refer to section 11.1
of this MD&A which identifies some of the operational risks that can affect
our businesses.
We cannot provide any assurance that forecasted financial or operational
performance will actually be achieved, or if it is, that it will result in an
increase in the price of Canadian Tire shares.
1.0 Our Company
1.1 Overview of the business
Canadian Tire has been in business for over 85 years, offering everyday
products and services to Canadians through its growing network of interrelated
businesses. Canadian Tire, our Dealers, franchisees and Petroleum agents
operate more than 1,170 general merchandise and apparel retail stores and gas
bars. The Canadian Tire Financial Services® (Financial Services) division of
the Company also markets a variety of financial services to Canadians,
primarily its proprietary Options® MasterCard®, personal loans, insurance
and warranty products, and a retail banking pilot offering products to
customers in certain test markets.
Canadian Tire's model of interrelated businesses provides market
differentiation and competitive advantage. Canadian Tire's businesses benefit
from the Company's key capabilities in merchandising, marketing and
advertising, supply chain and real estate, which enable us to achieve a
greater level of efficiency. Canadian Tire's primary loyalty program, Canadian
Tire 'Money'® - shared by Canadian Tire Retail (CTR), Financial Services and
Petroleum - is an example of how interrelationships between the businesses
create a strong competitive advantage for the Company.
The success of the loyalty program has proven - through high customer
acceptance and redemption - to be a key element of Canadian Tire's total
customer value proposition and is designed to drive higher total sales across
CTR, Financial Services and Petroleum. For example, a customer who fills up
with gas at Petroleum's gas bars and uses Canadian Tire credit cards spends
considerably more at Canadian Tire stores, on average, than a customer who
only shops at Canadian Tire stores.
Mark's has derived meaningful cost and operating synergies from Canadian
Tire's strengths in real estate and supply chain since its acquisition by the
Company in 2002. Canadian Tire co-locates Mark's and Canadian Tire stores in
certain locations and, where appropriate, has been extending its national
marketing and advertising channels to boost customer traffic and loyalty to
Mark's and increase its brand penetration.
1.2 Operational synergies
All of our businesses benefit from strategic and operational synergies
including real estate management, supply chain, merchandising, marketing and
advertising. Meaningful cost savings are also derived through Canadian Tire's
collective buying power and economies of scale, and we are continually
enhancing our customer value proposition by creating promotions and reward
programs to increase customer loyalty.
Canadian Tire's four main businesses are described below.
CTR is Canada's most shopped general merchandise retailer with a network
of 473 Canadian Tire stores that are operated by Dealers, who are independent
business owners. Dealers buy merchandise from the Company and sell it to
consumers in Canadian Tire stores. CTR also includes our online shopping
channel and PartSource. PartSource is a chain of 74 specialty automotive hard
parts stores that cater to serious "do-it-yourselfers" and professional
installers of automotive parts. The PartSource network consists of 38
franchise stores and 36 corporate stores.
Mark's is one of Canada's leading clothing and footwear retailers,
operating 360 stores nationwide, including 313 corporate and 47 franchise
stores that offer men's wear, women's wear and industrial wear. Mark's
operates under the banner "Mark's", and in Quebec, "L'Equipeur®". 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 266 gas bars, 259 convenience stores and kiosks, 74 car washes, 13
Pit Stops and 89 propane stations. The majority of Petroleum's sites are
co-located with Canadian Tire stores as a strategy to attract customers to
Canadian Tire stores. Substantially all of Petroleum's sites are operated by
agents.
Financial Services markets a range of Canadian Tire-branded credit cards,
including the Canadian Tire Options MasterCard, Commercial Link®
MasterCard® and Gas Advantage® MasterCard®. Financial Services also
markets personal loans, insurance and warranty products and an emergency
roadside assistance service called Canadian Tire Roadside Assistance®.
Canadian Tire Bank®, a wholly-owned subsidiary, is a federally regulated
bank that manages and finances Canadian Tire's consumer MasterCard and retail
credit card portfolios, as well as the personal loan and line of credit
portfolios. Canadian Tire Bank also offers high interest savings accounts,
guaranteed investment certificates and residential mortgages in three pilot
markets as well as the Canadian Tire One-and-Only™ account which offers
customers the opportunity to pay down their loan balances faster by
consolidating their chequing, savings, loans and mortgage loan balances into
one account.1.3 Store network at a glance
-------------------------------------------------------------------------
March 29, March 31,
Number of stores and retail square footage 2008 2007
-------------------------------------------------------------------------
Consolidated store count
CTR retail stores(1) 473 468
PartSource stores 74 64
Mark's retail stores(1) 360 340
Petroleum gas bar locations 266 265
-------------------------------------------------------------------------
Total stores 1,173 1,137
Consolidated retail square footage
CTR retail square footage (in millions) 17.8 16.4
PartSource retail square footage (in millions) 0.3 0.3
Mark's retail square footage (in millions) 3.0 2.7
-------------------------------------------------------------------------
Total retail square footage(2) 21.1 19.4
-------------------------------------------------------------------------
(1) Store count numbers reflect individual selling locations; therefore,
CTR and Mark's totals include both CTR-Mark's combination stores and
Mark's-inside-a-CTR concept stores.
(2) The average retail square footage for Petroleum's convenience stores
was 400 square feet per store in 2007 and 392 square feet per store
in 2006 and has not been included in the total above.2.0 Our Strategic Plan
2.1 Rolling Five-Year Strategic Plan to 2012 (2012 Plan)
The 2012 Plan outlines our strategy to build a bigger and better Canadian
Tire through a continued focus on growth and productivity from a consolidated
perspective. The key initiatives of the 2012 Plan include network expansion
across all of our retail businesses (CTR, PartSource and Mark's), store
concept renewals and the continued testing of our retail banking products.
Other initiatives to improve productivity include upgrading our automotive
supply chain, renewing our technology infrastructure and streamlining our
organizational design.
Specific objectives related to these programs are included in section 3.3
of this MD&A and section 3.0 of the MD&A section contained in the 2007
Financial Report.
2.2 Financial Aspirations
The 2012 Plan includes financial aspirations for the Company for the
five-year period ending in 2012. These aspirations are not to be construed as
guidance or forecasts for any individual year within the 2012 Plan, but rather
as long-term, rolling targets that we aspire to achieve over the life of the
2012 Plan, based on the successful execution of our various initiatives.-------------------------------------------------------------------------
Financial Aspirations 2012 Plan
-------------------------------------------------------------------------
Same store sales
(simple average of annual percentage
growth, CTR stores only) 3% to 4%
Gross operating revenue
(compound annual growth rate) 6% to 8%
Retail sales (POS)
(compound annual growth rate) 6%+
Adjusted earnings per share(1)
(compound annual growth rate) 10%+
After-tax return on invested capital
(annual simple average) 10%+
-------------------------------------------------------------------------
(1) Excludes gains and losses on real estate and the net effect of
securitization activities, gain on disposal/redemption of investment
and former CEO retirement obligation.
3.0 Our performance in 2008
3.1 Consolidated results
Consolidated financial results
($ in millions except per share amounts) Q1 2008 Q1 2007(1) Change
-------------------------------------------------------------------------
Retail sales(2) $1,840.3 $1,806.3 1.9%
Gross operating revenue 1,825.3 1,737.7 5.0%
EBITDA(3) 174.5 144.4 20.9%
Earnings before income taxes 98.8 85.7 15.4%
Effective tax rate 32.5% 35.0%
Net earnings $ 66.7 $ 55.7 19.8%
Basic earnings per share 0.82 0.68 19.8%
Adjusted basic earnings per share(3) 0.68 0.71 (4.9)%
---------------------------------------------------------------
(1) 2007 figures have been restated for adoption of CICA HB 3031 -
Inventories as required by the CICA. See section 13.1 for additional
information.
(2) Represents retail sales at CTR (which includes PartSource), Mark's
corporate and franchise stores and Petroleum's sites.
(3) See section 14.0 for non-GAAP measures.
Highlights of top-line performance by business
(year-over-year percentage change) Q1 2008 Q1 2007
---------------------------------------------------------------
CTR retail sales(1) (1.9)% 3.1%
CTR gross operating revenue 0.0% 10.9%
CTR net shipments (0.2)% 11.1%
Mark's retail sales (3.2)% 17.6%
Petroleum retail sales 16.5% 8.9%
Petroleum gasoline volume (litres) (0.4)% 7.9%
Financial Services' credit card sales 7.3% 14.2%
Financial Services' gross average receivables 8.9% 6.2%
---------------------------------------------------------------
(1) Includes sales from Canadian Tire stores, PartSource stores and CTR's
online web store and the labour portion of CTR's auto service sales.Gross operating revenue
During the first quarter of 2008, our retail businesses faced similar
challenges in the economic and retail environments as those that affected the
fourth quarter of 2007. In addition, the introduction of the new Family Day
statutory holiday in Ontario and a shift in the timing of the Good Friday and
Easter Sunday holidays contributed to reduced sales from the strong sales
results achieved in the first quarter of 2007. Unseasonable March weather
patterns, particularly in Central and Eastern Canada, may have challenged the
willingness of some customers to travel to our stores due to record snowfalls
and icy conditions. Despite these challenges, consolidated gross operating
revenue increased in the first quarter primarily due to higher sales at
Petroleum and receivables growth at Financial Services. Financial Services
growth was driven by both increased transaction volume and increased account
balances. Increased Petroleum revenues were a function of sustained higher
retail gasoline prices as well as strong convenience store sales.
Net earnings
Increased earnings in CTR, Financial Services and Petroleum were
partially offset by a decrease in earnings for Mark's in the first quarter.
The increase in CTR earnings reflects stronger operating margins and the
continued focus on improving productivity. Mark's earnings for the first
quarter of 2008 were $3.5 million below last year due to softer sales which
were only partially offset by higher margins.
Earnings for our retail businesses during the first quarter of 2008 and
the restated quarter of 2007 were also affected by the adoption of the new
accounting standard, issued by the CICA, regarding inventory, with the largest
impact on Mark's earnings. See section 13.1 for additional information on the
impact of the changes to this accounting standard.
Impact of non-operating items
The following tables show our consolidated earnings on a pre-tax and
after-tax basis.Adjusted consolidated earnings before income taxes(1)
-------------------------------------------------------------------------
($ in millions) Q1 2008 Q1 2007(2) Change
-------------------------------------------------------------------------
Earnings before income taxes $ 98.8 $ 85.7 15.4%
Less pre-tax adjustment for:
Former CEO retirement obligation(3) 0.4 -
Net effect of securitization activities(4) 12.9 (3.0)
Gain (loss) on disposals of property and
equipment 3.7 (0.6)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(1) $ 81.8 $ 89.3 (8.4)%
-------------------------------------------------------------------------
(1) See section 14.0 on non-GAAP measures.
(2) 2007 figures have been restated for the adoption of CICA HB 3031 -
Inventories as required by the CICA. See section 13.1 for additional
information.
(3) See section 3.3.1 on CTR's performance.
(4) Includes initial gain/loss on the sale of loans receivable,
amortization of servicing liability, change in securitization reserve
and gain/loss on reinvestment.
Adjusted consolidated net earnings after tax(1)
($ in millions except per share amounts) Q1 2008 Q1 2007(2) Change
-------------------------------------------------------------------------
Net earnings $ 66.7 $ 55.7 19.8%
Less after-tax adjustment for:
Former CEO retirement obligation 0.3 -
Net effect of securitization activities(3) 8.7 (2.0)
Gain on disposals of property and equipment 2.5 (0.4)
-------------------------------------------------------------------------
Adjusted net earnings after tax(1) $ 55.2 $ 58.1 (4.9)%
-------------------------------------------------------------------------
Basic earnings per share $ 0.82 $ 0.68 19.8%
Adjusted basic earnings per share(1) $ 0.68 $ 0.71 (4.9)%
-------------------------------------------------------------------------
(1) See section 14.0 on non-GAAP measures.
(2) 2007 figures have been restated for the adoption of CICA HB 3031 -
Inventories as required by the CICA. See section 13.1 for additional
information.
(3) Includes initial gain/loss on the sale of loans receivable,
amortization of servicing liability, change in securitization reserve
and gain/loss on reinvestment.Seasonal impact
The first quarter of the year is the smallest quarter for both revenue
and earnings at Canadian Tire. In addition, we 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(1)
($ in millions except per Q1 Q4 Q3 Q2
share amounts) 2008 2007 2007 2007
-------------------------------------------------------------------------
Gross operating revenue $1,825.3 $2,503.1 $2,047.2 $2,311.7
Net earnings 66.7 131.3 101.2 123.5
Basic earnings per share 0.82 1.61 1.24 1.52
Diluted earnings per share 0.82 1.61 1.24 1.52
-------------------------------------------------------------------------
($ in millions except per Q1 Q4 Q3 Q2
share amounts) 2007 2006 2006 2006
-------------------------------------------------------------------------
Gross operating revenue $1,737.7 $2,426.1 $2,023.3 $2,247.6
Net earnings 55.7 108.3 95.4 103.3
Basic earnings per share 0.68 1.33 1.17 1.27
Diluted earnings per share 0.68 1.32 1.16 1.25
-------------------------------------------------------------------------
(1) 2007 quarterly results have been restated for adoption of CICA HB
3031 - Inventory as required by the CICA. See section 13.1 for
additional information. 2006 results have not been restated as the
information required to calculate the restatement on a quarterly
basis is not readily available.
3.2 Business unit Q1 2008 performance overview
-------------------------------------------------------------------------
Canadian Tire Retail Mark's Work Wearhouse
-------------------------------------------------------------------------
Q1 2008 Performance highlights Q1 2008 Performance highlights
- continued development of store - opened three corporate stores
network, now a total of 473 including one CTR-Mark's
stores including 195 Concept combination store and one
20/20 stores; mobile unit;
- continued development of next - store network increased to
new store concepts; and 360 locations and increased
- replaced two traditional stores total retail space by 10.3
with Concept 20/20 stores. percent over the first quarter
of 2007;
PartSource Q1 2008 performance - continued focus on Clothes That
highlights Work campaign, with the
introduction of one new women's
- acquired three stores and wear Clothes That Work item
converted all to PartSource during the quarter.
banner;
- network growth to 74 stores
including three hub stores;
and
- double-digit total sales
growth.
-------------------------------------------------------------------------
Canadian Tire Financial Services Petroleum
-------------------------------------------------------------------------
Q1 2008 Performance highlights Q1 2008 Performance highlights
- continued testing of the retail - growth of network to 266 gas
banking initiative; bars and 259 convenience
- continued overall improvement in stores;
the net write-off rate of the - refurbishment of two gas bars
total managed portfolio of as part of the initiative to
loans receivable, reflecting the improve the overall customer
benefits of a number of experience at Petroleum's
initiatives implemented over the sites; and
last few years to improve the - strong improvement in earnings
portfolio quality. over the prior year, reflecting
higher and stabilized gasoline
prices and margins during the
quarter as well as effective
expense management.
-------------------------------------------------------------------------The following sections outlining the Company's business segment
performance highlight the respective segments' achievements to date against
key initiatives identified in the 2012 Strategic Plan. The initiatives have
been divided into those contributing to building a "Bigger" Canadian Tire and
those designed to create a "Better" Canadian Tire.
In this context, "Bigger" is intended to convey the objective of
achieving increased sales and market share primarily through network growth,
new store concepts and new products. "Better" is intended to convey the
objective of improved productivity, service levels and rates of return.
3.3 Business segment performance
3.3.1 Canadian Tire Retail
3.3.1.1 Q1 2008 Strategic Plan performance
The following outlines CTR's performance for the first quarter of 2008 in
the context of our 2012 Strategic Plan.-------------------------------------------------------------------------
Initiatives to build a "BIGGER" Canadian Tire
-------------------------------------------------------------------------
New store concept program
Concept 20/20 has been the cornerstone of CTR's growth agenda since 2003.
Based on the results from the Concept 20/20 stores opened to date, CTR is
developing the next new store concepts which are designed to build on the
successes of the Concept 20/20 store with a greater focus on improving
sales and productivity. Plans for 2008 include opening two of the new
concept "smart" stores that will have the same focus of improving sales
and productivity, as well as providing a more exciting customer
experience and four new stores with the further goal of expanding our
presence in smaller markets.
-------------------------------------------------------------------------
2008 Key initiatives 2008 Performance
-------------------------------------------------------------------------
CTR's strategy for the continued First quarter
rollout of new concept stores
including our existing Concept 20/20 CTR opened three new stores in the
stores, new small market concept quarter, including two replacement
and new "smart" concept stores is stores and one store that was new
an important aspect of the 2012 to the network. One of the three
Plan. stores opened in the quarter was a
CTR-Mark's combination store. In
addition, one traditional store was
closed during the quarter.
The store network now totals 473
stores, 33 of which include a Mark's
component.
-------------------------------------------------------------------------
Customers for Life
Canadian Tire is committed to building customer loyalty through fostering
a positive, consistent and memorable customer experience. During 2007,
Canadian Tire began working on a new strategic model for the organization
that will lead to a stronger focus on customer service and improvements
in generating Customers for Life.
-------------------------------------------------------------------------
2008 Key initiatives 2008 Performance
-------------------------------------------------------------------------
CTR is committed to generating First quarter
consistent and coherent customer
service measures, tracking and The Customer Satisfaction Index
performance. (CSI) was successfully developed,
piloted and rolled out in 2007.
The collecting of CSI data for
2008 has begun with phase one of
six having just been completed.
The Dealer relations team has also
been working with the Canadian
Tire Dealers Association to address
issues that will improve the overall
process and survey results.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
PartSource network expansion
PartSource will continue its expansion into new markets through a
combination of new stores and small-scale acquisitions. PartSource's
strategy to buy small local businesses and convert them to the PartSource
banner has proven successful, with high rates of customer retention after
conversion.
-------------------------------------------------------------------------
2008 Key initiatives 2008 Performance
-------------------------------------------------------------------------
Key initiatives for PartSource First quarter
include building CTR as a new
commercial account for emergency During the quarter PartSource made
shipments, updating the significant progress on building the
organizational structure, testing CTR commercial account and is now
new operating systems and launching the first call for emergency auto
a new auto parts catalogue. parts to 130 Canadian Tire stores.
Progress on this initiative will
continue building throughout the
year.
PartSource acquired and opened three
corporate stores bringing the
network total to 74 stores,
including three hub stores.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Initiatives to build a "BETTER" Canadian Tire
-------------------------------------------------------------------------
Automotive Infrastructure initiative
CTR has made revitalizing its cornerstone automotive business a key
priority over the 2012 Plan period and began to roll out Phase One of
this project in 2007 through opening two PartSource hub stores. Regional
hub stores are larger than traditional PartSource stores and are designed
to provide a broader assortment of automotive parts to service both
Canadian Tire and PartSource customers on an as needed basis. This
investment over the next five to seven years will be directed at
increasing auto parts sales and generating a high rate of return for the
project, and will benefit Canadian Tire, PartSource and our Dealers.
-------------------------------------------------------------------------
2008 Key initiatives 2008 Performance
-------------------------------------------------------------------------
The Automotive Infrastructure First quarter
initiative will be an important
factor in CTR's future growth and Progress on Phase One of the
will involve significant investment Automotive Infrastructure initiative
in fixed assets and working capital continued in the first quarter as
and a redesign of key technology follows:
solutions.
Emergency supply implementation:
- 130 CTR stores began sourcing
emergency auto parts from
PartSource as their first call;
and
- 120 CTR stores finalized
arrangements with local
Uni-Select stores as the second
source for emergency auto
parts.
Corporate assortment expansion:
- creation, testing and
implementation of new stock
keeping unit (SKU) system; and
- modifications to and integration
testing of warehouse management
system in the Vaughan facility.
Enabling technologies:
- preliminary progress made on
system analysis and design work;
and
- vendor negotiations initiated to
secure licenses and professional
services for analysis and design
work.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CTR Change program
Canadian Tire is committed to continually working to improve the way that
we do business for enhanced returns. During 2007, CTR began to implement
its multi-year productivity effort with projects designed to overhaul and
upgrade internal processes and IT systems. As the benefits of these
projects begin to unfold, we will be able to make faster, better
decisions and improve our agility and speed to market.
-------------------------------------------------------------------------
2008 Key initiatives 2008 Performance
-------------------------------------------------------------------------
CTR will implement productivity/ First quarter
control initiatives in the areas of
pricing and product hierarchy to Progress made on the CTR change
streamline and strengthen program in the first quarter
operations and improve included:
organizational structures and
efficiencies. - implementation of new
customer-centric hierarchy
functions in operating system;
- continued testing of new pricing
system and began implementation
readiness activities;
- establishment of future
promotional planning design
principles; and
- vendor management workshops held
to understand vendor data links
and dependencies.
-------------------------------------------------------------------------
3.3.1.2 Key performance indicators
The following are key measures of CTR's sales productivity:
- total same store sales growth;
- average retail sales per store;
- average sales per square foot of retail space; and
- average transaction value
CTR total retail and same store sales
(year-over-year percentage change) Q1 2008 Q1 2007
-------------------------------------------------------------------------
Total retail sales(1) (1.9)% 3.1%
Same store sales(2) (4.0)% 1.3%
-------------------------------------------------------------------------
(1) Includes sales from Canadian Tire and PartSource stores, sales from
CTR's online web store and the labour portion of CTR's auto service
sales.
(2) Includes sales from Canadian Tire and PartSource stores, but excludes
sales from CTR's online web store and the labour portion of CTR's
auto service sales.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CTR's retail sales
Retail sales represent total merchandise sold at retail prices and the
labour portion of automotive sales to consumers across CTR's network of
stores, including CTR's online web store and PartSource.
-------------------------------------------------------------------------
CTR same store sales by store format
(year-over-year percentage change) Q1 2008
---------------------------------------------------------------
Same store sales(1)
Concept 20/20 stores (2.9)%
New-format stores (5.2)%
Traditional stores (4.9)%
---------------------------------------------------------------
(1) Excludes sales from PartSource stores, CTR's online web store and the
labour portion of CTR's auto service sales.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CTR's same store sales
Same store sales include sales from all stores that have been open for
more than 53 weeks.
-------------------------------------------------------------------------
As our store network continues to evolve, we will be introducing new store
formats into our store class categories. In this 2008 first quarter MD&A, we
continue to report three separate classes of stores, defined as follows:
-------------------------------------------------------------------------
Concept 20/20 store New-format store Traditional store
format format format
(mid 2003 to 2008) (1994 to mid 2003) (1994 and prior)
Average retail Average retail Average retail
square footage: square footage: square footage:
54,000 32,000 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 (excluding Mark's- 16,000 to 66,000 square Traditional stores
inside-a-CTR concept feet, most of which were are characterized by
stores which can be opened between 1994 and varied sizes and
significantly larger). mid 2003. New-format layouts. Traditional
Concept 20/20 stores stores make up stores make up
make up approximately 58 approximately 34 percent approximately eight
percent of the retail of the retail square percent of the retail
square footage of the footage in the network. square footage in
network. See section This format immediately the network.
3.3.1.1, Q1 2008 preceded the Concept
Strategic Plan 20/20 format.
performance for more
information on the
Concept 20/20 rollout.
-------------------------------------------------------------------------
Concept 20/20 stores represented approximately 58 percent of CTR's retail
square footage and 50 percent of total retail sales in the first quarter of
2008.
CTR store count
Q1 2008 2007 2006 2005 2004
-------------------------------------------------------------------------
Concept 20/20 stores(1) 195 192 126 53 25
New-format stores(2) 189 189 237 292 302
Traditional stores 89 92 105 117 130
-------------------------------------------------------------------------
Total new-format,
traditional and Concept
20/20 stores 473 473 468 462 457
PartSource stores 74 71 63 57 47
-------------------------------------------------------------------------
(1) Concept 20/20 store total in 2008 count includes two Concept 20/20
Mark's-inside-a-CTR concept stores which were opened in pilot phase
in 2007 and 28 CTR-Mark's combination Concept 20/20 stores.
(2) New-format store total in 2008 includes three CTR-Mark's combination
stores.
CTR continues to expand and retrofit its' store network with a focus on
converting older format stores to the Concept 20/20 store format while
introducing new store formats consistent with the goals of the 2012 Plan.
Average retail sales per Canadian Tire store(1),(2)
For the For the
12 months 12 months
ended ended
March 29, March 31,
($ in millions) 2008 2007
-------------------------------------------------------------------------
Concept 20/20 stores $ 18.4 $ 18.9
New-format stores 14.1 14.4
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.
Concept 20/20 stores experience higher customer traffic and increases in
average transaction value compared to previous store formats as customers
spend more time browsing in these stores.
Average sales per square foot of Canadian Tire retail space(1),(2),(3)
For the For the
12 months 12 months
ended ended
March 29, March 31,
($ in millions) 2008 2007
-------------------------------------------------------------------------
Retail square footage(1),(3) (millions of square feet) 17.8 16.4
Concept 20/20 stores(2),(3)($) $ 366 $ 375
New-format stores(2),(3)($) 442 452
Traditional stores(2),(3)($) 493 506
-------------------------------------------------------------------------
(1) Retail square footage is based on the total retail square footage
including stores that have not been open for a minimum of two years
as at the end of the quarter.
(2) Retail sales are shown on a 52-week basis in each year for those
stores that have been open for a minimum of two years as at the end
of the current quarter. Sales from PartSource stores, CTR's online
web store and the labour portion of CTR's auto service sales are
excluded.
(3) Retail space does not include warehouse, garden centre and auto
service areas.The two tables above show a year-over-year decrease in retail sales per
store and retail sales per square foot. The decrease is partially due to the
significant number of new-format and Concept 20/20 stores that are excluded
from the calculation as they have not been open, in that format, for a period
of two years. Once the stores have been open for two years, they are included
once again in the average sales metrics.
Average sales per square foot of retail space in the larger store formats
are lower than in traditional stores because additional space is utilized to
display more merchandise, accommodate wider aisles, include more appealing
product displays and provide a more compelling shopping experience overall.
The larger Concept 20/20 stores and new-format stores do however, on average,
generate more total sales and have a lower operating cost for Dealers per
retail square foot.
CTR retail sales
First quarter
CTR's first quarter retail sales were impacted by approximately
$18 million due to the introduction of the new Family Day statutory holiday in
Ontario and the Good Friday and Easter Sunday holiday shift to March in 2008
from April in 2007. Sales trends in April have, however, significantly
improved on the strength of the new Spring 2008 seasonal programs, a more
competitive pricing strategy and the arrival of warmer weather in Eastern
Canada.
In addition, sales continued to be affected by a decline in the tools
category of approximately 15 percent year-over-year, due in part to changes to
the pricing and promotional strategy and a decline in consumer tool purchases
throughout the industry. While tool sales in the quarter remain below levels
seen in 2007, the business started to recover over the course of the quarter
as promotional strategies were refined.
PartSource generated double-digit sales growth in the first quarter,
driven by the continued expansion of the network and growth in the commercial
customer segment.3.3.1.3 CTR's financial results
($ in millions) Q1 2008 Q1 2007(1) Change
-------------------------------------------------------------------------
Retail sales $1,218.8 $1,242.6 (1.9)%
Net shipments (year-over-year % change) (0.2)% 11.1%
Gross operating revenue 1,071.3 1,070.9 0.0%
EBITDA(2) 99.0 93.1 6.4%
-------------------------------------------------------------------------
Earnings before income taxes 43.6 38.0 15.1%
Less adjustment for:
Gain on disposals of property and equipment 3.9 -
Former CEO retirement obligation 0.4 -
-------------------------------------------------------------------------
Adjusted earnings before income taxes(2) $ 39.3 $ 38.0 3.7%
-------------------------------------------------------------------------
(1) 2007 earnings figures have been restated for the adoption of CICA HB
3031 - Inventories as required by the CICA. Please refer to section
13.1 for additional information.
(2) See section 14.0 on non-GAAP measures.CTR's net shipments
-------------------------------------------------------------------------
CTR's net shipments are the total value of merchandise shipped to
Canadian Tire and PartSource stores, and through our online web store,
less discounts and net of returns, recorded at the wholesale price that
we charge to our Dealers and PartSource franchisees.
-------------------------------------------------------------------------
Explanation of CTR's financial results
First quarter
For the quarter, gross operating revenue was flat compared to the first
quarter of 2007, a result of weaker net shipment trends and consistent with
first quarter retail sales results.
Despite flat revenues, adjusted pre-tax earnings in CTR increased 3.7
percent in the first quarter due to improved product margins, lower
advertising expenses due to the replacement of the print version of the Spring
catalogue with the on-line version and reduced operating costs due to general
productivity improvements throughout CTR's operations. First quarter earnings
growth also accommodated an incremental $3.4 million of investments in
long-term productivity and growth initiatives. As referred to in sections 3.1
and 13.1, CTR's earnings were impacted by accounting changes required by the
CICA HB 3031 - Inventories that were implemented retrospectively during the
quarter.
3.3.1.4 Business risks
CTR is exposed to a number of risks in the normal course of its business
that have the potential to affect its operating performance. The following are
some of the business risks specific to CTR's retail and other operations.
Please also refer to section 9.0 of our 2007 Financial Report for a discussion
of some other industry-wide and Company-wide risks affecting the business.
Supply chain disruption risk
An increasing portion of CTR's product assortment is being sourced from
foreign suppliers, lengthening the supply chain and extending the time between
order and delivery to CTR's warehouses. Accordingly, CTR is exposed to
potential supply chain disruptions due to foreign supplier failures,
geopolitical risk, labour disruption or insufficient capacity at ports, and
risks of delays or loss of inventory in transit. The Company mitigates this
risk through effective supplier selection and procurement practices, strong
relationships with transportation companies, port and other shipping
authorities, supplemented by marine insurance coverage. CTR has demonstrated
its ability to mitigate this risk in the past.
Seasonality risk
CTR derives a significant amount of its revenues from the sale of
seasonal merchandise and, accordingly, bears a degree of risk from
unseasonable weather patterns. CTR mitigates this risk, to the extent
possible, through the breadth of our product mix as well as effective
procurement and inventory management practices.
Environmental risk
Environmental risk within CTR is primarily associated with the handling
and recycling of certain materials, such as tires, paint, oil and lawn
chemicals, sold in Canadian Tire and PartSource stores. The Company has
established and follows comprehensive environmental policies and practices to
avoid a negative impact on the environment, protect CTR's reputation and
comply with environmental laws.
3.3.2 Mark's Work Wearhouse
3.3.2.1 Q1 2008 Strategic Plan performance
The following outlines Mark's performance for the first quarter of 2008
in the context of our 2012 Strategic Plan.-------------------------------------------------------------------------
Initiatives to build a "BIGGER" Canadian Tire
-------------------------------------------------------------------------
Network expansion
A critical aspect of Mark's growth plan revolves around its objective of
capturing an increasingly significant share of overall apparel sales in
each geographic market in which Mark's competes. To increase Mark's
market presence, the Company plans to continue with its aggressive goal
of expanding the network of Mark's stores.
-------------------------------------------------------------------------
2008 Key initiatives Q1 2008 Performance
-------------------------------------------------------------------------
Mark's will continue network First quarter
development through opening new
stores, relocating or expanding - opened three new stores,
existing stores and renovating including one CTR-Mark's
older stores to the newest Mark's Concept 20/20 combination
format. store;
- closed one corporate store;
- renovated one corporate store;
and
- repurchased three franchise
stores.
Mark's total retail square footage
at the end of the quarter was
3.0 million square feet.
-------------------------------------------------------------------------
New store concepts
In addition to adding incremental stores to the total network, Mark's is
in the process of developing new store concepts that will be rolled out
over the Plan period.
-------------------------------------------------------------------------
2008 Key initiatives Q1 2008 Performance
-------------------------------------------------------------------------
Mark's will continue to expand the First quarter
store network by developing new and
innovative ways to bring Clothes - opened one new CTR-Mark's
That Work to consumers across the Concept 20/20 combination
country, resulting in an increased store (included in total
physical presence across the above); and
geographic regions of Canada. - opened one new mobile Mark's
store (not included in total
above).
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Initiatives to build a "BETTER" Canadian Tire
-------------------------------------------------------------------------
Category expansion
Mark's has set aggressive growth goals for the 2012 Plan period which
will be supported by its plans for category expansion in its three major
product lines. Although growth was modest in 2007, women's wear is
expected to be the fastest growing segment of the business over the plan
period as it is the least developed of the Mark's main category lines.
Improvements in the product assortment in the women's wear category is
expected to bring continued growth during the Plan period.
-------------------------------------------------------------------------
2008 Key initiatives Q1 2008 Performance
-------------------------------------------------------------------------
In 2008, Mark's will continue to First quarter
expand its product assortment in
the three main categories of - sales of industrial wear
apparel and footwear with a focus increased by 3.6 percent;
on the Clothes That Work campaign. - sales of men's wear decreased
by 8.2 percent; and
- sales of women's wear decreased
by 8.4 percent.
Mark's continued to focus on the
Clothes That Work campaign with the
introduction of one new women's
wear Clothes That Work item during
the quarter.
-------------------------------------------------------------------------
3.3.2.2 Key performance indicators
The following are key performance indicators for Mark's:
- retail and same store sales growth;
- average sales per corporate store; and
- average sales per square foot of retail space
Mark's retail and same store sales growth
(year-over-year percentage change) Q1 2008 Q1 2007
-------------------------------------------------------------------------
Total retail sales (3.2)% 17.6%
Same store sales(1) (7.0)% 15.7%
-------------------------------------------------------------------------
(1) Mark's same store sales excludes new stores, stores not open for the
full period in each year and store closures.
-------------------------------------------------------------------------
Mark's retail sales
Mark's retail sales represent total merchandise sales to consumers and
business-to-business customers, net of returns, across Mark's entire
network of stores, fulfillment centres and Mark's online web store
recorded at retail prices.
-------------------------------------------------------------------------
First quarter
Mark's retail sales during the first quarter of 2008 were impacted by a
shift in timing of the Easter holidays, the new Family Day statutory holiday
in Ontario and the continued softening of retail and economic conditions
experienced across many parts of Canada. Same store sales growth decreased
7.0 percent compared to the first quarter of 2007, which had experienced
particularly strong same store sales results, due to more favourable weather
conditions compared to those that prevailed in the first quarter of 2008 and
stronger economic conditions at that time. Men's industrial footwear and men's
accessories demonstrated the largest sales dollar increases in corporate store
sales in the first quarter.
Average corporate store sales(1)
For the For the For the
12 months 12 months 12 months
ended, ended, ended,
March 29, March 31, April 1,
2008 2007 2006
-------------------------------------------------------------------------
Average retail sales per store
($ thousands)(2) $ 2,743 $ 2,817 $ 2,443
Average sales per square foot ($)(3) 327 347 314
-------------------------------------------------------------------------
(1) Calculated on a rolling 12-month basis.
(2) Average retail sales per corporate store include corporate stores
that have been open for 12 months or more.
(3) Average sales per square foot is based on sales from corporate
stores. We have prorated square footage for corporate stores that
have been open for less than 12 months.
Mark's continues to focus on productivity at its stores. Due to the
softening retail environment in Canada during the first quarter of 2008, there
was a decrease in average sales per store and average sales per square foot,
but this followed strong 15.3 percent and 10.5 percent year-over-year
increases in those respective measures in the first quarter of 2007 over the
first quarter of 2006.
3.3.2.3 Mark's financial results
($ in millions) Q1 2008 Q1 2007(1) Change
-------------------------------------------------------------------------
Retail sales(2) $ 172.5 $ 178.3 (3.2)%
Gross operating revenue(3) 147.5 152.1 (3.0)%
EBITDA(4) 3.0 4.5 (34.1)%
-------------------------------------------------------------------------
Earnings before income taxes (3.4) (0.2) N/A
Less adjustment for:
Loss on disposals of property and equipment - (0.3)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(4) $ (3.4) $ 0.1 N/A
-------------------------------------------------------------------------
(1) Mark's 2007 results have been restated for the adoption of CICA HB
3031 - inventories as required by the CICA. Please refer to section
13.1 for additional information.
(2) Includes retail sales from corporate and franchise stores.
(3) Gross operating revenue includes retail sales at corporate stores
only.
(4) See section 14.0 on non-GAAP measures.Explanation of Mark's financial results
First quarter
Mark's pre-tax earnings decreased in the first quarter of 2008 primarily
as a result of the decrease in gross operating revenue from the first quarter
of 2007 for reasons explained above. This was partially offset by the gross
margin rate improving by 130 basis points, due to an improvement in most cost
factors, particularly increased purchase markups, offset to some degree by
higher total markdowns. The gross margin was also favourably impacted by
exchange rates during the quarter although Mark's participates in Canadian
Tire's hedging program, designed to manage the variability in exchange rates
and moderate their effect on earnings. Total expenses increased by 5.2 percent
over the first quarter of 2007, largely attributable to higher occupancy and
depreciation costs related to the growth experienced in the store network over
the last few years. As referred to in sections 3.1 and 13.1, Mark's first
quarter 2008 and first quarter 2007 earnings were also impacted by accounting
changes required by the CICA HB 3031 - Inventories which were implemented
retrospectively during the quarter.
3.3.2.4 Business risks
Mark's is exposed to a number of risks in the normal course of its
business that have the potential to affect its operating performance. The
following are some of the business risks specific to Mark's. Please also refer
to section 9.0 of our 2007 Financial Report for a discussion of some other
industry and Company-wide risks affecting the business.
Seasonality risk
Mark's business remains very seasonal, with the fourth quarter typically
producing the largest share of annual sales and earnings. In 2007, for
example, the fourth quarter produced about 40 percent of total annual retail
sales and prior to the adoption of CICA HB-3031 - Inventories, approximately
54 percent of annual pre-tax earnings, resulting from the general increase in
consumer spending for winter clothing and Christmas related purchases. With
the adoption of CICA HB-3031 - Inventories, an even higher percentage of
Mark's annual pre-tax earnings is expected to occur in the fourth quarter.
Detailed sales reporting and merchandise planning modules assist Mark's in
mitigating the risks and uncertainties associated with unseasonable weather
and consumer behaviour during the important Christmas selling season, but
cannot remove risks completely because inventory orders, especially for a
significant portion of merchandise purchased off-shore, must be placed well
ahead of the season.
Market obsolescence risk
All clothing retailers are exposed, to varying degrees, to the vagaries
of consumers' fashion preferences. Mark's mitigates this risk through its
brand positioning, consumer preference monitoring, demand forecasting and
merchandise selection efforts. Mark's specifically targets consumers of
durable everyday wear and is less exposed to changing fashions than apparel
retailers offering high-fashion apparel and accessories.
3.3.3 Canadian Tire Petroleum
3.3.3.1 Q1 2008 Strategic Plan performance
Petroleum plays a strategic role in increasing customer loyalty and
driving traffic and transactions for CTR and Financial Services. Petroleum
increases Canadian Tire's total value proposition by offering Canadian Tire
'Money' loyalty rewards on gas purchases paid for in cash or by Canadian
Tire's Options MasterCard. Petroleum also supports other cross-marketing
promotions and joint product launches, such as Canadian Tire's Gas Advantage
MasterCard, which has gained wide popularity since its introduction in Ontario
in mid-2006. Customers who have a Canadian Tire MasterCard and purchase gas at
Petroleum are Canadian Tire's most loyal and profitable customers.
The following outlines Petroleum's performance for the first quarter of
2008 in the context of our 2012 Strategic Plan.-------------------------------------------------------------------------
Initiatives to build a "BIGGER" Canadian Tire
-------------------------------------------------------------------------
Network renewal and new store concept
Petroleum's business is an integral part of the Canadian Tire
organization as customers that use Petroleum's gas bars drive sales and
traffic to our other business units. Over the 2012 Plan period, Petroleum
will continue to develop its real estate plan, focusing on introducing
new store concepts into its existing network of locations, while
continuing to focus on renewing its current sites.
-------------------------------------------------------------------------
2008 Key initiatives Q1 2008 Performance
-------------------------------------------------------------------------
In 2008, Petroleum will continue to First quarter
strengthen the existing network by
opening new sites and refurbishing - opened two new gas bars;
or rebuilding existing sites. - refurbished two gas bars; and
- closed two locations.
At the end of the quarter,
Petroleum had 266 gas bars,
including 42 re-branded sites.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Initiatives to build a "BETTER" Canadian Tire
-------------------------------------------------------------------------
Enhancing interrelatedness
Petroleum's business is integrated with CTR and Financial Services
through Canadian Tire 'Money' and various cross-marketing programs
designed to build customer loyalty. Petroleum is also in the process of
enhancing its interrelatedness strategy to further extend its marketing
leverage across the Company.
-------------------------------------------------------------------------
2008 Key initiatives Q1 2008 Performance
-------------------------------------------------------------------------
In 2008, Petroleum will aggressively First quarter
seek out additional cross-marketing
opportunities to further leverage - issued multiplier coupons that
its interrelatedness strategy to increase the Canadian Tire
drive customer traffic, 'Money' offered on gas
transactions, customer loyalty and purchases paid for in cash or
earnings across the enterprise. by Canadian Tire Options
MasterCard;
- offered discount coupons on
Canadian Tire merchandise with
the purchase of gas;
- sold car wash vouchers at CTR
stores; and
- held a cross-promotion offer
with Mark's.
-------------------------------------------------------------------------
3.3.3.2 Key performance indicators
Gasoline sales volume is a top-line performance indicator for Petroleum,
as measured by the number of gasoline litres sold. Fluctuations in the
wholesale and retail price of gasoline may result in fluctuations in
Petroleum's margin and profitability.
Gasoline sales volume
Q1 2008 Q1 2007 Change
-------------------------------------------------------------------------
Sales volume (millions of litres) 413.8 415.3 (0.4)%
-------------------------------------------------------------------------
Petroleum has continued to grow its market share over the past couple of
years in a mature market where gas prices are at historically high levels,
largely due to our loyalty program, customer service experience at our gas
bars and an increased combined penetration rate on our Canadian Tire Options
MasterCard and the Gas Advantage MasterCard. Gasoline sales during the quarter
were down slightly due to lower same site sales, offset by increases in new
site openings over the past few years. On a same site basis, our gasoline
volume decreased by 1.9 percent in the quarter. The decrease in volume was
partially attributable to a year-over-year increase in gas prices of
approximately 18 percent and unfavourable driving conditions due to record
breaking snowfalls.
Petroleum's convenience and car wash sales
(year-over-year percentage change) Q1 2008 Q1 2007
--------------------------------------------------------------
Total retail sales
Convenience store sales 11.6% 16.9%
Car wash sales (24.4)% 20.8%
---------------------------------------------------------------
Same store sales
Convenience(1) 9.7% 12.3%
Car wash (24.8)% 17.1%
---------------------------------------------------------------
(1) Same store convenience sales excludes three "Q" convenience stores.
Convenience store sales in the first quarter of 2008 increased as a result
of new site openings and increases in tobacco and lottery sales. The decline
in car wash sales is largely attributable to the impact of the unfavourable
weather conditions and record breaking snowfalls experienced in the first
quarter of 2008 compared to the previous year.
3.3.3.3 Petroleum's financial results
($ in millions) Q1 2008 Q1 2007 Change
-------------------------------------------------------------------------
Retail sales $ 449.0 $ 385.4 16.5%
Gross operating revenue 422.8 362.8 16.5%
EBITDA(1) 9.0 6.5 38.2%
-------------------------------------------------------------------------
Earnings (loss) before income taxes 5.0 2.5 96.3%
Less adjustment for:
Loss on disposals of property and equipment (0.2) (0.2)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(1) $ 5.2 $ 2.7 84.5%
-------------------------------------------------------------------------
(1) See section 14.0 on non-GAAP measures.
Petroleum's retail sales
Retail sales include the sales of gasoline at Petroleum's entire network
of petroleum sites recorded at retail pump prices, including re-branded
sites, and excluding goods and services taxes and provincial sales taxes,
where applicable. Retail sales also include sales of products sold at our
convenience stores, car wash sites, propane and Pit Stop sites, all of
which we record at retail selling prices.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gasoline pricing
Petroleum maintains long-term wholesale agreements with major refiners to
source competitively priced gasoline across Canada. This fuel is then
sold through Petroleum retail locations at market prices.
-------------------------------------------------------------------------Explanation of Petroleum's financial results
First quarter
Higher and more stable gasoline margins and an increase in convenience
store sales, partially offset by lower gasoline volumes, contributed to
Petroleum's revenue growth in the first quarter. Average gasoline prices
during the first quarter of 2008 increased by approximately 18 percent over
the first quarter of 2007, driving this increased revenue.
Increased gasoline margins was the major factor that contributed to
Petroleum's positive earnings performance during the quarter combined with
strong expense management. Petroleum incurred $0.7 million in environmental
expenses in the first quarter related to clean-up costs associated with
certain site closures compared to $0.2 million incurred in the first quarter
of 2007.
3.3.3.4 Business risks
Petroleum is exposed to a number of risks in the normal course of its
business that have the potential to affect its operating performance. The
following are some of the business risks specific to Petroleum's operations.
Please also refer to section 9.0 of our 2007 Financial Report for a discussion
of some other industry-wide and Company-wide risks.
Commodity price and disruption risk
The operating performance of petroleum retailers can be affected by
fluctuations in the commodity cost of oil. The wholesale price of gasoline is
subject to global oil price supply and demand conditions, which are
increasingly a function of rising demand from fast-developing countries such
as India and China, political instability in the Middle East, potential supply
chain disruptions from natural and human-caused disasters, as well as
commodity speculation. To mitigate this risk to profitability, Petroleum
tightly controls its operating costs and enters into long-term gasoline
purchase arrangements with integrated gasoline wholesalers.
Environmental risk
Environmental risk within Petroleum is primarily associated with the
handling of gasoline, oil and propane. Environmental contamination, if not
prevented or remediated, could result in fines and sanctions and damage our
reputation. Petroleum mitigates its environmental risks through a
comprehensive regulatory compliance program, which involves environmental
investigations, as required, and the remediation of any contaminated sites in
a timely manner. Petroleum also carries environmental insurance coverage.
3.3.4 Canadian Tire Financial Services
3.3.4.1 Q1 2008 Strategic Plan performance
The following outlines Financial Service's performance for the first
quarter of 2008 in the context of our 2012 Strategic Plan.-------------------------------------------------------------------------
Initiatives to build a "BIGGER" Canadian Tire
-------------------------------------------------------------------------
Total managed portfolio of loans receivable (credit card loans, personal
loans, line of credit loans and mortgage loans)
Financial Services plans to grow its portfolio through increases in
average balances, new account acquisition, the introduction of new credit
cards and continued testing of the personal loan portfolio.
-------------------------------------------------------------------------
2008 Key initiatives Q1 2008 Performance
-------------------------------------------------------------------------
For 2008, Financial Services has First quarter
targeted increasing gross average
credit card receivables and the Gross average loans receivable were
number of accounts carrying a $3.8 billion in the first quarter.
balance and growing its total The growth reflects an 8.6 percent
managed portfolio as key increase in the average account
initiatives. balance and a 0.3 percent increase
in the number of accounts carrying
In addition, Financial Services is a balance.
planning a major re-launch of the
Canadian Tire Options MasterCard In January 2008, Financial Services
in 2008. purchased a portfolio of line of
credit loans receivable for
$29.6 million.
During the quarter Financial
Services continued planning for
the re-launch of the Canadian
Tire Options MasterCard and began
the rollout of new cards in
March 2008.
-------------------------------------------------------------------------
Retail banking
Financial Services began offering retail banking products in two pilot
markets in October 2006, including high interest savings accounts,
guaranteed investment certificates and residential mortgages. In 2007,
the pilot was expanded to include a third market in Ontario along with
the launch of the Canadian Tire One-and-Only account. The retail banking
business leverages the trust and credibility Canadian Tire has earned
over the last 40 years providing financial services to millions of
customers.
-------------------------------------------------------------------------
2008 Key initiatives Q1 2008 Performance
-------------------------------------------------------------------------
Financial Services' retail banking First quarter
plans include increasing the
ending mortgage portfolio balance Financial Services had accumulated
and deposit balances. over $147 million in deposits and
approximately $48 million in
Financial Services will incur mortgages as at the end of the
approximately $28 million in net first quarter of 2008.
expenses associated with the
marketing and operations of the Financial Services incurred
retail banking initiative in $7.3 million in net expenses
2008. associated with the marketing and
operations of the retail banking
initiative during the first quarter
of 2008.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Initiatives to build a "BETTER" Canadian Tire
-------------------------------------------------------------------------
Insurance and other ancillary products
Financial Services plans to enhance its insurance and warranty product
offering to credit card customers. Revenues from insurance and warranty
products have increased significantly in the last five years through
direct marketing to Canadian Tire's growing base of customers.
-------------------------------------------------------------------------
2008 Key initiatives Q1 2008 Performance
-------------------------------------------------------------------------
Financial Services plans to Revenues from insurance and
increase revenues from insurance warranty products increased 4.8
and warranty products during 2008. percent in the first quarter
year-over-year.
-------------------------------------------------------------------------
3.3.4.2 Key performance indicators
The following are key indicators of Financial Services' performance:
- size of the total managed portfolio
- profitability of the portfolio
- quality of the portfolio
Financial Services' total managed portfolio of loans receivable
($ in millions, except where noted) Q1 2008 Q1 2007 Change
-------------------------------------------------------------------------
Average number of accounts with a balance
(thousands) 1,849 1,845 0.3%
Average account balance ($) $ 2,072 $ 1,907 8.6%
Gross average receivables (GAR) 3,831.7 3,517.9 8.9%
Total managed portfolio (end of period) 3,783.9 3,473.5 8.9%
Net managed portfolio (end of period) 3,735.1 3,438.0 8.6%
-------------------------------------------------------------------------Net managed portfolio
Financial Services' net managed portfolio is the total value, after
allowances, of loans receivable including credit card loans, personal loans,
line of credit loans and residential mortgage loans.
Financial Services' gross average receivables were up in the first
quarter, due primarily to marketing programs designed to increase average
balances. The continued success of the Gas Advantage MasterCard in Ontario
contributed to the increase in total portfolio growth, offset by a decline in
personal loan accounts.
Financial Services' future growth will be driven by increases in average
account balances, modest increases in new accounts and the introduction of new
credit card and insurance products. Management regards new retail banking
products as another high-potential channel for growth in the longer term.
Gross average receivables
GAR is the monthly average of Financial Services' loans receivable
averaged over a specified period of time.
Securitization of loans receivable
Securitization is the process by which interests in financial assets are
sold to a third party. Financial Services routinely securitizes credit card
loans receivable by selling an interest in those assets to trusts involved in
the business of handling receivables portfolios. In the case of credit card
loans, co-ownership interests are sold to Glacier Credit Card Trust® (GCCT).
Financial Services records these securitization transactions as a sale, and as
a result, these assets are not included on the Company's Consolidated Balance
Sheets, but are included in our total managed portfolio of loans receivable.
Financial Services has traditionally securitized between 70 percent and 80
percent of loans receivable on an ongoing basis.Financial Services' portfolio of credit card loans receivable
($ in millions, except where noted) Q1 2008 Q1 2007 Change
-------------------------------------------------------------------------
Average number of accounts with a balance
(thousands) 1,809 1,804 0.3%
Average account balance ($) $ 2,004 $ 1,829 9.6%
Gross average receivables 3,625.3 3,298.7 9.9%
Total managed portfolio (end of period) 3,572.0 3,261.6 9.5%
-------------------------------------------------------------------------Ending credit card loans receivable grew 9.5 percent to $3.6 billion at
the end of the quarter primarily due to a 9.6 percent increase in the average
account balance compared to the previous year. The increase in average account
balances is largely a result of marketing programs designed to increase
average balances.
Financial Services' profitability
Financial Services' profitability measures are tracked as a percentage of
GAR, shown in the table below.Profitability of total managed portfolio(1)
Q1 2008 Q1 2007 Q1 2006
-------------------------------------------------------------------------
Total revenue as a % of GAR(2) 24.54% 24.96% 25.22%
Gross margin as a % of GAR(2) 12.63% 13.12% 13.31%
Operating expenses as a % of GAR(3) 7.84% 7.78% 8.27%
Return on average total managed
portfolio(2),(3),(4) 4.79% 5.34% 5.03%
-------------------------------------------------------------------------
(1) Figures are calculated on a rolling 12-month basis and comprise the
total managed portfolio of loans receivable.
(2) Excludes the net effect of securitization activities and gain on
disposal/redemption of investment.
(3) Excludes the impact of the modification to the stock option
agreements in the fourth quarter of 2006.
(4) Return is calculated as earnings before taxes as a percentage of GAR.Gross margin
Gross margin is Financial Services' total revenue less direct expenses
associated with credit card, personal, line of credit and mortgage loans and
insurance and warranty products. The most significant direct expenses are the
provision for credit losses associated with the credit card, personal loan and
line of credit portfolios, the loyalty program and interest expense.
Financial Services' MasterCard accounts provide increased earnings
potential through cross-selling of balance-based insurance products and other
financial services being offered by Financial Services. As Financial Services
introduces lower rate credit cards and other loans receivable, the reduction
in revenue and gross margin as a percentage of gross average receivables will
be offset by continued growth in loans receivable, higher sales of insurance
and warranty products and ongoing improvements in the operating expense ratio.
As part of the strategic planning process, management set a long-term
goal of managing Financial Services' pre-tax return on the average total
managed portfolio in the target range of 4.5 to 5.0 percent. As shown in the
table above, Financial Services has met or exceeded this target in the first
quarter of 2006, 2007 and 2008.Portfolio quality
Q1 2008 Q1 2007 Q1 2006
-------------------------------------------------------------------------
Net write-off rate (rolling 12-month basis) 5.83% 5.95% 5.98%
Account balances less than 30 days overdue
at end of period 96.10% 96.29% 96.31%
Allowance rate 2.61% 2.48% 2.55%
-------------------------------------------------------------------------Net write-offs
Net write-offs represents account balances that have been written off,
net of collections of amounts previously written off. Net write-off rate is
the net write-offs expressed as a percentage of gross average receivables in a
given period.
Financial Services' net write-off rate was 5.83 percent in the first
quarter of 2008, falling within the target range of 5.0 to 6.0 percent and an
improvement of 12 basis points over the same period of the previous year.
Allowance
The allowance is determined using historical loss experience of account
balances based on the aging and arrears status, with certain adjustments for
other relevant circumstances influencing the recoverability of the loans.
Periodic fluctuations in write-offs, aging and allowances occur as a
result of a variety of economic influences such as job growth or losses,
personal debt levels and personal bankruptcy rates, as well as changes caused
by adjustments to collection strategies.3.3.4.3 Financial Services' financial results
($ in millions) Q1 2008 Q1 2007 Change
-------------------------------------------------------------------------
Gross operating revenue 208.7 176.1 18.5%
EBITDA(2) $ 63.5 $ 46.1 38.0%
-------------------------------------------------------------------------
Earnings before income taxes 53.6 45.4 18.1%
Less adjustment for:
Loss on disposals of property and equipment - (0.1)
Net effect of securitization activities(1) 12.9 (3.0)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(2) $ 40.7 $ 48.5 (16.0)%
-------------------------------------------------------------------------
(1) Includes initial gain/loss on the sale of loans receivable,
amortization of servicing liability, change in securitization reserve
and gain/loss on reinvestment.
(2) See section 14.0 on non-GAAP measures.Explanation of Financial Services' financial results
First quarter
Financial Services' gross operating revenue increased over the first
quarter of 2007 largely as a result of higher credit interest earned from the
increase in total receivables and due to the gain from the net effect of
securitization activities as compared with a loss in the first quarter of the
prior year. This gain resulted from the deferral of fourth quarter
securitizations in 2007 to the first quarter of 2008.
First quarter earnings before income taxes increased over the first
quarter of 2007 reflecting the gain from the net effect of securitization
activities compared to a loss in the same period last year. Adjusted earnings
before income taxes decreased from the first quarter of 2007 due to the impact
of a 13 basis point increase in the allowance rate for doubtful accounts
($4.9 million) and incremental expenses related to the retail banking
initiative of $2.6 million. The increase in the allowance rate was due to
slightly higher aging and the impact of changes to the collection process, the
benefits of which are expected to be realized over the long term.
3.3.4.4 Business risks
Financial Services is exposed to a number of risks in the normal course
of its business that have the potential to affect its operating performance.
The following are some of the business risks specific to Financial Services'
operations. Please also refer to section 9.0 of our 2007 Financial Report for
a discussion of some other industry-wide and Company-wide risks affecting the
business.
Consumer credit risk
Financial Services grants credit to its customers through Canadian Tire
MasterCards, retail credit cards, personal loans, line of credit loans and
residential mortgages. With the granting of credit, Financial Services assumes
certain risks such as the failure to accurately predict the creditworthiness
of its customers or their ability to repay debt. Financial Services minimizes
credit risks to maintain and improve the quality of its consumer lending
portfolio by:- employing sophisticated credit-scoring models to constantly monitor
the creditworthiness of customers;
- using the latest technology to make informed credit decisions for
each customer account;
- adopting technology to improve the effectiveness of the collection
process; and
- monitoring the macro-economic environment, especially with respect to
consumer debt levels, interest rates, employment levels and income
levels.Securitization funding risk
Securitization is an important source of funding for Canadian Tire,
involving the sale of credit card loans to GCCT and the sale of personal loans
to another third party trust. Securitization enables Financial Services to
diversify funding sources, and manage risks and capital requirements.
Financial Services' securitization program relies on the marketability of the
asset-backed commercial paper (ABCP) and notes issued by GCCT as described in
section 5.2.4. A decline in the marketability of the commercial paper and
notes would require the Company to find new sources of funding. Developments
in the last half of 2007 in the international credit markets had an impact on
some companies' securitization programs; see sections 5.2.3 and 5.2.4 below.
Interest rate risk
The Company's sensitivity to movements in interest rates is substantially
limited to its cash and short-term investments. A one percent change in
interest rates would not materially affect its earnings, cash flow or
financial position.
Most of Financial Services' revenue is not interest rate sensitive as it
is generated primarily from Canadian Tire MasterCards, which carry a fixed
interest rate appropriate to customer segments with common credit ratings. The
securitization program as described in section 5.2.4 of this MD&A reduces
Financial Services' funding requirements. Canadian Tire constantly monitors
the potential impact of interest rate fluctuations on its fixed versus
floating rate exposure and manages its overall balance to reduce the magnitude
of this exposure.
As the success of Financial Services is dependent upon its ability to
access capital markets at favourable rates, and given the rapid growth of the
total managed portfolio, maintaining the quality of the total managed
portfolio and securitized loans receivable is a key priority of Financial
Services. For additional information on Canadian Tire's liquidity and capital
market activity, please refer to section 5.2 below.
Regulatory risk
Regulatory risk is the risk of negative impact to business activities,
earnings or capital, regulatory relationships or reputation as a result of
failure to comply with or a failure to adapt to current and changing
regulations or regulatory expectations.
Financial Services' regulatory compliance strategy is to manage
regulatory risk through the promotion of a strong compliance culture and the
integration of solid controls within the Company. Primary responsibility for
compliance with all applicable regulatory requirements rests with senior
management of the Company and extends to all employees.
Financial Services' Compliance Department is responsible for the
development and maintenance of a legislative compliance management system and
reports on a quarterly basis to Canadian Tire Bank's Governance and Conduct
Review Committee.
Specific activities that assist the Company in adhering to regulatory
standards include communication of regulatory requirements, advice, training,
testing, monitoring, reporting and escalation of control deficiencies and
regulatory risks.
4.0 Capital management
In order to support our growth agenda and meet the objectives enumerated
in our 2012 Strategic Plan the Company actively manages its capital in the
manner indicated below.4.1 Capital management objectives
The Company's objectives when managing capital are:
- minimizing the after-tax cost of capital; and
- maintaining flexibility in capital structure to ensure the ongoing
ability to execute the Strategic Plan.4.2 Definition and management of capital
In the process of managing the Company's capital, management includes the
following items in its definition of capital:March 29, % March 31, %
($ in millions) 2008 of total 2007 of total
-------------------------------------------------------------------------
Capital components
Current portion of long-term debt $ 156.7 3.3% $ 2.9 0.1%
Long-term debt 1,355.5 28.8% 1,166.5 29.1%
Other long-term liabilities(1) - - 13.0 0.3%
Share capital 701.9 14.9% 702.7 17.5%
Contributed surplus 1.5 0.1% 0.2 0.1%
Components of accumulated other
comprehensive income(2) (11.3) (0.2)% (7.0) (0.2)%
Retained earnings 2,504.8 53.1% 2,144.4 53.1%
-------------------------------------------------------------------------
Net capital under management $4,709.1 100.0% $4,022.7 100.0%
-------------------------------------------------------------------------
December 29, %
2007 of total
-----------------------------------------------------
Capital components
Current portion of long-term debt $ 156.3 3.4%
Long-term debt 1,341.8 28.9%
Other long-term liabilities(1) 10.6 0.2%
Share capital 700.7 15.0%
Contributed surplus 2.3 0.1%
Components of accumulated other
comprehensive income(2) (8.5) (0.2)%
Retained earnings 2,455.1 52.6%
-----------------------------------------------------
Net capital under management $4,658.3 100.0%
-----------------------------------------------------
(1) Long-term liabilities that are derivative or hedge instruments
related to capital items only.
(2) Components of other comprehensive income relating to capital items
only.The Company has in place various policies which it uses to manage
capital, including the leverage and liquidity policy and securities and
derivatives policy. As part of the overall management of capital, management's
Financial Risk Management Committee and the Audit Committee of the Board of
Directors review the Company's compliance with, and performance against, these
policies.
In addition, management's Financial Risk Management Committee and the
Audit Committee of the Board of Directors perform a periodic review of the
policies to ensure they remain consistent with approved risk tolerance levels.
4.3 Constraints on managing capital
The Company manages its capital structure and makes modifications in
response to changes in economic conditions and the risks associated with the
underlying strategic initiatives. In addition, we are required to comply with
regulatory requirements associated with the operations of CTB, our federally
chartered bank, and other regulatory requirements that impact our business
operations.
As part of existing debt agreements, two key financial covenants are
monitored on an on-going basis by management to ensure compliance with the
agreements. The key covenants are as follows:- net tangible assets coverage - calculated as:
- total assets less intangible assets, current liabilities
(excluding current portion of long-term debt), and liability for
employee future benefits
- divided by long-term debt (including current portion of long-term
debt)
- limitations on surplus available for distribution to shareholders -
the Company is restricted from distributions (including dividends and
redemptions or purchases of shares) exceeding its accumulated net
income over a defined period.The Company was in compliance with these covenants during the first
quarter of 2008. Under these covenants, the Company has significant
flexibility to fund business growth and increase dividend rates within our
existing dividend policy.
In order to maintain or adjust the capital structure, the Company may
adjust the amount of dividends paid to shareholders, purchase shares for
cancellation pursuant to normal course issuer bids (NCIB), issue new shares,
issue new debt, issue new debt to replace existing debt with different
characteristics and/or increase or decrease the amount of sales of loan
receivable to Glacier Credit Card Trust.
4.3.1 Canadian Tire Bank's regulatory environment
The Company's wholly-owned subsidiary, Canadian Tire Bank manages its
capital under guidelines established by the Office of the Superintendent of
Financial Institutions Canada (OSFI). The regulatory capital guidelines
measure capital in relation to credit, market and operational risks. CTB has a
capital management policy, capital plan, and procedures and controls which it
utilizes to achieve its goals and objectives. CTB's objectives include:- providing sufficient capital to maintain the confidence of
depositors;
- being an appropriately capitalized institution, as measured
internally, defined by regulatory authorities and compared with CTB's
peers; and
- achieving the lowest overall cost of capital consistent with
preserving the appropriate mix of capital elements to meet target
capitalization levels.OSFI's current regulatory capital guidelines classify capital into two
tiers. At the end of the first quarter of 2008, Tier 1 capital included common
shares and retained earnings reduced by net securitization exposures. CTB
currently does not hold any instruments in Tier 2 capital. Risk-weighted
assets (RWA), referenced in the regulatory guidelines, include all on-balance
sheet assets weighted for the risk inherent in each type of asset as well as
an operational risk component based on a percentage of average risk-weighted
revenues.
CTB's ratios are above internal minimum targets of 11.0 percent for
Tier 1 and total capital ratios and within internal maximum targets of 11.0
times for the assets-to-capital multiple. OSFI's minimum Tier 1 and total
capital ratios for Canadian banks are seven percent and 10 percent,
respectively. OSFI will consider applications for authorized assets-to-capital
multiples in excess of 20 times for institutions that meet certain
requirements. OSFI has currently authorized CTB to maintain a maximum
assets-to-capital multiple of 12.5.
During the first quarter of 2008, CTB complied with the capital
guidelines issued by OSFI under the "International Convergence of Capital
Measurement and Capital Standards - A Revised Framework" (Basel II). For the
comparative period, CTB complied with the capital guidelines issued by OSFI
under the then current Basel I Capital Accord (Basel I).
4.4 Key performance measures
Management also monitors capital and measures our capital position
according to certain key performance measures identified in the table below.March 29, March 31, December
2008 2007 29, 2007
-------------------------------------------------------------------------
Debt ratio
Long-term debt to total capitalization(1) 32.1% 29.2% 32.5%
Coverage ratio
Interest coverage(2) 7.3 times 8.2 times 7.3 times
-------------------------------------------------------------------------
(1) Long-term debt includes current portion and capitalization is based
on book value of debt plus shareholders' equity.
(2) Long-term interest coverage is calculated on a rolling 12-month basis
after annualizing interest on long-term debt issued and retired
during the period. See section 14.0 for additional information on
non-GAAP measures.5.0 Financing
5.1 Credit facilities
At the end of the first quarter of 2008, the Company had committed bank
lines of $1.0 billion in place. The bank lines are provided by 11 domestic and
international banks reflecting the strong support for Canadian Tire and the
GCCT commercial paper program.
The committed bank lines provide flexibility to the Company to support
its growing retail and financial services businesses and help the Company to
better manage seasonal cash flow activity. In addition to the above-noted
lines, Canadian Tire has the following sources of financing:- A $750.0 million shelf prospectus for its MTN Program, $300.0 million
of which was issued successfully in an oversubscribed transaction in
October 2007; and
- An $800.0 million Canadian Tire commercial paper program that has
strong investor demand at cost-effective rates and is fully supported
by the aforementioned committed bank lines.The GCCT commercial paper program has access to $760.0 million of the
total Canadian Tire committed lines and, as of March 29, 2008, GCCT had
achieved compliance with DBRS® Global Liquidity Standards. During the
current quarter, the market conditions surrounding the liquidity of ABCP
continued to experience some volatility; however, GCCT has been successful at
rolling over its commercial paper, albeit at varying spreads. There continues
to be a constrained amount of ABCP that GCCT is able to issue, as investor
demand remains limited. As of March 29, 2008, $132.4 million of GCCT's
commercial paper was outstanding and backed by the bank credit lines.
Debt market conditions
In August and September of 2007, 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 Medium Term Notes (MTN). GCCT
issued five-year MTN in the quarter and continues to refinance its maturing
commercial paper, demonstrating that these market challenges have not affected
our ability to access funding.
In November 2007, Canadian Tire received confirmation from its rating
agencies on its various funding programs, all of which had a stable outlook.
As at March 29, 2008 there has been no change in the ratings.Credit rating summary DBRS S&P
-------------------------------------------------------------------------
Canadian Tire
Commercial paper R-1 (low) A-1 (low)
Debentures A (low) BBB+
Medium-term notes A (low) BBB+
Glacier Credit Card Trust(1)
Asset-backed commercial paper R-1 (high) -----
Asset-backed senior notes AAA AAA
Asset-backed subordinated notes A A
Trend or outlook Stable Stable
-------------------------------------------------------------------------
(1) Asset-backed Series 2002 Senior and Subordinated Notes were
discontinued on January 2, 2008.
Overall, Canadian Tire believes it is in a strong position with respect to
its financial flexibility and is well positioned to support its proposed
growth agenda.
5.2 Funding program
5.2.1 Funding requirements
We fund our capital expenditures, working capital needs, dividend payments
and other financing needs, such as debt repayments and Class A Non-Voting
Share purchases under the NCIB, from a combination of sources. In the first
quarter of 2008, the primary sources of funding were:
- $621 million of cash generated from the net effect of securitization
activities; and
- $158 million of cash arising from the issuance of commercial paper.
5.2.2 Cash and cash equivalents
At March 29, 2008, the Company's cash and cash equivalents totaled
$288.6 million and outstanding commercial paper totaled $158.2 million
compared to a negative cash position of $20 million at March 31, 2007 and
outstanding commercial paper of $21.5 million. This change in cash balances
was largely due to a securitization transaction that historically has occurred
in the fourth quarter being deferred and instead completed during the current
quarter. During the first quarter of 2008, we used cash primarily for the
following:
- $508 million to fund increased operational working capital
requirements; and
- $138 million for the addition of property and equipment.
5.2.3 Working capital
Minimizing our working capital requirements continues to be a long-term
priority in order to maximize cash flow for use in the operations of the
Company. The table below shows the change in the value of our working capital
components at the end of the first quarter of 2008 from the first quarter of
2007.
Comparable working capital components(1)
Increase/
(decrease)
in
March 29, March 31, working
($ in millions) 2008 2007 capital
-------------------------------------------------------------------------
Accounts receivable $ 514.5 $ 576.8 $ (62.3)
Loans receivable 705.3 577.2 128.1
Merchandise inventories 1,021.3 902.9 118.4
Prepaid expenses and deposits 69.3 61.5 7.8
Income taxes (payable)/recoverable 76.3 (3.8) 80.1
Accounts payable and other (1,383.5) (1,184.8) (198.7)
-------------------------------------------------------------------------
$ 73.4
-------------------------------------------------------------------------
(1) 2007 figures have been restated for the implementation of CICA HB
3031 - Inventories as required by the CICA. See section 13.1 for
additional information.The decrease in accounts receivable is largely due to lower Dealer
receivables which is consistent with lower shipment volumes during the
quarter. The increase in loans receivable is due to increases in the mortgage
portfolio balances and the purchase of the line of credit portfolio. The
increase in merchandise inventories is due to the timing of shipments of
domestic and foreign-sourced goods. Accounts payable increased during the
quarter largely due to an increase in deposits at Canadian Tire Bank (CTB),
which stand at approximately $147 million at the end of the first quarter of
2008.
5.2.4 Asset-backed commercial paper
Background
The global disruption in the market experienced in August 2007 which
greatly impacted the Canadian market for third-party ABCP has been addressed
in a formal restructuring proposal. On April 25, 2008, the majority of the
note holders with investments in the affected ABCP voted in favour of the
restructuring proposal. The restructuring provides investors with new
long-term notes to replace the short-term ABCP that is currently illiquid. The
deal, however, includes a controversial clause that would give all players in
the market immunity from lawsuits, something that has caused concern for many
of the ABCP holders and has led to challenges in court that the presiding
judge is still considering. The judge is scheduled to rule on the fairness of
the proposal by the end of May 2008. The Company's $8.9 million of affected
ABCP will be converted into notes that will pay interest at the rate paid on
banker's acceptance notes less 50 basis points until maturity, which is
currently expected to be between 2016 and 2017. The committee responsible for
the restructuring proposal is working to ensure that a secondary market in the
new notes develops so that investors will have an opportunity to sell their
new notes, should they so choose.
Valuation and classification
During 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 of impairment at the time. Due to additional
information provided to investors who hold ABCP through the formal
restructuring proposal, the Company recorded an additional $1.0 million
before-tax provision for impairment of the ABCP during the first quarter of
2008, bringing the total charge for impairment to $2.3 million or 25 percent.
The valuation model used by the Company to estimate the fair value of the
ABCP incorporates discounted cash flows considering the best available
information regarding market conditions and other factors that a market
participant would consider for such investments.
Consistent with the terms of the restructuring proposal, the Company has
classified the remaining balance of this investment in ABCP of $6.6 million as
long-term investments on the Consolidated Balance Sheet.
Assumptions underlying valuation
The valuation assumes a redemption term of approximately nine years
corresponding to the expected maturities of the ABCP held by the Company. As
indicated above, the Company's valuation assumes that the replacement notes
will bear interest rates similar to short-term instruments and that such rates
would be commensurate with the nature of the underlying assets and their
associated cash flows. Assumptions have been made as to the amount of
restructuring and other costs that the Company will bear.
There still remains some uncertainty regarding the value of the
underlying assets, the amount and timing of cash flows and whether a secondary
market can be established for the new notes and this 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. While these changes could positively or
negatively affect the Company's future earnings, it would not be considered
material to the Company's overall financial position, given the relatively
small amount of ABCP held at March 29, 2008.
Impact on debt covenants and ratings
The write-down and reclassification of the Company's investment in ABCP
has had no effect to date on the Company's debt covenants, debt ratings or
compliance with banking regulations governing Financial Services or Canadian
Tire Bank.
As referenced in section 5.1, due to the amount of funds we 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 a material adverse impact on
its business as a result of the current third-party ABCP liquidity issue.5.2.5 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:
March 29, March 31,
($ in millions) 2008 2007
-------------------------------------------------------------------------
Securitized $2,944.5 $2,784.8
Unsecuritized 790.7 653.3
-------------------------------------------------------------------------
Net managed loans receivable $3,735.2 $3,438.1
-------------------------------------------------------------------------Net managed loans receivable continued to increase over the last 12
months as customers' use of the Canadian Tire MasterCard and Canadian Tire Gas
Advantage MasterCard grew. At the end of the first quarter of 2008, net
managed loans receivable were 8.6 percent higher than at the end of the first
quarter of 2007.
Canadian Tire Bank sells co-ownership interests in credit card loans to
GCCT. The Company does not have a controlling interest in GCCT, so we do not
include financial results of GCCT in our Consolidated Financial Statements.
We record the sale of loans receivable in accordance with CICA's
Accounting Guideline 12, "Transfers of Receivables". Please see note 1 in the
Notes to the 2007 Consolidated Financial Statements.
During the first quarter of 2008, the Company sold a portion of its loans
receivable to GCCT in a securitization transaction, receiving approximately
$630 million in net proceeds. The loans receivable were removed from the
Consolidated Balance Sheet.
We expect the continued growth in the number and average balances of
Canadian Tire MasterCard credit card accounts to lead to an increase in total
loans receivable in 2008. 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. 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. Please refer to section 5.1 above for a listing of
GCCT's credit ratings.
The trustee and custodian for GCCT, The Canada Trust Company, manages the
co-ownership interest and acts as agent for, and on behalf of, CTB and GCCT,
as the owners of the co-ownership interests. Computershare Trust Company of
Canada acts as agent for The Canada Trust Company in its capacity as
custodian. Pursuant to an asset purchase agreement dated February 26, 2007,
all rights and obligations of The Canada Trust Company as custodian will be
assigned to Computershare Trust Company of Canada once the legal requirements
have been fulfilled. BNY Trust Company of Canada acts as indenture trustee
with respect to GCCT and manages the security interests of the holders of the
senior and subordinated notes issued by GCCT. We are currently not aware of
any events, commitments, trends or uncertainties that may have a negative
impact on our arrangement with GCCT.
6.0 Equity
The book value of Common and Class A Non-Voting Shares at the end of the
first quarter of 2008 was $39.23 per share compared to $34.89 at the end of
the first quarter of 2007.
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. In addition, the
Company may purchase additional Class A Non-Voting Shares if the Board
determines, after consideration of market conditions and the Company's
financial flexibility and investment opportunities, that a purchase of
additional Class A Non-Voting Shares is an appropriate means of enhancing the
value of the remaining Class A Non-Voting Shares.
On February 7, 2008, we announced our intention to initiate a NCIB to
purchase up to 3.6 million of the issued and outstanding Class A Non-Voting
Shares over the 12-month period ending February 18, 2009.
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 0.5 million Class A Non-Voting Shares were
purchased in 2007 under the previous NCIB.Shares outstanding
March 29, March 31,
2008 2007
-------------------------------------------------------------------------
Class A Non-Voting Shares (CTC.A)
Shares outstanding at beginning of year 78,048,062 78,047,456
Shares issued under plans(1) 103,395 91,765
Shares purchased under NCIB (100,000) (90,000)
-------------------------------------------------------------------------
Shares outstanding at end of quarter 78,051,457 78,049,221
Common Shares (CTC)
Shares outstanding at beginning and end
of the quarter 3,423,366 3,423,366
-------------------------------------------------------------------------
(1) We issue shares under various employee profit sharing and share
purchase plans, and the dividend reinvestment plan.Dividends
Dividends of approximately $17.0 million were declared on Common and
Class A Non-Voting Shares in the first quarter of 2008 compared to dividends
of $15.1 million in the first quarter of 2007. The increase in dividends
declared reflected the Board of Directors' decision in February 2008 to
increase the annual dividend rate by 13.5 percent from $0.74 per share to
$0.84 per share. The first quarterly dividend at the 2008 rate was declared on
March 6, 2008 in the amount of $0.21 per share payable on June 1, 2008 to
shareholders of record as of April 30, 2008.
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 include gains and losses on the ordinary
course disposition of property and equipment.7.0 Investing activities
7.1 Q1 2008 Capital expenditures program
Canadian Tire's capital expenditures totaled $113 million in the first
quarter of 2008 (as disclosed in the Consolidated Financial Statements of Cash
Flows, see Note 11), approximately 21 percent higher than the $93 million
spent in the first quarter of 2007. These 2008 capital expenditures were
comprised of:
- $66 million for real estate projects, including $65 million
associated with the rollout of CTR's Concept 20/20 stores;
- $19 million for the Eastern Canada distribution centre;
- $8 million for information technology; and
- $20 million for other purposesOverall, capital investments for real estate projects were up
significantly year-over-year in 2008, primarily due to the acceleration of the
Concept 20/20 store rollout, investment in the construction of an Eastern
Canada distribution centre and other capital required for certain larger urban
store developments.7.2 2008 Capital expenditures plan
The 2008 capital plan is for net capital expenditures in the range of $430
million to $455 million (including the impact of $145 million in proceeds we
expect to receive from the sale and leaseback of three CTR urban store
developments during the year). The 2008 gross capital plan is comprised of the
following, which total $588 million:
- $416 million for real estate projects, including $200 million
associated with the rollout of CTR's Concept 20/20 stores;
- $ 71 million for the Eastern Canada distribution centre;
- $ 78 million for information technology; and
- $ 23 million for other purposes
8.0 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:
- U.S.-based subsidiaries hold highly rated short-term securities and
loans to the Company and its wholly-owned Canadian subsidiaries. The
capital and earnings of these U.S.-based subsidiaries arose from
investments made to offset net operating losses incurred by U.S.
retail operations closed in the 1980s and 1990s and from the
reinsurance of risks relating to certain insurance products marketed
to customers of Financial Services and other reinsurance activities;
- 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 2007, 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;
and
- 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 and its wholly-owned Canadian subsidiaries.9.0 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 have reassessed and are also expected to
issue further reassessments 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 $259.0 million. Although the Company will appeal these
reassessments, current tax legislation requires the Company to remit to the
CRA and its provincial counterparts approximately $159.9 million, of which
$154.0 million had been remitted by the end of the current period.
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.
10.0 Off-balance sheet arrangements
10.1 Glacier Credit Card Trust
As noted earlier, GCCT was formed to buy our credit card loans and it
issues debt to third-party investors to fund its credit card loans purchases.
Refer to sections 5.1 and 5.2.4 of this MD&A for additional information on
GCCT.
10.2 Trust financing for Dealers
A financing program has been established to provide an efficient and
cost-effective way for Dealers to access the majority of the financing they
require for their store operations. Refer to MD&A section 8.2 of our 2007
Financial Report for additional information on this program.
10.3 Bank financing for Dealers and PartSource franchisees
We have guaranteed the bank debt of some Dealers and some PartSource
franchisees. Refer to MD&A section 8.3 of our 2007 Financial Report for
additional information on this program.
10.4 Derivative financial instruments
We use derivative financial instruments to manage our exposure to changes
in interest rates and foreign currency exchange rates. We also use equity
derivative contracts to hedge certain future stock-based compensation
expenses. We do not use hedging to speculate, but rather as a risk management
tool. Refer to MD&A section 8.4 of our 2007 Financial Report for additional
information on derivative financial instruments.
11.0 Enterprise risk management
To preserve and enhance shareholder value, the Company approaches the
management of risk strategically through its Enterprise Risk Management (ERM)
framework. Introduced in 2003, the ERM framework sets out principles and tools
for identifying, evaluating, prioritizing and managing risk effectively and
consistently across the Company.
The ERM framework and the identification of principle risks that the
Company manages on an ongoing basis is described in detail in section 9.0 of
the MD&A in our 2007 Financial Report.
Management reviews risks on an ongoing basis and did not identify any new
principal risks during the first quarter of 2008.11.1 Operational risks
In addition to the Principal Risks identified above, operational business
risks that may cause actual results or events to differ materially from those
forecasted in this MD&A include:
- expansion activity planned for Mark's, PartSource, Petroleum and CTR,
(the retail businesses), as well as the associated supply chain
infrastructure, could be affected by weather conditions that could
impact the timing of construction;
- 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 and access sufficient funds from capital markets
to finance the development of properties could also impact the timing
of construction;
- expansion activity planned for the retail businesses, the associated
supply chain infrastructure and Financial Services could be
negatively affected by the Company's ability to access sufficient
funds, in a cost-effective manner, to finance the building projects
due to difficulties experienced in the capital markets;
- expansion activity for CTR could also be affected by the ability of
our Dealers to secure financing through the Trusts referenced in
section 10.0 or through other means;
- 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 currency exchange rates could impact cross-border
shopping patterns and employment levels in the manufacturing and
export sectors and, consequently, negatively impact consumer spending
practices;
- disruptions in the supply of gasoline could affect Petroleum's
revenue and earnings;
- the earnings of 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 laws 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.
12.0 Contractual obligations
Contractual obligations due by period
In the
remaining
nine In years In years
months 2009 - 2011 - After
($ in millions) Total of 2008 2010 2012 2012
-------------------------------------------------------------------------
Long-term debt $1,472.3 $ 152.4 $ 454.8 $ 15.0 $ 850.1
Capital lease obligations 33.5 3.5 8.2 8.6 13.2
Operating leases 1,919.8 155.3 384.4 319.5 1,060.6
Purchase obligations 882.4 825.2 46.0 10.1 1.1
Other obligations 17.5 3.9 6.4 2.8 4.4
-------------------------------------------------------------------------
Total contractual
obligations $4,325.5 $1,140.3 $ 899.8 $ 356.0 $1,929.4
-------------------------------------------------------------------------
13.0 Changes in accounting policies
13.1 Merchandise inventories
Effective, December 30, 2007 (the first day of the Company's 2008 fiscal
year), the Company implemented, on a retrospective basis with restatement, the
new Canadian Institute of Chartered Accountants (CICA) Handbook Section 3031 -
Inventories, which is effective for interim and annual financial statements
for fiscal years beginning on or after January 1, 2008.
This 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 are 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 actual
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
write-downs that is recognized as a reduction of expenses.
In order to correspond with the new standard, the Company's new policy
states that merchandise inventories are carried at the lower of cost and net
realizable value, with cost being determined using the weighted average cost
method.
As a result of the retrospective implementation of this new standard, the
cumulative impact on previously reported balances on the following dates is as
follows:Increase/(Decrease)
-------------------------------------------------------------------------
December 29, March 31, December
($ in millions) 2007 2007 30, 2006
-------------------------------------------------------------------------
Retained earnings $ 14.2 $ 11.3 $ 20.1
Inventories 22.0 16.6 31.5
Income taxes recoverable (5.8) - -
Future income tax assets (2.0) (5.3) (5.3)
Accounts payable and other - (0.8) 0.6
Income taxes payable - 0.8 5.5
-------------------------------------------------------------------------In addition, the impact of the retrospective impact on net earnings for
the 13 weeks ended March 31, 2007 was a reduction of $8.8 million.
13.2 Capital management disclosures
Effective December 30, 2007, the Company implemented the new CICA
Handbook Section 1535 - Capital Disclosures which is effective for fiscal
years beginning on or after October 1, 2007. The new standard requires
entities to disclose information about their objectives, policies and
processes for managing capital, as well as their compliance with any
externally imposed capital requirements. See section 4.0 for additional
information. The adoption of this new standard does not require any changes to
the Company's accounting, but does require additional note disclosure.
13.3 Financial instruments
Effective, December 30, 2007, the Company implemented the new CICA
Handbook Section 3862 -Financial Instruments - Disclosures and CICA Handbook
Section 3863 - Financial Instruments - Presentation. These standards replace
the existing CICA Handbook Section 3861 - Financial Instruments - Disclosure
and Presentation. They also require increased disclosures regarding the risks
associated with financial instruments and how these risks are managed. These
new standards carry forward the presentation standards for financial
instruments and non-financial derivatives but provide additional guidance for
the classification of financial instruments, from the perspective of the
issuer, between liabilities and equity. The adoption of these new standards
does not require any changes to the Company's accounting, but does require
additional note disclosure. See note 9 in the Notes to the Consolidated
Financial Statements for additional information.
13.4 International Financial Reporting Standards
In February 2008, the CICA announced that Canadian generally accepted
accounting principles (GAAP) for publicly accountable enterprises will be
replaced by International Financial Reporting Standards (IFRS) for fiscal
years beginning on or after January 1, 2011. Companies will be required to
provide IFRS comparative information for the previous fiscal year.
Accordingly, the conversion from Canadian GAAP to IFRS will be applicable to
the Company's reporting for the first quarter of 2011 for which the current
and comparative information will be prepared under IFRS. The Company expects
the transition to IFRS to impact accounting, financial reporting, IT systems
and processes as well as certain contractual arrangements. The Company is
currently assessing the impact of the transition to IFRS. Training and
additional resources will be engaged to ensure the timely conversion to IFRS.
13.5 Goodwill and intangible assets
In February 2008, the CICA issued CICA Handbook Section 3064 - Goodwill
and Intangible Assets, which replaces CICA Handbook Section 3062 - Goodwill
and Other Intangible Assets and CICA Handbook Section 3450 - Research and
Development.
This new standard provides guidance on the recognition, measurement,
presentation and disclosure of goodwill and intangible assets.
As this standard applies to interim and annual financial statements for
fiscal years beginning on or after October 1, 2008, the Company will adopt
this new standard effective January 4, 2009 (the first day of the Company's
2009 fiscal year) retrospectively with a restatement of prior periods.
We are currently evaluating the potential impact of this new standard on
our financial statements for 2009 and will adjust our systems and processes as
necessary to comply with this new standard.14.0 Non-GAAP measures
The following measures included in this MD&A do not have a standardized
meaning under Canadian generally accepted accounting principles (GAAP) and may
not be comparable to similar measures presented by other companies:
- EBITDA (earnings before interest, income taxes, depreciation and
amortization);
- adjusted earnings; and
- same store salesEBITDA
With the exception of Financial Services, we consider EBITDA 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 is also commonly regarded as an indirect
measure of operating cash flow, a significant indicator of success for many
businesses.
A reconciliation of EBITDA to the most comparable GAAP measure (earnings
before income taxes) is provided as follows:Reconciliation of EBITDA to GAAP measures(1)
($ in millions) Q1 2008 Q1 2007(2)
-------------------------------------------------------------------------
EBITDA
CTR $ 99.0 $ 93.1
Financial Services 63.5 46.1
Petroleum 9.0 6.5
Mark's 3.0 4.5
Eliminations - (5.8)
-------------------
Total EBITDA $ 174.5 $ 144.4
-------------------
Less: Depreciation and amortization expense
CTR $ 42.0 $ 36.8
Financial Services 3.2 3.3
Petroleum 4.0 4.0
Mark's 5.4 4.3
-------------------
Total depreciation and amortization expense $ 54.6 $ 48.4
-------------------
Interest expense
CTR $ 13.4 $ 18.3
Financial Services 6.7 (2.6)
Mark's 1.0 0.4
Eliminations - (5.8)
-------------------
Total interest expense $ 21.1 $ 10.3
-------------------------------------------------------------------------
Earnings (loss) before income taxes
CTR $ 43.6 $ 38.0
Financial Services 53.6 45.4
Petroleum 5.0 2.5
Mark's (3.4) (0.2)
-------------------
Total earnings before income taxes $ 98.8 $ 85.7
-------------------------------------------------------------------------
(1) Differences may occur due to rounding.
(2) 2007 figures have been restated for adoption of CICA HB 3031 -
Inventories as required by the CICA. See section 13.1 for additional
information.References to adjusted earnings
In several places in this MD&A, we refer to adjusted pre-tax and
after-tax earnings before the impact of non-operating items. Historically,
non-operating items have included the net effect of securitization activities
and dispositions of surplus property and equipment. The timing and amount of
gains and losses from these items are not consistent from quarter to quarter.
We believe the adjusted figures allow for a clearer assessment of earnings for
each of our businesses and provide a more meaningful measure of our
consolidated and segmented operating results.
Same store sales
Same store sales is the metric used by management, and most commonly used
in the retail industry, to compare retail sales growth in a more consistent
manner across the industry. CTR's same store sales includes sales from all
stores that have been open for more than 53 weeks and therefore allows for a
more consistent comparison to other stores open during the period and to
results in the prior year.
15.0 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
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 March 29,
2008 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting. Management has
determined that no material changes occurred in the first quarter.Commitment to disclosure and investor communication
Canadian Tire strives to maintain a high standard of disclosure and
investor communication and has been recognized as a leader in financial
reporting practices. In many cases, the Company's disclosure practices exceed
the requirements of current legislation. 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; and
- 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.2008 FIRST QUARTER
INTERIM REPORT FINANCIALS
Consolidated Statements of Earnings (Unaudited)
-------------------------------------------------------------------------
13 weeks ended,
March 29, March 31,
(Dollars in millions except per share amounts) 2008 2007
-------------------------------------------------------------------------
(Restated -
Notes 2 and 14)
Gross operating revenue $ 1,825.3 $ 1,737.7
-------------------------------------------------------------------------
Operating expenses
Cost of merchandise sold and all other
operating expenses except for the
undernoted items 1,644.5 1,587.5
Net interest expense (Note 6) 21.1 10.3
Depreciation and amortization 54.6 48.4
Employee Profit Sharing Plan 6.3 5.8
-------------------------------------------------------------------------
Total operating expenses 1,726.5 1,652.0
-------------------------------------------------------------------------
Earnings before income taxes 98.8 85.7
Income taxes 32.1 30.0
-------------------------------------------------------------------------
Net earnings $ 66.7 $ 55.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted earnings per share (Note 5) $ 0.82 $ 0.68
-------------------------------------------------------------------------
Weighted average number of Common and
Class A Non-Voting Shares outstanding 81,518,607 81,503,488
-------------------------------------------------------------------------
Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------------------------------------------
13 weeks ended,
March 29, March 31,
(Dollars in millions) 2008 2007
-------------------------------------------------------------------------
(Restated -
Notes 2 and 14)
Cash generated from (used for):
Operating activities
Net earnings $ 66.7 $ 55.7
Items not affecting cash
Depreciation and amortization 54.6 48.5
Other 20.8 (9.2)
Net provision for loans receivable (Note 3) 17.3 16.1
Employee future benefits expense (Note 4) 1.6 1.7
Impairment of other long-term investments
(Note 10) 1.0 -
Loss (gain) on disposals of property and
equipment (3.8) 0.6
Securitization loans receivable (12.2) (13.4)
Gain on sales of loans receivable (Note 3) (24.4) (21.8)
-------------------------------------------------------------------------
121.6 78.2
-------------------------------------------------------------------------
Changes in other working capital components (508.2) (874.7)
-------------------------------------------------------------------------
Cash used for operating activities (386.6) (796.5)
-------------------------------------------------------------------------
Investing activities
Additions to property and equipment (138.3) (125.6)
Purchases of stores (15.4) (3.2)
Long-term receivables and other assets (11.3) 16.3
Other (0.9) (0.6)
Proceeds on disposition of property and equipment 14.9 0.6
Investment in loans receivable, net 168.4 157.5
Net securitization of loans receivable 620.6 (16.9)
-------------------------------------------------------------------------
Cash generated from investing activities 638.0 28.1
-------------------------------------------------------------------------
Financing activities
Commercial paper 158.2 21.5
Other 0.5 -
Repayment of long-term debt (1.0) (0.8)
Dividends (15.0) (13.5)
-------------------------------------------------------------------------
Cash generated from financing activities 142.7 7.2
-------------------------------------------------------------------------
Cash generated (used) in the period 394.1 (761.2)
Cash and cash equivalents, beginning of period (105.5) 741.3
-------------------------------------------------------------------------
Cash and cash equivalents, end of period
(Note 7) $ 288.6 $ (19.9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income (Unaudited)
-------------------------------------------------------------------------
13 weeks ended,
March 29, March 31,
(Dollars in millions) 2008 2007
-------------------------------------------------------------------------
(Restated -
Note 2)
Net earnings $ 66.7 $ 55.7
Other comprehensive income (loss), net of taxes
Gain/(loss) on derivatives designated as cash
flow hedges (net of tax of $9.7 (2007 -
$(1.8))) 19.8 (3.4)
Reclassification to non-financial asset of
(gain)/loss on derivatives designated
as cash flow hedges (net of tax of $7.5
(2007 - $(4.8))) 15.5 (9.0)
Reclassification to earnings of (gain)/loss on
derivatives designated as cash flow hedges
(net of tax of $1.5 (2007 - $(0.7))) 3.0 (1.4)
-------------------------------------------------------------------------
Other comprehensive income (loss) 38.3 (13.8)
-------------------------------------------------------------------------
Comprehensive income $ 105.0 $ 41.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
-------------------------------------------------------------------------
13 weeks ended,
March 29, March 31,
(Dollars in millions) 2008 2007
-------------------------------------------------------------------------
(Restated -
Note 2)
Share capital
Balance, beginning of period $ 700.7 $ 702.7
Transactions, net 1.2 -
-------------------------------------------------------------------------
Balance, end of period $ 701.9 $ 702.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contributed surplus
Balance, beginning of period $ 2.3 $ 0.1
Transactions, net (0.8) 0.1
-------------------------------------------------------------------------
Balance, end of period $ 1.5 $ 0.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings
Balance, beginning of period as previously
reported $ 2,440.9 $ 2,083.7
Transitional adjustment on adoption of new
accounting policies - Inventory (Note 2) 14.2 20.1
-------------------------------------------------------------------------
Balance, beginning of period as restated 2,455.1 2,103.8
Net earnings for the period 66.7 55.7
Dividends (17.0) (15.1)
-------------------------------------------------------------------------
Balance, end of period $ 2,504.8 $ 2,144.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Balance, beginning of period $ (50.0) $ 8.6
Other comprehensive income (loss) for the
period 38.3 (13.8)
-------------------------------------------------------------------------
Balance, end of period $ (11.7) $ (5.2)
-------------------------------------------------------------------------
Retained earnings and accumulated other
comprehensive income (loss) $ 2,493.1 $ 2,139.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Balance Sheets (Unaudited)
-------------------------------------------------------------------------
(Dollars in millions) March 29, March 31, December 29,
As at 2008 2007 2007
-------------------------------------------------------------------------
(Restated - (Restated -
Note 2) Note 2)
ASSETS
Current assets
Cash and cash equivalents
(Note 7) $ 288.6 $ - $ -
Accounts receivable 514.5 576.8 707.1
Loans receivable (Note 3) 705.3 577.2 1,486.1
Merchandise inventories (Note 2) 1,021.3 902.9 778.7
Income taxes recoverable 76.3 - 53.2
Prepaid expenses and deposits 69.3 61.5 29.5
Future income taxes 57.7 36.5 75.7
-------------------------------------------------------------------------
Total current assets 2,733.0 2,154.9 3,130.3
-------------------------------------------------------------------------
Long-term receivables and other
assets (Note 3) 246.9 255.6 231.2
Other long-term investments, net
(Note 10) 6.6 - 7.6
Goodwill 62.4 49.6 51.8
Intangible assets 52.4 52.4 52.4
Property and equipment 3,336.0 2,925.3 3,283.6
-------------------------------------------------------------------------
Total assets $ 6,437.3 $ 5,437.8 $ 6,756.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Bank indebtedness (Note 7) $ - $ 19.9 $ 105.5
Commercial paper 158.2 21.5 -
Accounts payable and other 1,383.5 1,184.8 1,847.8
Income taxes payable - 3.8 -
Current portion of long-term debt 156.7 2.9 156.3
-------------------------------------------------------------------------
Total current liabilities 1,698.4 1,232.9 2,109.6
-------------------------------------------------------------------------
Long-term debt 1,355.5 1,166.5 1,341.8
Future income taxes 71.8 70.6 71.8
Other long-term liabilities 115.1 125.7 125.6
-------------------------------------------------------------------------
Total liabilities 3,240.8 2,595.7 3,648.8
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 5) 701.9 702.7 700.7
Contributed surplus 1.5 0.2 2.3
Accumulated other comprehensive
loss (11.7) (5.2) (50.0)
Retained earnings 2,504.8 2,144.4 2,455.1
-------------------------------------------------------------------------
Total shareholders' equity 3,196.5 2,842.1 3,108.1
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 6,437.3 $ 5,437.8 $ 6,756.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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, 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 29, 2007 contained in our 2007 Annual 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 (including goodwill), employee
benefits, product warranties, inventory provisions, amortization,
uncollectible loans, environmental reserves, asset retirement
obligations, financial instruments, and the liability for the
Company's loyalty programs.
2. Change in 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 29, 2007, except
as noted below.
Merchandise inventories
Effective, December 30, 2007 (the first day of the Company's 2008
fiscal year), the Company implemented, on a retrospective basis with
restatement, the new Canadian Institute of Chartered Accountants
(CICA) Handbook Section 3031 - Inventories, which is effective for
interim and annual financial statements for fiscal years beginning on
or after January 1, 2008.
This 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 are 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 actual 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 write-downs that is recognized as a
reduction of expenses.
The Company's new policy to correspond with the new standard is as
follows:
Merchandise inventories are carried at the lower of cost and net
realizable value, with cost being determined as weighted average
cost.
As a result of the retrospective implementation of this new standard,
the cumulative impact on previously reported balances on the
following dates is as follows:
(Dollars in millions) Increase/(Decrease)
------------------------------
December March 31, December
29, 2007 2007 30, 2006
------------------------------
Retained earnings $ 14.2 $ 11.3 $ 20.1
Inventories 22.0 16.6 31.5
Income taxes recoverable (5.8) - -
Future income tax assets (2.0) (5.3) (5.3)
Accounts payable and other - (0.8) 0.6
Income taxes payable - 0.8 5.5
------------------------------
In addition, the retrospective impact on net earnings for the 13
weeks ended March 31, 2007 was a reduction of $8.8 million, or $0.11
per share.
Included in "cost of merchandise sold and all other operating
expenses except for the undernoted items" is $1,228.7 million (2007 -
$1,191.5 million) of inventory recognized as an expense, which
included $16.8 million (2007 - $11.7 million) of write-downs of
inventory as a result of net realizable value being lower than cost.
Inventory writedowns recognized in previous years and reversed in the
current quarter and the comparative quarter were insignificant.
Financial Instruments
Effective, December 30, 2007, the Company implemented the new CICA
Handbook Section 3862 "Financial Instruments - Disclosures" and CICA
Handbook Section 3863 "Financial Instruments - Presentation". These
standards replace the existing CICA Handbook Section 3861 "Financial
Instruments - Disclosure and Presentation". They also require
increased disclosures regarding the risks associated with financial
instruments and how these risks are managed. These new standards
carry forward the presentation standards for financial instruments
and non-financial derivatives but provide additional guidance for the
classification of financial instruments, from the perspective of the
issuer, between liabilities and equity. The adoption of these new
standards does not require any changes to the Company's accounting,
but does require additional note disclosure, which is included in
note 9.
Capital Management Disclosures
Effective, December 30, 2007, the Company implemented the new CICA
Handbook Section 1535 "Capital Disclosures" which is effective for
fiscal years beginning on or after October 1, 2007. The new standard
requires entities to disclose information about their objectives,
policies and processes for managing capital, as well as their
compliance with any externally imposed capital requirements. The
adoption of this new standard does not require any changes to the
Company's accounting, but does require additional note disclosure,
which is included in note 8.
Future accounting changes
Goodwill and Intangible Assets
In February 2008, the CICA issued CICA HB 3064 - Goodwill and
Intangible Assets, which replaces CICA HB 3062 - Goodwill and Other
Intangible Assets as well as CICA HB 3450 - Research and Development.
This new standard provides guidance on the recognition, measurement,
presentation and disclosure of goodwill and intangible assets.
As this standard applies to interim and annual financial statements
for fiscal years beginning on or after October 1, 2008, the Company
will adopt this new standard effective January 4, 2009 (the first day
of the Company's 2009 fiscal year) retrospectively with a restatement
of prior periods.
The Company is evaluating the potential impact of this new standard
on the financial statements for 2009 and will adjust its systems and
processes as necessary to comply with this new standard.
International Financial Reporting Standards (IFRS)
In February 2008, the CICA announced that Canadian generally accepted
accounting principles (GAAP) for publicly accountable enterprises
will be replaced by International Financial Reporting Standards
(IFRS) for fiscal years beginning on or after January 1, 2011.
Companies will be required to provide IFRS comparative information
for the previous fiscal year. Accordingly, the conversion from
Canadian GAAP to IFRS will be applicable to the Company's reporting
for the first quarter of 2011 for which the current and comparative
information will be prepared under IFRS. The Company is currently
assessing the impact of the transition to IFRS.
3. Loans Receivable
The Company sells pools of loans receivable (the Loans) to third
party trusts (the Trusts) in transactions known as securitizations.
The transactions are accounted for as sales in accordance with
Accounting Guideline 12 (AcG-12), Transfers of Receivables, 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"), which are components of retained
interests. The interest-only strip represents the present value of
the expected spread to be earned over the collection period on the
loans receivable sold. The expected spread is equal to the yield
earned, less the net write-offs and interest expense on the loans
receivable sold. The seller's interest and securitization reserve
provide the 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 interest-only strip, the seller's interest and the
securitization reserve.
The proceeds of the sale are deemed to be the cash received,
interest-only strip and securitization reserve, less any servicing
obligation assumed. The servicing liability represents the Company's
estimated cost of servicing the securitized loans and is amortized
over the life of the securitized loans. 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 Trusts have not been consolidated in these financial statements
because either they meet the criteria for a qualified special purpose
entity (which are exempt from consolidation) or the Company is not
the primary beneficiary.
Quantitative information about loans managed and securitized by the
Company is as follows:
Average balances
Total principal amount for the
(Dollars in millions) of receivables as at(1) 13 weeks ended
------------------------------ -------------------
March 29, March 31, December March 29, March 31,
2008 29, 2007 2007 2008 2007
---------- --------- --------- --------- ---------
Total net managed
credit card loans $3,526.4 $3,229.4 $3,719.1 $3,576.7 $3,268.1
Credit card loans
sold (2,897.5) (2,679.0) (2,271.5) (2,585.0) (2,691.0)
---------- --------- --------- --------- ---------
Credit card loans
held 628.9 550.4 1,447.6 991.7 577.1
Total net managed
personal loans(2) 132.2 205.5 143.6 136.4 214.1
Personal loans sold (47.1) (105.8) (59.4) (53.1) (115.2)
---------- --------- --------- --------- ---------
Personal loans held 85.1 99.7 84.2 83.3 98.9
Total net managed
mortgage loans(3) 48.4 3.2 35.4 42.9 2.0
---------- --------- --------- --------- ---------
Total net managed
line of credit
loans(4) 28.2 - - 24.0 -
---------- --------- --------- --------- ---------
Total loans receivable 790.6 653.3 1,567.2 $1,141.9 $ 678.0
--------- ---------
--------- ---------
Less: long-term
portion(5) (85.3) (76.1) (81.1)
---------- --------- ---------
Current portion of
loans receivable $ 705.3 $ 577.2 $1,486.1
---------- --------- ---------
---------- --------- ---------
(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.
(3) Mortgage loans are issued for terms of up to ten years, have
fixed or variable interest rates, are secured and include a mix
of both high and low ratio loans. High ratio loans are fully
insured and low ratio loans are partially insured.
(4) Line of credit portfolio was purchased in January 2008 for
$29.6 million.
(5) The long-term portion of loans is included in "Long-term
receivables and other assets".
Net credit losses for the owned portfolio for the 13 weeks ended
March 29, 2008 were $17.3 million (2007 - $16.1 million). Net credit
losses for the total managed portfolio for the 13 weeks ended March
29, 2008 were $62.3 million (2007 - $50.3 million).
4. Employee Future Benefits
The net employee future benefit expense for the 13 weeks ended
March 29, 2008 was $1.6 million (2007 - $1.7 million).
5. Share Capital
March 29, March 31, December
(Dollars in millions) 2008 2007 29, 2007
--------- --------- ---------
Authorized
3,423,366 Common Shares
100,000,000 Class A Non-Voting Shares
Issued
3,423,366 Common Shares (March 31,
2007 - 3,423,366) $ 0.2 $ 0.2 $ 0.2
78,051,457 Class A Non-Voting Shares
(March 31, 2007 - 78,049,221) 701.7 702.5 700.5
--------- --------- ---------
$ 701.9 $ 702.7 $ 700.7
--------- --------- ---------
--------- --------- ---------
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 shares with any
remainder allocated to retained earnings.
The following transactions occurred with respect to Class A Non-
Voting Shares:
13 weeks ended 13 weeks ended
(Dollars in millions) March 29, 2008 March 31, 2007
--------------------- ---------------------
Number $ Number $
----------- --------- ----------- ---------
Shares outstanding at
the beginning of the
period 78,048,062 700.5 78,047,456 702.5
Issued 103,395 6.7 91,765 6.5
Repurchased (100,000) (6.3) (90,000) (6.5)
Excess of repurchase
price over issue price - 0.8 - -
----------- --------- ----------- ---------
Shares outstanding at
the end of the period 78,051,457 701.7 78,049,221 702.5
----------- --------- ----------- ---------
----------- --------- ----------- ---------
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 no longer
have a dilutive impact on the average number of shares outstanding.
6. Segmented Information - Statement of Earnings
---------------------------------------------------------------------
13 weeks 13 weeks
ended ended
March 29, March 31,
2008 2007
(Restated
- Notes
(Dollars in millions) 2 and 14)
---------------------------------------------------------------------
Gross operating revenue
CTR $1,071.3 $1,070.9
Financial Services 208.7 176.1
Petroleum 422.8 362.8
Mark's 147.5 152.1
Eliminations
Total gross operating revenue (25.0) (24.2)
-------------------
$1,825.3 $1,737.7
---------------------------------------------------------------------
Earnings (loss) before income taxes
CTR $ 43.6 $ 38.0
Financial Services 53.6 45.4
Petroleum 5.0 2.5
Mark's (3.4) (0.2)
-------------------
Total earnings before income taxes 98.8 85.7
Income taxes 32.1 30.0
-------------------
Net earnings $ 66.7 $ 55.7
---------------------------------------------------------------------
Net Interest expense(1)
CTR $ 13.4 $ 18.3
Financial Services 6.7 (2.6)
Petroleum - -
Mark's 1.0 0.4
Eliminations - (5.8)
-------------------
Total interest expense $ 21.1 $ 10.3
---------------------------------------------------------------------
Depreciation and amortization expense
CTR $ 42.0 $ 36.8
Financial Services 3.2 3.3
Petroleum 4.0 4.0
Mark's 5.4 4.3
-------------------
Total depreciation and amortization expense $ 54.6 $ 48.4
---------------------------------------------------------------------
(1) Net interest expense includes interest on short term and long
term debt, offset by passive interest income. Long-term interest
for the 13 weeks ended March 29, 2008 was $20.7 million (2007 -
$15.7 million).
Segmented Information - Total Assets
---------------------------------------------------------------------
March 29, March 31, December
2008 2007 29, 2007
(Restated (Restated
(Dollars in millions) - Notes - Notes
2 and 14) 2 and 14)
---------------------------------------------------------------------
CTR $5,631.5 $4,557.9 $5,724.5
Financial Services 1,346.8 1,310.2 1,852.0
Petroleum 256.7 244.7 573.4
Mark's 507.2 450.8 470.3
Eliminations (1,304.9) (1,125.8) (1,863.3)
-----------------------------
Total $6,437.3 $5,437.8 $6,756.9
---------------------------------------------------------------------
7. Cash and Cash Equivalents (Bank Indebtedness)
The components of cash and cash equivalents (bank indebtedness) are:
March 29, March 31, December
(Dollars in millions) 2008 2007 29, 2007
--------- --------- ---------
Cash (bank overdraft) $ (62.9) $ (103.9) $ 71.8
Line of credit borrowings - - (316.8)
Short-term investments 351.5 84.0 139.5
--------- --------- ---------
Cash and cash equivalents (bank
indebtedness) $ 288.6 $ (19.9) $ (105.5)
--------- --------- ---------
--------- --------- ---------
8. Capital Management Disclosures
The Company's objectives when managing capital are:
- minimizing the after-tax cost of capital; and
- maintaining flexibility in capital structure to ensure the ongoing
ability to execute the Strategic Plan;
Management includes the following items in its definition of capital:
March 29, % March 31, %
(Dollars in millions) 2008 of total 2007 of total
------------------- -------------------
Current portion of long-term
debt $ 156.7 3.3% $ 2.9 0.1%
Long-term debt 1,355.5 28.8% 1,166.5 29.1%
Other long-term liabilities(1) - - 13.0 0.3%
Share capital 701.9 14.9% 702.7 17.5%
Contributed surplus 1.5 0.1% 0.2 0.1%
Components of accumulated other
comprehensive income(2) (11.3) (0.2)% (7.0) (0.2)%
Retained earnings 2,504.8 53.1% 2,144.4 53.1%
------------------- -------------------
Net capital under management $4,709.1 100.0% $4,022.7 100.0%
------------------- -------------------
------------------- -------------------
December %
29, 2007 of total
-------------------
Current portion of long-term
debt $ 156.3 3.4%
Long-term debt 1,341.8 28.9%
Other long-term liabilities(1) 10.6 0.2%
Share capital 700.7 15.0%
Contributed surplus 2.3 0.1%
Components of accumulated other
comprehensive income(2) (8.5) (0.2)%
Retained earnings 2,455.1 52.6%
-------------------
Net capital under management $4,658.3 100.0%
-------------------
-------------------
(1) Long-term liabilities that are derivative or hedge instruments
related to capital items only.
(2) Components of other comprehensive income relating to capital
items only.
The Company has in place various policies which it uses to manage
capital, including the leverage and liquidity policy and the
securities and derivatives policy. As part of the overall management
of capital, management's Financial Risk Management Committee and the
Audit Committee of the Board review the Company's compliance with and
performance against these policies.
In addition, management's Financial Risk Management Committee and the
Audit Committee of the Board perform periodic reviews of the policies
to ensure they remain consistent with the risk tolerance acceptable
to the Company and with current market trends and conditions.
To assess its effectiveness in managing capital, management monitors
certain key ratios to ensure they are within targeted ranges.
March 29, March 31, December
2008 2007 29, 2007
------------------------------
Debt ratio
Long-term debt to total
capitalization(1) 32.1% 29.2% 32.5%
Coverage ratio
Interest coverage(2) 7.3 times 8.2 times 7.3 times
------------------------------
(1) Long-term debt includes current portion and capitalization is
based on book value of debt plus shareholders' equity.
(2) Long-tem interest coverage is calculated on a rolling 12-month
basis after annualizing interest on long-term debt issued and
retired during the period.
As part of existing debt agreements, two key financial covenants are
monitored on an on-going basis by management to ensure compliance
with the agreements. The key covenants are as follows:
- net tangible assets coverage - calculated as:
- total assets less intangible assets, current liabilities
(excluding current portion of long-term debt), and liability
for employee future benefits
- divided by long-term debt (including current portion of
long-term debt)
- limitations on surplus available for distribution to shareholders
- the Company is restricted from distributions (including
dividends and redemptions or purchases of shares) exceeding its
accumulated net income over a defined period.
The Company was in compliance with these covenants during the period.
The Company's wholly-owned subsidiary, Canadian Tire Bank (the
"Bank") manages its capital under guidelines established by the
Office of the Superintendent of Financial Institutions Canada
("OSFI"). The regulatory capital guidelines measure capital in
relation to credit, market and operational risks. The Bank has
various capital policies, procedures and controls which it utilizes
to achieve its goals and objectives.
The Bank's objectives include:
- Providing sufficient capital to maintain the confidence of
depositors.
- Being an appropriately capitalized institution, as measured
internally, defined by regulatory authorities and compared with
the Bank's peers.
- Achieving the lowest overall cost of capital consistent with
preserving the appropriate mix of capital elements to meet target
capitalization levels.
The Bank's total capital consists of two tiers of capital approved
under OSFI's current regulatory capital guidelines. As at March 31,
2008 (the bank's fiscal first quarter), Tier 1 capital includes
common shares and retained earnings reduced by net securitization
exposures. The Bank currently does not hold any instruments in Tier 2
capital. Risk-weighted assets ("RWA"), referenced in the regulatory
guidelines, include all on-balance sheet assets weighted for the risk
inherent in each type of asset as well as an operational risk
component based on a percentage of average risk-weighted revenues.
The Bank's ratios are above internal minimum targets of 11% for Tier
1 and Total capital ratios and within internal maximum targets of
11.0 times for the assets to capital multiple. OSFI's minimum Tier 1
and Total capital ratios for Canadian banks are 7% and 10%,
respectively. OSFI will consider applications for authorized assets-
to-capital multiples in excess of 20 times for institutions that meet
certain requirements. CTB is currently restricted to a maximum
assets-to-capital multiple of 12.5.
During the three months ended March 31, 2008, the Bank complied with
the capital guidelines issued by OSFI under the "International
Convergence of Capital Measurement and Capital Standards - A Revised
Framework" ("Basel II"). For the comparative period, the Bank
complied with the capital guidelines issued by OSFI under the then
current Basel I Capital Accord ("Basel I").
9. Financial Instruments Disclosures
Allowance for credit losses
The Company's allowances for receivables are maintained at levels
which are considered adequate to absorb future credit losses. A
continuity of the Company's allowances for credit losses is as
follows:
(Dollars in millions) Credit card loans Other loans(1)
---------------------------------------
March 29, March 31, March 29, March 31,
2008 2007 2008 2007
---------------------------------------
Balance, beginning of period $ 51.5 $ 30.4 $ 2.7 $ 2.9
Provision for credit losses 15.7 14.2 1.7 1.6
Recoveries 3.6 2.4 0.1 -
Write-offs (25.2) (14.8) (1.8) (1.3)
Portfolio acquisition - - 0.6 -
---------------------------------------
---------------------------------------
Balance, end of period 45.6 32.2 3.3 3.2
---------------------------------------
---------------------------------------
(Dollars in millions) Accounts receivable Total(2)
---------------------------------------
March 29, March 31, March 29, March 31,
2008 2007 2008 2007
---------------------------------------
Balance, beginning of period $ 5.0 $ 4.6 $ 59.2 $ 37.9
Provision for credit losses 0.3 0.4 17.7 16.2
Recoveries - - 3.7 2.4
Write-offs (2.3) (0.1) (29.3) (16.2)
Portfolio acquisition - - 0.6 -
---------------------------------------
---------------------------------------
Balance, end of period 3.0 4.9 51.9 40.3
---------------------------------------
---------------------------------------
(1) Other Loans include personal loans, mortgages loans and lines of
credit loans.
(2) Relates to Company owned receivables.
Foreign currency risk
The Company has significant demand for foreign currencies, primarily
United States dollars, due to global sourcing. However, it mitigates
its exposure to foreign exchange rate risk through active hedging
programs and through its ability, subject to competitive conditions,
to pass on changes in foreign currency exchange rates through
pricing.
Liquidity risk
The following table summarizes the Company's contractual maturity for
its financial liabilities. The table includes both interest and
principal cash flows.
(Dollars in
millions) 1 year 2 years 3 years 4 years 5 years
-------------------------------------------------
Accounts payable
and other(1) $1,374.3 $ - $ - $ - $ -
Long-term debt 411.3 89.6 534.8 54.3 53.6
Other - 0.9 6.4 - -
-------------------------------------------------
Total $1,785.6 $ 90.5 $ 541.2 $ 54.3 $ 53.6
-------------------------------------------------
-------------------------------------------------
Thereafter Total
-------------------
Accounts payable
and other(1) $ - $1,374.3
Long-term debt 1,564.1 2,707.7
Other - 7.3
-------------------
Total $1,564.1 $4,089.3
-------------------
-------------------
(1) Includes Canadian Tire Bank deposits from customers and
commercial paper.
Interest rate risk
The Company is exposed to interest rate risk, which it manages
through the use of interest rate swaps. The Company has in pace a
policy that requires that for debt with terms greater than one year,
a minimum of 75% must be fixed versus floating rates. The Company is
in compliance with the policy.
10. Other Long-Term Investments
The global disruption in the market experienced in August 2007 which
greatly impacted the market for Canadian third-party ABCP has been
addressed in a formal restructuring proposal. On April 25, 2008, the
majority of the note holders with investments in the affected ABCP
voted in favour of the restructuring proposal. The restructuring
provides investors with new long-term notes to replace the short-term
ABCP that is currently illiquid. The deal, however, includes a
controversial clause that would give all players in the market
immunity from lawsuits, something that has caused concern for many of
the ABCP holders and has led to challenges in court that the
presiding judge is still considering. The judge is scheduled to rule
on the fairness of the proposal by the end of May 2008. The Company's
$8.9 million of affected ABCP will be converted into notes that will
pay interest at the rate paid on banker's acceptance notes less 50
basis points until maturity, which is currently expected to be
between 2016 and 2017. The committee responsible for the
restructuring proposal is working to ensure that a secondary market
in the new notes develops so that investors will have an opportunity
to sell their new notes, should they so choose.
During 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 of impairment at the time. Due to
additional information provided to investors who hold ABCP through
the formal restructuring proposal, the Company recorded an additional
$1.0 million before-tax provision for impairment of the ABCP during
the first quarter of 2008, bringing the total charge for impairment
to $2.3 million or 25 percent.
The valuation model used by the Company to estimate the fair value of
the ABCP incorporates discounted cash flows considering the best
available information regarding market conditions and other factors
that a market participant would consider for such investments. The
valuation assumes a redemption term of approximately nine years
corresponding to the expected maturities of the ABCP held by the
Company. As indicated above, the Company's valuation assumes that the
replacement notes will bear interest rates similar to short-term
instruments and that such rates would be commensurate with the nature
of the underlying assets and their associated cash flows. Assumptions
have been made as to the amount of restructuring and other costs that
the Company will bear.
Consistent with the terms of the restructuring proposal, the Company
has classified the remaining balance of this investment in ABCP of
$6.6 million as long-term investments on the Consolidated Balance
Sheet.
There still remains some uncertainty regarding the value of the
underlying assets, the amount and timing of cash flows and whether a
secondary market can be established for the new notes and this could
give rise to a further change in the value of the Company's
investment in ABCP. While these changes could positively or
negatively affect the Company's future earnings, it would not be
considered material to the Company's overall financial position,
given the relatively small amount of ABCP held at March 29, 2008.
The write-down and reclassification of the Company's investment in
ABCP has had no effect to date on the Company's debt covenants, debt
ratings or compliance with banking regulations governing Financial
Services or Canadian Tire Bank.
The Company has sufficient credit facilities available through
committed lines of credit and various other forms of funding to
satisfy its financial obligations as they come due and does not
expect a material adverse impact on its business as a result of the
current third-party ABCP liquidity issue.
11. Supplementary Cash Flow Information
The Company paid income taxes during the 13 weeks ended March 29,
2008, amounting to $55.8 million (2007 - $105.4 million) and made
interest payments of $20.3 million (2007 - $14.7 million).
During the 13 weeks ended March 29, 2008, property and equipment were
acquired at an aggregate cost of $112.7 million (2007 -
$93.0 million). The amount of property and equipment acquired that is
included in accounts payable and other at March 29, 2008 was
$39.6 million (2007 - $27.5 million).
12. Legal Matters
The Company and certain of its subsidiaries are party to a number of
legal proceedings. The Company believes that each such proceeding
constitutes a routine legal matter incidental to the business
conducted by the Company and that the ultimate disposition of the
proceedings will not have a material effect on the Company's
consolidated earnings, cash flow or financial position.
13. 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 have reassessed and are also expected to
issue further reassessments 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 unlikely - it is estimated that the
total liability of the Company for additional taxes, interest and
penalties could be approximately $259.0 million. Although the Company
will appeal these reassessments, current tax legislation requires the
Company to remit to the CRA and its provincial counterparts
approximately $159.9 million, of which $154.0 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.
14. Comparative Figures
Certain of the prior period's figures have been reclassified to
conform to the current year's presentation, including amounts with
respect to securitizations and net provision for loans receivable in
the consolidated statements of cash flows. As a result, cash flow
from operations has been restated by $72.4 million for the 13 weeks
ended March, 31 2007 with a corresponding offset to investing
activities. There is no impact on cash generated/used in the
respective periods.
In addition, passive interest income has been reclassified from Gross
Operating Revenue to net short-term interest expense.Interest Coverage Exhibit to the Consolidated Financial Statements
-------------------------------------------------------------------------
The Company's long-term interest requirements for the 13 weeks ended
March 29, 2008, after annualizing interest on long-term debt issued and
retired during this period, amounted to $95.2 million. The Company's earnings
before interest on long-term debt and income taxes for the 13 weeks then ended
were $695.4 million, which is 7.3 times the Company's long-term interest
requirements for this period.
%SEDAR: 00000534EF
For further information:
For further information: Media: Caroline Casselman, (416) 480-8159, caroline.casselman@cantire.com; Investors: Karen Meagher, (416) 480-8058, karen.meagher@cantire.com