Canadian Tire releases third quarter earnings - Retail sales up 7.3%; adjusted net earnings up 12.7%
Consolidated 2008 2007(2) Highlights(1): 3rd Quarter 3rd Quarter Change ------------------------------------------------------------------------- Retail sales $2.61 billion $2.43 billion 7.3% Gross operating revenue $2.26 billion $2.05 billion 10.2% Adjusted earnings before income taxes (excludes non-operating gains and losses)(3) $158.4 million $153.2 million 3.4% Net earnings $108.6 million $102.2 million 6.3% Adjusted net earnings (excludes non-operating gains and losses)(3) $115.5 million $102.5 million 12.7% Basic earnings per share $1.33 $1.25 6.3% Adjusted basic earnings per share (excludes non-operating gains and losses)(3) $1.42 $1.26 12.7% (1) All dollar figures in this table are rounded. (2) The 2007 earnings figures have been restated for implementation, on a retrospective basis, of the CICA HB 3031-Inventories. Please refer to Note 2 in the Consolidated Financial Statements. (3) Non-GAAP measure. Please refer to section 14.0 of Management's Discussion and Analysis.TORONTO, Nov. 6 /CNW/ - Canadian Tire Corporation, Limited (CTC, CTC.a) released its third quarter results today. In a simultaneous news release, the Company announced the appointment of Stephen Wetmore as its next president and CEO effective the beginning of 2009. Tom Gauld will retire from the role at the end of this year and will continue as a member of the Board of Directors. Despite challenging economic conditions, the company reported a 7.3% increase in retail sales and a 6.3% increase in net earnings compared to the same period in 2007. Adjusted net earnings were $115.5 million, a 12.7% increase over the previous year. The growth in adjusted earnings during the quarter reflects strong quarterly performance in Canadian Tire Retail and Financial Services, as well as benefits from lower effective tax rates. "Given the challenging market conditions, we are pleased with third quarter sales and the continuing strong sales momentum during the month of October," said Tom Gauld, president and CEO, Canadian Tire Corporation. "The positive sales trends in Canadian Tire Retail stores reflect improvements in our pricing and promotional strategies which will continue through the fourth quarter. Financial Services' earnings growth is also expected to remain strong throughout the remainder of 2008 reflecting the impact of our recent card relaunch and stable aging trends in past due accounts."Business Overview CANADIAN TIRE RETAIL (CTR) Q3 Q3 YTD YTD ($ in millions) 2008 2007(1) Change 2008 2007(1) Change ------------------------------------------------------------------------- Retail sales(2) $1,860.3 $1,787.4 4.1% $5,253.6 $5,171.9 1.6% Same store sales(3) (year-over- year % change) 2.0% (2.7)% (0.5)% 0.0% Gross operating revenue $1,399.3 $1,304.0 7.3% $4,032.7 $3,889.8 3.7% Net shipments (year-over- year % change) 7.6% 1.4% 3.8% 3.1% Earnings before income taxes and minority interest $94.0 $94.9 (1.0)% $222.6 $221.4 0.6% ------------------------------------------------------------------------- Less adjustment for: Gain/loss on disposals of property and equipment(4) (0.3) 6.6 3.7 10.3 Former CEO retirement obligations 0.2 0.2 1.1 (6.5) ------------------------------------------------------------------------- Adjusted earnings before income taxes and minority interest(5) $94.1 $88.1 6.9% $217.8 $217.6 0.1% ------------------------------------------------------------------------- (1) 2007 figures have been restated for implementation, on a retrospective basis, of the CICA HB 3031-Inventories. Please refer to Note 2 in the Consolidated Financial Statements. (2) Includes sales from Canadian Tire stores, PartSource stores, sales from CTR's online web store and the labour portion of CTR's auto service sales. (3) Same store sales include sales from all stores that have been open for more than 53 weeks. (4) Includes fair market value adjustments and impairments on property and equipment. (5) Non-GAAP measure. Please refer to section 14.0 in Management's Discussion and Analysis.CTR's retail sales increased 4.1% over the same quarter in 2007 reflecting an increase in sales across all three lines of business. CTR experienced a 20% increase in fall/winter seasonal categories driven by strong early sales in winter tires and snow throwers and an increase across kitchen and storage and organization. Overall same store sales were up 2.0% compared to the third quarter in 2007. CTR's third quarter adjusted earnings before taxes were $94.1 million, up 6.9% compared to a year ago due to strong shipment growth. CTR opened three new stores in the quarter, all of which were replacement stores. Two of the stores were CTR's new small store format with a fully integrated Mark's Work Wearhouse. During the fourth quarter, CTR will open the first two Smart stores in Welland and Orleans, Ontario, which are expected to significantly enhance the customer shopping experience and showcase core CTR growth categories in a new and exciting way. PartSource experienced another quarter of sales growth driven primarily by strong commercial sales. PartSource acquired six new corporate stores, two of which were converted to the PartSource brand at the end of the quarter. PartSource also converted one franchise store to a corporate store and opened one new hub store during the quarter, bringing the network total to 82 locations.CANADIAN TIRE PETROLEUM (Petroleum) Q3 Q3 YTD YTD ($ in millions) 2008 2007 Change 2008 2007 Change ------------------------------------------------------------------------- Sales volume (millions of litres) 414.5 434.3 (4.6)% 1,257.9 1,287.0 (2.3)% Retail sales $550.2 $451.3 21.9% $1,541.1 $1,308.6 17.8% Gross operating revenue $519.3 $424.0 22.5% $1,456.9 $1,232.4 18.2% Earnings before income taxes $7.5 $7.9 (5.5)% $20.5 $16.8 22.3% ------------------------------------------------------------------------- Less adjustment for: Loss on disposals of property and equipment(1) (0.1) (0.7) (0.3) (2.0) ------------------------------------------------------------------------- Adjusted earnings before income taxes(2) $7.6 $8.6 (12.2)% $20.8 $18.8 11.0% ------------------------------------------------------------------------- (1) Includes asset impairment losses. (2) Non-GAAP measure. Please refer to section 14.0 in Management's Discussion and Analysis.Higher fuel prices drove a 4.6% decrease in gasoline sales volumes. Petroleum's gross operating revenue totaled $519.3 million during the quarter, a 22.5% increase over the $424.0 million in the comparable 2007 period, reflecting a significant increase in pump prices during the quarter and a 10.7% increase in convenience store sales. Petroleum recorded pre-tax earnings of $7.5 million compared to $7.9 million a year ago, based on continued stable margins and good expense management. While adjusted earnings were down 12.2% from $8.6 million this time last year, compared to historical norms, this represents a strong quarterly performance. Petroleum opened two new gas stations and rebranded two gas stations during the quarter. The business also refurbished seven gas stations and rebuilt one existing location during the period.MARK'S WORK WEARHOUSE (Mark's) Q3 Q3 YTD YTD ($ in millions) 2008 2007(1) Change 2008 2007(1) Change ------------------------------------------------------------------------- Total retail sales $194.5 $189.5 2.6% $600.1 $589.1 1.9% Same store sales(2) (year-over- year % change) (1.0)% 0.6% (2.0)% 7.2% Gross operating revenue(3) $168.7 $159.8 5.5% $516.8 $499.1 3.5% ------------------------------------------------------------------------- Earnings (loss) before income taxes $(0.3) $6.2 (104.1)% $4.2 $31.0 (86.3)% ------------------------------------------------------------------------- Less adjustment for: Loss on disposal of property and equipment (0.3) (0.2) (0.4) (0.8) ------------------------------------------------------------------------- Adjusted earnings before income taxes(4) $0.0 $6.4 (99.2)% $4.6 $31.8 (85.4)% ------------------------------------------------------------------------- (1) 2007 figures have been restated for implementation, on a retrospective basis, of the CICA HB 3031-Inventories. Please refer to Note 2 in the Consolidated Financial Statements. (2) Mark's same store sales exclude new stores, stores not open for the full period in each year and store closures. (3) Gross operating revenue includes retail sales at corporate stores only. (4) Non-GAAP measure. Please refer to section 14.0 in Management's Discussion and Analysis.Mark's third quarter total retail sales grew to $194.5 million, a modest increase of 2.6% from the $189.5 million recorded a year ago. While sales overall were challenging during the quarter, Mark's mature industrial wear business led corporate store sales growth, with a 10.1% increase over last year driven principally by men's industrial footwear and accessories. Adjusted pre-tax earnings were $6.4 million lower than the same 2007 period due to lower margins related to promotional activity to clear seasonal merchandise and continued investments in network expansion and longer term growth and productivity initiatives. During the quarter, Mark's opened three new stores, bought back four franchise stores, expanded one store and relocated seven stores.CANADIAN TIRE FINANCIAL SERVICES (Financial Services) Q3 Q3 YTD YTD ($ in millions) 2008 2007 Change 2008 2007 Change ------------------------------------------------------------------------- Total managed portfolio end of period $4,002.3 $3,717.4 7.7% Gross operating revenue $197.8 $187.2 5.6% $608.0 $555.6 9.4% Earnings before income taxes $47.0 $43.7 7.4% $144.4 $157.7 (8.5)% ------------------------------------------------------------------------- Less adjustment for: Gain on disposal/ redemption of shares - - - 18.4 Net effect of securitization activities(1) (9.1) (6.3) 7.7 (3.8) Loss on disposals of property and equipment (0.6) (0.1) (0.6) (0.3) ------------------------------------------------------------------------- Adjusted earnings before income taxes(2) $56.7 $50.1 13.0% $137.3 $143.4 (4.3)% ------------------------------------------------------------------------- (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 14.0 in Management's Discussion and Analysis in our 2007 Financial Report.Financial Services' total managed portfolio of loans receivable was $4.0 billion at the end of the third quarter, a 7.7% increase over the $3.7 billion portfolio at the end of the comparable 2007 period. Financial Services' gross operating revenue was $197.8 million in the quarter, a 5.6% increase over the $187.2 recorded in the prior year. Adjusted pre-tax earnings for the quarter were $56.7 million or 13.0% higher than the third quarter of 2007. The increase in earnings in the third quarter was due to higher receivable balances in the quarter and tight controls on operating expenses. The net write-off rate for the total managed portfolio on a rolling 12-month basis was 6.04%, compared to 5.87% in the comparable 2007 period. Overall aging of past due accounts is comparable to the same period in 2007 and 2006. For Financial Services, a number of new actions have been taken to mitigate future credit risk exposure which may arise due to current economic conditions including: reducing credit limits for cardholders; enhancing predictive scorecards to identify high risk customer behaviour; and further enhancing collection strategies. Financial Services continued its investment in the retail banking pilot and at quarter-end had more than $128 million in high rate savings, approximately $90 million in broker deposits, (net of liquidity reserves) which on average, have a maturity of three years and $102 million in mortgages. 2008 EARNINGS AND CAPITAL FORECAST The Company confirms its expectation that earnings per share for 2008 will be in the range of $4.75 to $5.05, excluding non-operating items. The fourth quarter of the year is the most significant for CTR and Mark's due to the concentration of sales and shipment activity for the Christmas season. While it is reasonable to expect that the current economic environment could affect consumer behaviour, the quarter has started strongly for CTR, with strong sales and same store sales performance in October resulting from continued improvements in pricing and promotional activity. As a result of the Corporation's long-standing currency hedging programs, CTR's product purchasing in US funds will be largely sheltered from the recent significant weakening of the Canadian dollar for the balance of 2008 and well into 2009. Ongoing effective management of credit risk points to strong fourth quarter earnings for Financial Services based on the anticipated level of provisions necessary for doubtful accounts. Expected growth from the card relaunch earlier this year and very effective expense management will also contribute to earnings growth. Should economic conditions continue to deteriorate, rolling write off rates may be outside the normal range of 5.0% to 6.0%. However, because of ongoing productivity initiatives it is anticipated that returns on receivables will remain at the upper end of the targeted range of 4.5% to 5.0% for 2008. Total capital commitments for 2008 have been reduced to approximately $543 million on a gross basis. As previously announced, two sale/leaseback transactions, including a total of 13 CTR properties in locations across the country, were completed for proceeds of $214 million in the third quarter. FUNDING UPDATE While overall credit market conditions in Canada remain challenging, the Corporation has substantial sources of liquidity to support its retail and financial services growth plans, including committed bank lines totaling approximately $1.22 billion from major Canadian and other banks. These credit facilities are committed until close to the end of fiscal 2009 and are currently renewed on a quarterly basis. In addition to the above bank lines, the following additional sources of funding contribute to a strong liquidity position:- Continued growth in high rate savings and broker deposits as part of Financial Services banking activities; - An authorized medium term note program of up to $750 million of which $300 million has been utilized; and - An authorized commercial paper program of $800 million, which is backed dollar for dollar by the above noted bank lines, in support of both Glacier Credit Card Trust ("Glacier") and the Corporation of which $367 million was outstanding at the end of the quarterThe broker deposit channel makes Canadian Tire Bank non-cashable GIC's, with 1 to 5 year terms, available to customers of established deposit brokers. Broker deposits, which have grown, as of November 4th to $382 million (net of liquidity reserves), have reduced the Corporation's dependency on the securitization market for longer term funding. In addition to all of these sources of funding the Corporation continues to look at creating additional financial flexibility through:- The addition of further committed bank lines for which it is in active discussion with its current bankers and other lenders. - Select real estate transactions at cost effective rates.For Glacier, the 2003 five year term notes totaling $570 million mature in November 2008 and will be repaid in late November from funds already on deposit. In terms of refinancing, the asset-backed term securitization market in Canada is currently inactive due to market conditions, Glacier does, however anticipate being able to access this market when conditions improve, based on the quality of the assets held by the Trust and the past performance of the program. As a result of current market conditions, the cost of funding for all Canadian corporations has increased. However, as at the end of the quarter, approximately 93% of the Corporation's and Glacier's funding rates were fixed, thus sheltering it to a substantial degree from the impact of this cost increase. Because of this significant fixed component of funding needs, management estimates that the total impact on an annualized basis of expected current or future funding cost increases, due to higher rates and fees, is not material to the Corporation's consolidated earnings. FORWARD-LOOKING STATEMENTS This disclosure contains statements that are forward-looking. Actual results or events may differ materially from those forecasted in this disclosure because of the risks and uncertainties associated with Canadian Tire's business and the general economic environment. Risks and uncertainties are disclosed in other public filings by the Company, such as Management's Discussion and Analysis ("the MD&A") and the 2007 Financial Report and include, but are not limited to: changes in interest, currency exchange and tax rates; the ability of Canadian Tire to attract and retain quality employees, Associate Dealers, Petroleum agents and PartSource and Mark's Work Wearhouse store operators and franchisees; and the willingness of customers to purchase the Company's merchandise, financial products and services. Risk factors associated with the assumptions that underlie Canadian Tire's forecasted performance in 2008 that have the potential to affect the operating performance and results of the Company's divisions are outlined in Section 11.2 of the MD&A. The Company has developed its 2008 forecast on the assumption that there will not be a material deviation in the risks described in the MD&A 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 4:30 p.m. EDT on Thursday, November 6th, 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 1,180 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 82 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 269 gas bars, 262 convenience stores and kiosks, and 74 car washes. Mark's Work Wearhouse is one of the country's leading apparel retailers operating 364 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 five million Canadian Tire MasterCard credit cards and also markets related financial products and services for retail and petroleum customers. Canadians can also access Financial Services online at www.ctfs.com. More than 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 November 6, 2008. Quarterly and annual comparisons in this MD&A Unless otherwise indicated, all comparisons of results for the third quarter (13 weeks ended September 27, 2008) are against results for the third quarter of 2007 (13 weeks ended September 29, 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 16 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 highlighted in note 1 in the Notes to the Consolidated Financial Statements for the quarter ended September 27, 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 11.2 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, store operators, franchisees and Petroleum agents operate more than 1,180 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, lines of credit, 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. The Company 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 82 specialty automotive hard parts stores that cater to serious "do-it-yourselfers" and professional installers of automotive parts. The PartSource network consists of 34 franchise stores and 48 corporate stores. Mark's is one of Canada's leading clothing and footwear retailers, operating 364 stores nationwide, including 321 corporate and 43 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 269 gas bars, 262 convenience stores and kiosks, 74 car washes, 13 Pit Stops and 85 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, lines of credit, insurance and warranty products as well as guaranteed investment certificates (GICs) offered through third-party brokers and an emergency roadside assistance service called Canadian Tire Roadside Assistance®. Canadian Tire Bank® (CTB), 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. CTB also offers high interest savings accounts, GICs 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 September 27, September 29, Number of stores and retail square footage 2008 2007 ------------------------------------------------------------------------- Consolidated store count CTR retail stores(1) 473 468 PartSource stores 82 68 Mark's retail stores(1) 364 348 Petroleum gas bar locations 269 265 ------------------------------------------------------------------------- Total stores 1,188 1,149 Consolidated retail square footage (in millions) CTR retail square footage 18.4 17.1 PartSource retail square footage 0.3 0.2 Mark's retail square footage 3.1 2.9 ------------------------------------------------------------------------- Total retail square footage(2) 21.8 20.2 ------------------------------------------------------------------------- (1) Store count numbers reflect individual selling locations; therefore, CTR and Mark's store count numbers each include stores that are co- located on the same property. (2) The average retail square footage for Petroleum's convenience stores was 400 square feet per store in 2007 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 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 (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 financial results ($ in millions except per share Q3 Q3 YTD YTD amounts) 2008 2007(1) Change 2008 2007(1) Change ------------------------------------------------------------------------- Retail sales(2) $2,605.0 $2,428.2 7.3% $7,394.8 $7,069.6 4.6% Gross operating revenue 2,257.5 2,049.2 10.2% 6,533.5 6,101.0 7.1% EBITDA(3) 223.9 218.0 2.7% 615.4 614.9 0.1% Earnings before income taxes 148.2 152.7 (2.9)% 391.7 426.9 (8.2)% Effective tax rate 26.7% 33.1% 30.3% 34.3% Net earnings $ 108.6 $ 102.2 6.3% $ 273.0 $ 280.4 (2.6)% Basic earnings per share $ 1.33 $ 1.25 6.3% $ 3.35 $ 3.44 (2.7)% Adjusted basic earnings per share(3) $ 1.42 $ 1.26 12.7% $ 3.26 $ 3.32 (1.9)% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) 2007 figures have been restated for the implementation, on a retrospective basis, of CICA HB 3031 - Inventories. 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) Q3 2008 Q3 2007 ------------------------------------------------------------------------- CTR retail sales(1) 4.1% (0.7)% CTR gross operating revenue 7.3% 1.3% CTR net shipments 7.6% 1.4% Mark's retail sales 2.6% 3.9% Petroleum retail sales 21.9% 0.0% Petroleum gasoline volume (litres) (4.6)% (1.5)% Financial Services' credit card sales 14.0% 10.9% Financial Services' gross average receivables 6.5% 7.2% ------------------------------------------------------------------------- (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 third quarter of 2008, all of our businesses contributed to the 10.2 percent increase in consolidated gross operating revenue, including higher CTR shipment volume to Dealers, increased sales at Petroleum and Mark's and receivables growth at Financial Services. Financial Services growth was driven by both increased transaction volume and higher loan account balances. Increased Petroleum revenues were a function of sustained higher retail gasoline prices as well as strong convenience store sales. Revenue growth at Mark's was attributable to the ongoing expansion of the store network. Net earnings Third quarter consolidated net earnings increased by 6.3 percent, despite challenging economic conditions, reflecting strong adjusted earnings performance at both CTR and Financial Services, as well as benefits attributable to a lower effective tax rate. These were partially offset by decreased earnings at Mark's which experienced a lower gross margin rate and higher costs associated with the ongoing network expansion and increased infrastructure. Earnings before income taxes were negatively impacted by non-operating items, as noted below. Impact of non-operating items The following tables show our adjusted consolidated earnings on a pre-tax and after-tax basis.Adjusted consolidated earnings before income taxes(1) Q3 Q3 YTD YTD ($ in millions) 2008 2007(2) Change 2008 2007(2) Change ------------------------------------------------------------------------- Earnings before income taxes $ 148.2 $ 152.7 (2.9)% $ 391.7 $ 426.9 (8.2)% Less pre-tax adjustment for: Gain on disposal of shares - - - 18.4 Former CEO retirement obligation(3) 0.2 0.2 1.1 (6.5) Net effect of securitization activities(4) (9.1) (6.3) 7.7 (3.8) Gain (loss) on disposals of property and equipment (1.3) 5.6 2.4 7.2 ------------------------------------------------------------------------- Adjusted earnings before income taxes(1) $ 158.4 $ 153.2 3.4% $ 380.5 $ 411.6 (7.5)% ------------------------------------------------------------------------- (1) See section 14.0 on non-GAAP measures. (2) 2007 figures have been restated for the implementation, on a retrospective basis, of CICA HB 3031 - Inventories. 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 Q3 Q3 YTD 2007 amounts) 2008 2007(2) Change 2008 YTD(2) Change ------------------------------------------------------------------------- Net earnings $ 108.6 $ 102.2 6.3% $ 273.0 $ 280.4 (2.6)% Less after-tax adjustment for: Gain on disposal of shares - - - 12.0 Former CEO retirement obligation 0.2 0.2 0.8 (4.2) Net effect of securitization activities(3) (6.2) (4.1) 5.2 (2.5) Gain (loss) on disposals of property and equipment (0.9) 3.6 1.6 4.7 ------------------------------------------------------------------------- Adjusted net earnings after tax(1) $ 115.5 $ 102.5 12.7% $ 265.4 $ 270.4 (1.8)% ------------------------------------------------------------------------- Basic earnings per share $ 1.33 $ 1.25 6.3% $ 3.35 $ 3.44 (2.7)% Adjusted basic earnings per share(1) $ 1.42 $ 1.26 12.7% $ 3.26 $ 3.32 (1.9)% ------------------------------------------------------------------------- (1) See section 14.0 on non-GAAP measures. (2) 2007 figures have been restated for the implementation, on a retrospective basis, of CICA HB 3031 - Inventories. 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.Included in the adjusted earnings table above, the tax provision was impacted favourably by the net effect of adjustments to taxes on the sale and leaseback of various properties and revisions to the estimate of tax provisions. See section 9.0 for further details. Seasonal impact The second quarter and fourth quarters of each year are typically when we experience stronger revenues and earnings in our retail businesses 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 share amounts) Q3 2008 Q2 2008 Q1 2008 Q4 2007 ------------------------------------------------------------------------- Gross operating revenue $2,257.5 $2,450.7 $1,825.3 $2,503.1 Net earnings 108.6 97.7 66.7 131.3 Basic earnings per share 1.33 1.20 0.82 1.61 Diluted earnings per share 1.33 1.20 0.82 1.61 ------------------------------------------------------------------------- ($ in millions except per share amounts) Q3 2007 Q2 2007 Q1 2007 Q4 2006 ------------------------------------------------------------------------- Gross operating revenue $2,049.2 $2,314.1 $1,737.7 $2,426.1 Net earnings 102.2 122.5 55.7 108.3 Basic earnings per share 1.25 1.50 0.68 1.33 Diluted earnings per share 1.25 1.50 0.68 1.32 ------------------------------------------------------------------------- (1) 2007 quarterly results have been restated for the implementation, on a retrospective basis, of CICA HB 3031 - Inventories. 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 Q3 2008 performance overview ------------------------------------------------------------------------- Canadian Tire Retail Mark's Work Wearhouse ------------------------------------------------------------------------- Q3 2008 Performance highlights Q3 2008 Performance highlights - continued development of - opened three new corporate stores store network, now with a (two of which are co-located with total of 473 stores including a CTR store), relocated seven 223 20/20 stores and two stores, bought back four small market stores that franchise stores which were opened in the pilot phase; converted to corporate stores, - continued development of new and closed three stores; store formats; and - increased total retail space - replaced two traditional by approximately eight percent stores with two new small year-over-year; store network market stores and replaced totals 364 locations; and one new-format store with a - continued focus on Clothes That CTR-Mark's 20/20 store, the Work campaign, with the Mark's component of which introduction of three new Clothes will open in October 2008. That Work items during the quarter. PartSource Q3 2008 performance highlights - acquired six corporate stores (two of which were converted to the PartSource banner); - opened one new hub store, and converted one franchise store to a corporate store; and - approximately 12 percent year-over-year increase in retail square footage. ------------------------------------------------------------------------- Canadian Tire Financial Services Petroleum ------------------------------------------------------------------------- Q3 2008 Performance highlights Q3 2008 Performance highlights - continued testing of the - growth of network to 269 gas bars retail banking initiative; and 262 convenience stores; - completion of the Options - refurbished seven gas bars and MasterCard relaunch; and replaced one gas bar as part of - continued increases in gross the initiative to improve the average receivables for the overall customer experience at total managed portfolio. Petroleum's sites; and - grew convenience store business by 10.7 percent over the prior year, despite record high gasoline prices. -------------------------------------------------------------------------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 stores 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 Q3 2008 Strategic Plan performance The following outlines CTR's performance for the third quarter of 2008 in the context of our 2012 Strategic Plan.------------------------------------------------------------------------- Initiatives to build a "BIGGER" Canadian Tire ------------------------------------------------------------------------- New store program 20/20 has been the cornerstone of CTR's growth agenda since 2003. This program is now largely complete and CTR is developing new store concepts which are designed to build on the successes of the 20/20 store with a greater focus on improving sales and productivity. Plans for 2008 include opening two of the new "smart" stores that will have the same focus of improving sales and productivity, as well as providing a more exciting customer experience, and four small market stores with the further goal of expanding our presence in smaller markets. ------------------------------------------------------------------------- 2008 Key initiatives 2008 Performance ------------------------------------------------------------------------- Third quarter With the substantial completion of the 20/20 program in 2008, During the third quarter CTR replaced CTR's strategy is to test the two existing traditional stores with next versions of the CTR store. two new small market stores and This includes completion of the replaced one existing new-format new small market stores and new store with a CTR-Mark's 20/20 "smart" stores which will be an combination store, the Mark's important aspect of the 2012 Plan. component of which will open in October 2008. All of the stores opened in the quarter incorporate a full-size Mark's store inside. The store network now totals 473 stores, 39 of which include a Mark's component, with a 40th scheduled to open in October 2008. ------------------------------------------------------------------------- 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 Third quarter consistent and coherent customer service measures, tracking and The Customer Satisfaction Index (CSI) performance. was successfully developed, piloted and rolled out in 2007. The collecting of data for 2008 continued, as planned, completing approximately two-thirds of the data gathering for the year. The Dealer relations team has also continued 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 Third quarter include building CTR as a new commercial account for emergency During the quarter, PartSource shipments, updating the continued making significant progress organizational structure, testing on building the CTR commercial new operating systems and account and is now used by 170 launching a new auto parts Canadian Tire stores for emergency catalogue. auto parts. Progress on this initiative will continue building throughout the year. PartSource acquired six new corporate stores (of which two had been rebranded to the PartSource banner by the end of the quarter), opened one new hub store, relocated and/or retrofitted two existing stores into hub stores and converted one franchise store to a corporate store during the quarter. This brings the network total to 82 stores, including seven 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. In addition, the Company is investing in physical distribution infrastructure and re-engineering customer facing processes and enabling technologies. ------------------------------------------------------------------------- 2008 Key initiatives 2008 Performance ------------------------------------------------------------------------- The Automotive Infrastructure Third quarter initiative is an important factor in CTR's future growth and Progress on the Automotive involves a significant investment Infrastructure initiative included: in fixed assets, working capital and the redesign of core processes Emergency supply implementation: and enabling technologies. - opened PartSource hub stores in Pickering, Ontario; Sudbury, Ontario and Edmonton, Alberta, bringing the total number of hub stores to seven. Corporate assortment expansion: - proceeded with the physical retrofit of the Vaughan auto parts distribution centre to accommodate a significantly larger auto parts assortment; - increased auto parts SKU count by 10 percent; - completed testing of a new, state of the art warehouse management system in the Vaughan auto parts distribution centre. Enabling technologies: - signed agreement with core software provider to secure licenses and professional services; - completed level two process designs and constructed a software test environment for in-depth training. ------------------------------------------------------------------------- ------------------------------------------------------------------------- CTR Change program 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 and better decisions and improve our agility and speed to market. ------------------------------------------------------------------------- 2008 Key initiatives 2008 Performance ------------------------------------------------------------------------- CTR will implement Third quarter productivity/control initiatives in the areas of pricing and Progress made on the CTR change product hierarchy to streamline program in the third quarter and strengthen operations and included: improve organizational structures - continued implementation of new and efficiencies. pricing system across the merchandising division; - continued implementation of Master Data Management infrastructure for CTR's core data; - began design of new promotional planning system; - continued work on vendor management capability; and - began initiative to review organizational design in merchandising and marketing areas. ------------------------------------------------------------------------- 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; and - average sales per square foot of retail space CTR total retail and same store sales (year-over-year percentage change) Q3 2008 Q3 2007 2008 YTD 2007 YTD ------------------------------------------------------------------------- Total retail sales(1) 4.1% (0.7)% 1.6% 2.0% Same store sales(2) 2.0% (2.7)% (0.5)% 0.0% ------------------------------------------------------------------------- (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) Q3 2008 Q3 2007 2008 YTD 2007 YTD ------------------------------------------------------------------------- Same store sales(1) 20/20 stores 2.9% 0.0% 0.4% 3.1% New-format stores 0.6% (4.8)% (1.7)% (2.1)% Traditional stores 2.4% (5.0)% (0.9)% (2.3)% ------------------------------------------------------------------------- (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 third quarter MD&A, we continue to report three separate classes of stores, defined as follows: ------------------------------------------------------------------------- 20/20 stores New-format stores Traditional stores (mid 2003 to 2008) (1994 to mid 2003) (1994 and prior) Average retail square Average retail square Average retail square footage: 53,000 footage: 31,000 footage: 16,000 ------------------------------------------------------------------------- Larger format launched Large format, including Smaller than either the in September 2003, "Class Of" and "Next new-format or 20/20 ranging in size from Generation" stores, stores on average. approximately 18,000 to ranging in size from Traditional stores are 89,000 square feet 16,000 to 66,000 square characterized by varied (excluding the Mark's feet, most of which were sizes and layouts. component of Mark's- opened between 1994 and Traditional stores make inside-a-CTR store). mid 2003. New-format up approximately seven 20/20 stores make up stores make up percent of the retail approximately 65 percent approximately 28 percent square footage in the of the retail square of the retail square network. footage of the network. footage in the network. See section 3.3.1.1, This format immediately Q3 2008 Strategic Plan preceded the 20/20 format. performance for more information on the 20/20 rollout. ------------------------------------------------------------------------- 20/20 stores represented approximately 65 percent of CTR's retail square footage and 58 percent of total retail sales in the third quarter of 2008. CTR store count Q3 2008 2007 2006 2005 2004 ------------------------------------------------------------------------- 20/20 stores(1) 225 192 126 53 25 New-format stores(2) 167 189 237 292 302 Traditional stores 81 92 105 117 130 ------------------------------------------------------------------------- Total new-format, traditional and 20/20 stores 473 473 468 462 457 PartSource stores 82 71 63 57 47 ------------------------------------------------------------------------- (1) The 20/20 store total in 2008 includes seven 20/20 Mark's-inside-a- CTR stores (the Mark's component of one will open in October 2008), two small market stores which have been opened in pilot phase and 28 CTR-Mark's combination 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 new formats. The 20/20 store format will be completed by the end of 2008 and new formats consistent with the goals of the 2012 Plan will be piloted in 2008 and rolled out in subsequent years. Average retail sales per Canadian Tire store(1),(2) For the For the 12 months 12 months ended ended September September ($ in millions) 27, 2008 29, 2007 ------------------------------------------------------------------------- 20/20 stores $ 19.2 $ 19.6 New-format stores 13.5 13.7 Traditional stores 7.9 8.1 ------------------------------------------------------------------------- (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. The 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, September September 27, 2008 29, 2007 ------------------------------------------------------------------------- Retail square footage(1),(3) (millions of square feet) 18.4 17.1 20/20 stores(2),(3) $ 365 $ 374 New-format stores(2),(3) 437 444 Traditional stores(2),(3) 492 503 ------------------------------------------------------------------------- (1) Retail square footage is based on the total retail square footage including stores that have not been open for a minimum of two years as at the end of the quarter. (2) Retail sales are shown on a 52-week basis in each year for those stores that have been open for a minimum of two years as at the end of the 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 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 designed to display more merchandise, accommodate wider aisles, include more appealing product displays and provide a more compelling shopping experience overall. The larger 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 Third quarter CTR's third quarter same store sales increased by 2.0 percent and retail sales increased 4.1 percent over the same quarter of 2007. The positive sales performance reflected increases in our home, leisure and automotive businesses and increases in both our regular and promotional sales when compared to the third quarter of 2007. Retail sales were also positively affected by improvements in non-seasonal categories and by strong early season results in fall/winter categories, driven by winter tires and snowthrowers and an increase across kitchen, storage and organization. While our retail stores continue to be influenced by the challenging economic conditions that are currently affecting Canada, CTR experienced increased retail sales in all provincial markets during the third quarter with stronger sales experienced in Quebec and Eastern Canada and weaker sales results in Alberta and in BC than in past quarters. In particular, retail sales were up 8.2 percent for the quarter in Quebec and are up 2.8 percent on a year-to-date basis. PartSource experienced another quarter of year-over-year sales increases driven by both the continued expansion of the network and growth in the commercial customer segment. In addition, PartSource shipments to Dealers continue to increase as components of the Automotive Infrastructure initiative project are rolled out.3.3.1.3 CTR's financial results ($ in millions) Q3 2008 Q3 2007(1) Change 2008 YTD 2007 YTD(1) Change ------------------------------------------------------------------------- Retail sales $1,860.3 $1,787.4 4.1% $5,253.6 $5,171.9 1.6% Net shipments (year-over-year % change) 7.6% 1.4% 3.8% 3.1% Gross operating revenue $1,399.3 $1,304.0 7.3% $4,032.7 $3,889.8 3.7% EBITDA(2) 152.8 148.5 2.8% 398.0 376.7 5.6% ------------------------------------------------------------------------- Earnings before income taxes 94.0 94.9 (1.0)% 222.6 221.4 0.6% Less adjustment for: Gain (loss) on disposals of property and equipment (0.3) 6.6 3.7 10.3 Former CEO retirement obligation 0.2 0.2 1.1 (6.5) ------------------------------------------------------------------------- Adjusted earnings before income taxes(2) $ 94.1 $ 88.1 6.9% $ 217.8 $ 217.6 0.1% ------------------------------------------------------------------------- (1) 2007 earnings figures have been restated for the implementation, on a retrospective basis, of CICA HB 3031 - Inventories. 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. Shipments to stores are recorded at the wholesale price that we charge to our Dealers and PartSource franchisees. -------------------------------------------------------------------------Explanation of CTR's financial results Third quarter Third quarter gross operating revenue increased 7.3 percent compared to the third quarter of 2007, primarily as a result of higher net shipments to Dealers, particularly in the automotive and home categories. Adjusted pre-tax earnings in CTR increased 6.9 percent in the third quarter principally due to an increase in product shipments. This was partially offset by a slight decline in the margin rate primarily due to aggressive promotional activity and product mix. Third quarter earnings also included $2.7 million of incremental expenses to support long-term productivity and growth initiatives, including the Automotive Infrastructure initiative and Information Technology Renewal, which will provide long-term benefits. 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. 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 Q3 2008 Strategic Plan performance The following outlines Mark's performance for the third 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 Q3 2008 Performance ------------------------------------------------------------------------- Mark's will continue network Third quarter development through opening new stores, relocating or expanding - opened three new corporate existing stores and renovating stores, two of which are older stores to the newest Mark's co-located inside a CTR format. store; - expanded one corporate store; - relocated six corporate stores and one franchise store; - bought back and converted four franchise stores to corporate stores; and - closed three corporate stores. Mark's total retail square footage at the end of the quarter was 3.1 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 Q3 2008 Performance ------------------------------------------------------------------------- Mark's will continue to expand the Third quarter store network by developing new and innovative ways to bring Mark's opened two new Clothes That Work to consumers Mark's-inside-a-CTR stores as across the country, resulting in part of CTR's small market store an increased physical presence network expansion (included in across the geographic regions of total above). Canada. ------------------------------------------------------------------------- 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 and the first three quarters of 2008, women's wear is still 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 are expected to bring continued growth during the Plan period. ------------------------------------------------------------------------- 2008 Key initiatives Q3 2008 Performance ------------------------------------------------------------------------- In 2008, Mark's will continue to Third quarter - corporate sales expand its product assortment in - sales of industrial wear the three main categories of increased by 10.1 percent; apparel and footwear with a focus - sales of women's wear on the Clothes That Work campaign. increased by 5.2 percent; and - sales of men's wear decreased by 0.2 percent. Mark's continued to focus on the Clothes That Work campaign with the introduction of three new Clothes That Work items 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) Q3 2008 Q3 2007 2008 YTD 2007 YTD ------------------------------------------------------------------------- Total retail sales 2.6% 3.9% 1.9% 9.9% Same store sales(1) (1.0)% 0.6% (2.0)% 7.2% ------------------------------------------------------------------------- (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. -------------------------------------------------------------------------Third quarter Mark's retail sales during the third quarter of 2008 continued to be impacted by further softening of retail and economic conditions across many parts of Canada. Despite these factors, retail sales increased 2.6 percent due to expansion in the store network. Same store sales growth decreased slightly compared to the third quarter of 2007. Men's industrial footwear demonstrated the largest dollar sales increase in corporate store sales in the third quarter, along with positive sales performance in men's accessories, women's sweaters, men's workwear and men's casual footwear categories.Average corporate store sales(1) For the For the For the 12 months 12 months 12 months ended, ended, ended, September September September 27, 2008 29, 2007 30, 2006 ------------------------------------------------------------------------- Average retail sales per store ($ thousands)(2) $ 2,712 $ 2,862 $ 2,623 Average sales per square foot ($)(3) 318 341 331 ------------------------------------------------------------------------- (1) Calculated on a rolling 12-month basis. (2) Average retail sales per corporate store include corporate stores that have been open for 12 months or more. (3) Average sales per square foot is based on sales from corporate stores. We have prorated square footage for corporate stores that have been open for less than 12 months.Mark's continues to focus on productivity at its stores. Due to the softening retail environment in Canada during 2008, there was a decrease in the current rolling 12 months average sales per store and average sales per square foot. This followed strong nine percent and three percent year-over- year increases in those respective measures for the two previous periods due to the factors noted above in the retail sales discussion.3.3.2.3 Mark's financial results ($ in millions) Q3 2008 Q3 2007(1) Change 2008 YTD 2007 YTD(1) Change ------------------------------------------------------------------------- Retail sales(2) $ 194.5 $ 189.5 2.6% $ 600.1 $ 589.1 1.9% Gross operating revenue(3) 168.7 159.8 5.5% 516.8 499.1 3.5% EBITDA(4) 6.7 11.7 (41.6)% 24.4 46.4 (47.4)% ------------------------------------------------------------------------- Earnings (loss) before income taxes (0.3) 6.2 (104.1)% 4.2 31.0 (86.3)% Less adjustment for: Loss on disposals of property and equipment (0.3) (0.2) (0.4) (0.8) ------------------------------------------------------------------------- Adjusted earnings before income taxes(4) $ 0.0 $ 6.4 (99.2)% $ 4.6 $ 31.8 (85.4)% ------------------------------------------------------------------------- (1) Mark's 2007 results have been restated for the implementation, on a retrospective basis, of CICA HB 3031 - inventories. 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 Third quarter Mark's pre-tax earnings decreased in the third quarter of 2008 primarily as a result of the decrease in gross margin rate attributable to higher markdowns, mainly related to inventory clearance, and a higher inventory shrinkage accrual provision made in the third quarter of 2008 compared to the same period of the previous year. Operating expenses, including depreciation but excluding interest, increased by 9.6 percent over the third quarter of 2007, largely attributable to higher personnel, occupancy and depreciation expenses to support the growth in the store network and backline infrastructure, that has occurred over the last several years. 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 due to the general increase in consumer spending for winter clothing and Christmas related purchases. 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. With the adoption of CICA HB 3031 - Inventories, an even higher percentage of Mark's annual pre-tax earnings are 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 Q3 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 third 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 Q3 2008 Performance ------------------------------------------------------------------------- In 2008, Petroleum will continue Third quarter to strengthen the existing network by opening new sites and - opened two new gas bars; refurbishing or rebuilding existing - rebranded two gas bars; sites. - refurbished seven gas bars and replaced one gas bar; and - closed two existing locations. At the end of the quarter, Petroleum had 269 gas bars, including 44 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 in the process of enhancing its interrelatedness strategy to further extend its marketing leverage across the Company. ------------------------------------------------------------------------- 2008 Key initiatives Q3 2008 Performance ------------------------------------------------------------------------- In 2008, Petroleum will Third quarter aggressively seek out additional cross-marketing opportunities to - issued multiplier coupons further leverage its that increase the Canadian interrelatedness strategy to drive Tire 'Money' offered on gas customer traffic, transactions, purchases paid for in cash customer loyalty and earnings or by Canadian Tire Options across the enterprise. MasterCard; - offered discount coupons on Canadian Tire merchandise with the purchase of gas; and - launched Gas Advantage MasterCard in Quebec and Atlantic Canada. -------------------------------------------------------------------------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 Q3 2008 Q3 2007 Change 2008 YTD 2007 YTD Change ------------------------------------------------------------------------- Sales volume (millions of litres) 414.5 434.3 (4.6)% 1,257.9 1,287.0 (2.3)% ------------------------------------------------------------------------- Gasoline sales volumes during the quarter were down slightly due to lower same site sales, partially offset by increases in new site openings. On a same site basis, our gasoline volumes decreased by 5.7 percent in the quarter, which was principally due to a year-over-year increase in average retail gas prices of approximately 29 percent and a softening economic environment. Petroleum's convenience and car wash sales (year-over-year percentage change) Q3 2008 Q3 2007 2008 YTD 2007 YTD ------------------------------------------------------------------------- Total retail sales Convenience store sales 10.7% 12.2% 9.0% 15.5% Car wash sales (14.3)% 29.2% (16.5)% 22.9% ------------------------------------------------------------------------- Same store sales Convenience 9.1% 7.9% 7.3% 11.1% Car wash (14.1)% 26.9% (16.5)% 19.8%Convenience store sales in the third quarter of 2008 increased as a result of new site openings and increases in confectionary, lottery and tobacco sales. The decline in car wash sales is largely attributable to decreased consumer disposable income which was impacted by higher gasoline prices and softening economic conditions experienced in the third quarter of 2008 compared to the previous year.3.3.3.3 Petroleum's financial results ($ in millions) Q3 2008 Q3 2007 Change 2008 YTD 2007 YTD Change ------------------------------------------------------------------------- Retail sales $ 550.2 $ 451.3 21.9% $1,541.1 $1,308.6 17.8% Gross operating revenue 519.3 424.0 22.5% 1,456.9 1,232.4 18.2% EBITDA(1) 11.7 12.1 (3.4)% 32.8 29.1 13.0% ------------------------------------------------------------------------- Earnings before income taxes 7.5 7.9 (5.5)% 20.5 16.8 22.3% Less adjustment for: Loss on disposals of property and equipment (0.1) (0.7) (0.3) (2.0) ------------------------------------------------------------------------- Adjusted earnings before income taxes(1) $ 7.6 $ 8.6 (12.2)% $ 20.8 $ 18.8 11.0% ------------------------------------------------------------------------- (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 Third quarter Record high gasoline prices and an increase in convenience store sales, partially offset by lower gasoline volumes, contributed to Petroleum's revenue growth in the third quarter. Average retail gasoline prices during the third quarter of 2008 increased by approximately 29 percent over the third quarter of 2007, driving the increased revenue. Lower gasoline sales volume and higher credit card fees, partially offset by increased gasoline margins, were the major factors that contributed to Petroleum's reduced earnings during the quarter. While adjusted earnings were down 12.2 percent from $8.6 million this time last year, compared to historical norms, this represents a strong quarterly performance. Petroleum incurred $1.0 million in environmental expenses in the third quarter related to clean-up costs associated with certain site closures compared to $0.8 million incurred in the third 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 Q3 2008 Strategic Plan performance The following outlines Financial Services' performance for the third 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, personal and line of credit 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 Q3 2008 Performance ------------------------------------------------------------------------- For 2008, Financial Services has Third quarter targeted increasing gross average credit card receivables and the Gross average loans receivable number of accounts carrying a were $4.0 billion in the third balance and growing its total quarter. The growth reflects a managed portfolio as key 6.1 percent increase in the initiatives. average account balance and a 0.4 percent increase in the In addition, Financial Services number of accounts carrying a is planning a major relaunch of balance. the Canadian Tire Options MasterCard in 2008. During the quarter Financial Services completed the relaunch of the Canadian Tire Options MasterCard. ------------------------------------------------------------------------- Retail banking Financial Services began offering retail banking products in two pilot markets in October 2006, including high interest savings accounts, GICs 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 Q3 2008 Performance ------------------------------------------------------------------------- Financial Services' retail Third quarter banking plans include increasing Financial Services had accumulated the ending mortgage portfolio over $300 million in deposits and balance and deposit balances. approximately $100 million in mortgages as at the end of the third quarter of 2008. Financial Services will incur approximately $28 million in net Financial Services incurred expenses associated with the $6.0 million in net expenses marketing and operations of the associated with the marketing and retail banking initiative in 2008. operation of the retail banking initiative during the third quarter of 2008. ------------------------------------------------------------------------- ------------------------------------------------------------------------- Initiatives to build a "BETTER" Canadian Tire ------------------------------------------------------------------------- Insurance and other ancillary products Financial Services plans to enhance its insurance and warranty product offering to credit card customers. Revenues from insurance and warranty products have increased significantly in the last five years through direct marketing to Canadian Tire's growing base of customers. ------------------------------------------------------------------------- 2008 Key initiatives Q3 2008 Performance ------------------------------------------------------------------------- Financial Services plans to Revenues from insurance and increase revenues from insurance warranty products increased 7.2 and warranty products during 2008. percent in the third quarter on a comparable basis year-over-year. ------------------------------------------------------------------------- 3.3.4.2 Key performance indicators The following are key indicators of Financial Services' performance: - size of the total managed portfolio - profitability of the portfolio - quality of the portfolio Financial Services' total managed portfolio of loans receivable ($ in millions, except where noted) Q3 2008 Q3 2007 Change 2008 YTD 2007 YTD Change ------------------------------------------------------------------------- Average number of accounts with a balance (thousands) 1,862 1,854 0.4% 1,857 1,851 0.3% Average account balance ($) $ 2,123 $ 2,001 6.1% $ 2,087 $ 1,950 7.0% Gross average receivables (GAR) 3,951.8 3,709.8 6.5% 3,876.1 3,609.1 7.4% Total managed portfolio (end of period) 4,002.3 3,717.4 7.7% Net managed portfolio (end of period) 3,903.2 3,626.9 7.6% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total and net managed portfolio Financial Services' total managed portfolio is the total value of loans receivable including credit card, personal, line of credit and mortgage loans. The total managed portfolio includes both loans that have been securitized and those that remain a receivable of the Company, as reflected in the Consolidated Balance Sheet. Financial Services' net managed portfolio represents the total managed portfolio, less allowances. -------------------------------------------------------------------------Financial Services' gross average receivables were up in the third quarter, due primarily to an increase in credit sales and increased mortgage volumes. The continued success of the Gas Advantage MasterCard and an increase in balance transfers contributed to the total portfolio growth, offset by a decline in personal loan accounts and personal loan account balances. During the quarter, Financial Services ramped up the offering of GICs through third- party brokers. Please refer to section 5.0 for additional information regarding the broker GICs. 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. Approximately 2.6 million cards were issued as part of the Options MasterCard relaunch which is now complete. By the end of the third quarter, over 13 percent of the accounts with a PayPass™ card had been used for PayPass transactions, which is higher than anticipated.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 Sheet, 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) Q3 2008 Q3 2007 Change 2008 YTD 2007 YTD Change ------------------------------------------------------------------------- Average number of accounts with a balance (thousands) 1,826 1,817 0.5% 1,820 1,812 0.4% Average account balance ($) $ 2,041 $ 1,934 5.5% $ 2,013 $ 1,878 7.2% Gross average receivables 3,728 3,513 6.1% 3,663 3,404 7.6% Total managed portfolio (end of period) 3,773 3,525 7.0% -------------------------------------------------------------------------Gross average credit card loans receivable grew 6.1 percent to $3.7 billion at the end of the quarter primarily due to a 5.5 percent increase in the average account balance during the quarter 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) Q3 2008 Q3 2007 Q3 2006 ------------------------------------------------------------------------- Total revenue as a % of GAR(2) 24.28% 24.88% 25.01% Gross margin as a % of GAR(2) 12.40% 13.19% 13.06% Operating expenses as a % of GAR(3) 7.73% 7.77% 7.98% Return on average total managed portfolio(2),(3),(4) 4.69% 5.43% 5.08% ------------------------------------------------------------------------- (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 adjusted earnings before taxes as a percentage of GAR. The decline in the return on the total managed portfolio is principally due to an increase in the provision for credit losses and is also due to expenses incurred for the Options MasterCard relaunch. ------------------------------------------------------------------------- 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, loyalty program costs 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 third quarters of 2006, 2007 and 2008.Portfolio quality Q3 2008 Q3 2007 Q3 2006 ------------------------------------------------------------------------- Net write-off rate (rolling 12-month basis) 6.04% 5.87% 5.94% Account balances less than 30 days overdue at end of period 96.32% 96.26% 96.14% Allowance rate 2.48% 2.44% 2.60% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net write-offs Net write-offs represent account balances that have been written off, net of recoveries. Net write-off rate is the net write-offs expressed as a percentage of gross average receivables in a given period. Financial Services calculates the write-off rate for the loans portfolio on a rolling 12-month basis to mitigate unusual quarterly fluctuations. -------------------------------------------------------------------------Financial Services' rolling 12-month net write-off rate on the total loans portfolio was 6.04 percent in the third quarter of 2008, an increase of 17 basis points over the same period of the previous year. As a result of more challenging economic conditions, Financial Services expects that the write-off rate may increase above the target range of 5.0 percent and 6.0 percent, however a number of actions have already been taken to manage the quality of the portfolio and expected write-off rates to acceptable levels.------------------------------------------------------------------------- Allowance The allowance is determined using a roll rate model that incorporates 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. The allowance rate is a point-in-time calculation and represents the allowance as a percentage of ending receivables. -------------------------------------------------------------------------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. The increase in the allowance rate compared to the third quarter of 2007 is due to a modest increase in the credit card portfolio aging due to challenging economic conditions and the impact of changes in collection practices in 2007. Aging of the credit card portfolio is comparable to the same period in 2007 and 2006.3.3.4.3 Financial Services' financial results ($ in millions) Q3 2008 Q3 2007 Change 2008 YTD 2007 YTD Change ------------------------------------------------------------------------- Gross operating revenue $ 197.8 $ 187.2 5.6% $ 608.0 $ 555.6 9.4% EBITDA(1) 52.7 45.7 15.3% 160.2 162.7 (1.5)% Earnings before income taxes 47.0 43.7 7.4% 144.4 157.7 (8.5)% Less adjustment for: Gain on sale of investment - - - 18.4 Loss on disposals of property and equipment (0.6) (0.1) (0.6) (0.3) Net effect of securitization activities(1) (9.1) (6.3) 7.7 (3.8) Adjusted earnings before income taxes(2) $ 56.7 $ 50.1 13.0% $ 137.3 $ 143.4 (4.3)% ------------------------------------------------------------------------- (1) Includes initial gain/loss on the sale of loans receivable, amortization of servicing liability, change in securitization reserve and gain/loss on re-investment. (2) See section 14.0 on non-GAAP measures.Explanation of Financial Services' financial results Third quarter Financial Services' gross operating revenue increased over the third quarter of 2007 largely as a result of higher credit sales and an increase in interest bearing balances which resulted in an increase in credit interest earned. In addition, ongoing expenses were well controlled as the third- quarter operating ratio on a rolling 12-month basis, excluding the Options MasterCard relaunch costs and costs of the retail banking initiative was 6.71 percent in 2008 compared to 7.07 percent in 2007 and 7.82 percent in 2006. 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. 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 longer term notes issued by GCCT as described in section 5.1.4. A decline in the marketability of the commercial paper and notes would require the Company to find new sources of funding. Developments since the last half of 2007 to date in the international credit markets had an impact on some companies' securitization programs. See sections 5.1.4 and 5.1.5 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 5.1.5 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 5.1 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 CTB'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 objectivesThe 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: ($ in September % of September % of December % of millions) 27, 2008 total 29, 2007 total 29, 2007 total ------------------------------------------------------------------------- Capital components Current portion of long-term debt $ 10.5 0.2% $ 153.1 3.6% $ 156.3 3.4% Long-term debt 1,370.3 28.1% 1,013.8 24.0% 1,341.8 28.8% Long-term deposits 114.5 2.4% 1.1 0.0% 3.8 0.1% Other long-term liabilities(1) 0.3 0.0% 12.4 0.3% 10.6 0.2% Share capital 706.5 14.5% 707.1 16.7% 700.7 15.0% Contributed surplus - - % 1.9 0.0% 2.3 0.0% Components of accumulated other comprehensive loss(2) (12.1) (0.2)% (6.0) (0.1)% (8.5) (0.2)% Retained earnings 2,674.3 55.0% 2,339.0 55.5% 2,455.1 52.7% ------------------------------------------------------------------------- Net capital under management $4,864.3 100.0% $4,222.4 100.0% $4,662.1 100.0% ------------------------------------------------------------------------- (1) Long-term liabilities that are derivative or hedge instruments related to capital items only. (2) Components of other comprehensive loss relating to capital items only.The Company has in place various policies which it uses to manage capital, including a leverage and liquidity policy and a 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 periodic reviews of the policies to ensure they remain consistent with the risk tolerance acceptable to the Company and the current market trends and conditions. 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 third quarter of 2008. Under these covenants, the Company currently 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, engage in additional sale and leaseback transactions of real estate properties and/or increase or decrease the amount of sales of loan receivable to Glacier Credit Card Trust. 4.3.1 CTB's regulatory environment The Company's wholly-owned subsidiary, CTB, 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 third 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, 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 12.0 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 7 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 third 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.September September December 27, 2008 29, 2007(1) 29, 2007(1) ------------------------------------------------------------------------- Debt ratio Long-term debt to total capitalization(2) 25.2% 26.0% 31.2% Coverage ratio Interest coverage(3) 8.1 times 11.5 times 10.7 times ------------------------------------------------------------------------- (1) 2007 results have been restated for the implementation, on a retrospective basis, of CICA HB 3031 - Inventories. Please refer to section 13.1 for additional information. (2) Long-term debt includes the current portion of long-term debt. Capitalization is based on current and long-term debt, commercial paper, long-term deposits, future income taxes, other long-term liabilities and shareholders' equity. (3) Interest coverage is calculated on a rolling 12-month basis after annualizing short -term and long-term interest on long-term debt issued and retired during the period. See section 14.0 for additional information on non-GAAP measures.The interest coverage ratio has declined from the previous two years due to the significant increase in interest expense which can be explained as follows:- higher interest rate on Q4 2007 MTN issuance; - additional utilization of commercial paper due to a delay in the GCCT refinancing; - an increase in retail banking interest of approximately $3.8 million; and - mark-to-market adjustments As noted above in section 4.3, we are in compliance with our debt covenants. 5.0 Financing Canadian Tire has a number of alternative financing sources in order to ensure that the appropriate level of liquidity is available to meet our strategic objectives. These sources may be summarized as follows: Summary of Canadian Tire's financing sources ------------------------------------------------------------------------- Financing Source Amount Available Description Committed bank lines of $1.22 billion Provided by 11 domestic and credit international banks and includes support for the $800 million commercial paper program noted below which is covered by the bank lines on a dollar for dollar basis. There was approximately $50 million drawn on the bank lines as at September 27, 2008. Commercial paper program $800 million $367 million was outstanding as at September 27, 2008. Medium Term Notes (MTN) $750 million $300 million has been issued program to date under the current Base Shelf Prospectus. Securitization of receivables Transaction Securitization transactions specific handled through Glacier Credit Card Trust have historically proved to be a relatively cost-effective form of financing. As of September 27, 2008, Financial Services has securitized $635 million of credit card receivables in 2008. Broker deposits Unlimited This avenue of fund-raising ramped up in the third quarter and funds are readily available through broker networks. As at the end of the third quarter, Financial Services held $89.7 million in broker deposits. Sale/leaseback transactions Transaction Additional sources of funding specific available on strategic transactions involving Company owned properties as appropriate. Completed two sale and leaseback transactions which raised $214 million in the quarter.As of September 27, 2008, the GCCT commercial paper program has access of up to $1.0 billion of the total Canadian Tire committed lines and 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 generally been able to roll over its commercial paper, albeit at varying spreads and terms. There continues to be constraints on the amount of ABCP that GCCT is able to issue, as investors are cautious and demand remains limited. As of September 27, 2008, $135 million of GCCT's commercial paper was outstanding, fully backed by the bank credit lines. Debt market conditions In August 2007, global debt markets began to experience 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 MTN. GCCT issued five-year MTN in the first quarter of 2008 and continues to refinance certain of its maturing commercial paper, demonstrating that access to the capital markets exists but is challenging. In November 2008, a five-year $570 million GCCT-issued MTN will be maturing. As per the Series Purchase Agreement, GCCT is required to accumulate the principal liquidation amounts for these notes from credit card collections over the three months preceding maturity into the Liquidation Principal Funding account. The total required funding for the repayment of the notes has been accumulated and will be repaid to the noteholders on November 20, 2008. Should the Company be unable to complete a credit card securitization transaction in the near term due to the unstable financial market conditions, the Company believes it has access to other sufficient sources of financing. 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 September 27, 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) (Cdn) 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.Broker deposits During the fourth quarter of 2007, CTB began piloting the use of broker GIC deposits. CTB broker deposits raise cash through sales of GICs through brokers rather than directly to the retail customer and are typically offered at a higher interest rate compared to retail GICs. Individual balances up to $100,000 are Canadian Deposit Insurance Corporation (CDIC) insured and CTB broker GICs are offered in one year to five year terms and all issued GICs are non-redeemable prior to maturity. Given that the overall size of the broker GIC market is estimated to be $57 billion, CTB believes that there is ample room in the market to take advantage of CTB broker GIC deposits as an alternative funding source to the securitization of credit card receivables at reasonable and cost-effective interest rates to fund operations. As at the end of the third quarter, CTB had approximately $90 million in short-term and long-term CTB broker deposits outstanding on its balance sheet. CTB believes that there is potential to generate further increases in this funding source in the future, depending on the time of year and on market conditions. Foreign exchange hedging program The Company has significant demand for United States dollars, due to global sourcing. To mitigate the impact of fluctuating foreign exchange rates on the cost of our globally sourced merchandise and consequently earnings, the Company had, and continues to have, a comprehensive foreign currency hedging program. The Company's Foreign Exchange Risk Management Policy has specific guidelines for determining the minimum hedge percentage required for purchases of foreign-denominated goods and services that are expected to be completed in the period from one month to 18 months forward. Consequently, when dramatic swings in foreign currency rates arise, as experienced since the end of the third quarter of 2008, the Company has fixed the foreign currency impact for US denominated purchases for the balance of 2008 and more than half of 2009, as a majority of the US dollars required are available at hedge rates well below the current spot reference rate. The current foreign currency hedge portfolio allows the Company to have a significant amount of margin stability for 2008 and 2009 and the Company may be able to pass on changes in foreign currency exchange rates through pricing, subject to competitive conditions. 5.1 Funding program 5.1.1 Funding requirements We fund our capital expenditures, working capital needs, dividend payments and other financing needs, such as debt repayments and Class A Non- Voting Share purchases under the NCIB, from a combination of sources. In the third quarter of 2008, the primary sources of funding were:- $ 367 million of cash generated from the issuance of commercial paper; - $ 214 million of cash generated from the sale and leaseback of property; - $140 million of cash generated from operating activities before other changes in working capital; and - $ 121 million of cash arising from an increase in net deposits.5.1.2 Cash and cash equivalents At September 27, 2008, the Company's cash and cash equivalents totaled $2.1 million compared to a negative cash and cash equivalents position of $84.2 million at September 29, 2007. There was $367.2 million of commercial paper outstanding at the end of the third quarter of 2008 compared to $135.4 million of commercial paper outstanding at the end of the third quarter of 2007. During the third quarter of 2008, we used cash primarily for the following:- $382 million for the net growth in new loans receivable; - $380 million for the accumulation of the maturing $570 million GCCT MTN to be repaid in November 2008; and - $122 million for additions to property and equipment.5.1.3 Working capital Minimizing our working capital requirements continues to be a long-term priority in order to maximize cash flow for use in the operations of the Company. The table below shows the change in the value of our working capital components at the end of the third quarter of 2008 from the third quarter of 2007.Comparable working capital components(1) Increase/ (decrease) September September in working ($ in millions) 27, 2008 29, 2007 capital ------------------------------------------------------------------------- Accounts receivable $ 584.1 $ 519.4 $ 64.7 Loans receivable 1,314.6 847.2 467.4 Merchandise inventories 1,301.2 1,083.7 217.5 Prepaid expenses and deposits 56.3 54.3 2.0 Income taxes recoverable 83.7 117.4 (33.7) Accounts payable and other (1,417.5) (1,525.9) 108.4 ------------------------------------------------------------------------- $ 826.3 ------------------------------------------------------------------------- (1) 2007 figures have been restated for the implementation, on a retrospective basis, of CICA HB 3031 - Inventories. See section 13.1 for additional information.The increase in loans receivable is due to increases in the mortgage portfolio, credit card loans portfolio, line of credit account balances and the repurchase of the securitized personal loan portfolio in May 2008. The balance is also higher compared to the third quarter of 2007 due to the timing of securitization transactions. Since a transaction was not completed during the third quarter of 2008, a greater amount of receivables is being reflected on the Consolidated Balance Sheet than would otherwise have been if the receivables been securitized. The increase in merchandise inventories is due to:- an increase in the amount of globally sourced product, which has longer lead times due to increases required by certain business partners which comprise the global supply chain; and - Management's decision to keep seasonal inventory from the spring and summer seasons in storage to sell next year versus heavily discounting or otherwise disposing of the goods.Plans are in place to manage inventories back to planned levels over the next several quarters. The decrease in accounts payable and other is largely due to a decrease, and consequent reclassification to accounts receivable, of foreign exchange derivatives resulting in their increase in value due to movement in the Canadian dollar exchange rate. Payables also decreased due to the timing of a financing arrangement for Petroleum (which will commence in the fourth quarter of 2008 compared to beginning in September 2007), partially offset by an increase in merchandise payables due to higher inventory levels. 5.1.4 Asset-backed commercial paper Background The market for Canadian third-party asset-backed commercial paper, which was greatly impacted by the global disruption in the market experienced in August 2007, has been addressed in a formal restructuring proposal. On September 19, 2008, the Supreme Court of Canada denied a challenge to the restructuring plan clearing the way for the committee of investors to proceed with the implementation. Under the plan investors will receive the restructured notes with maturities up to nine years. The new notes were expected in October 2008 however the restructuring plan has been delayed due to the recent market upheavals and it is expected that the restructuring will close by the end of November 2008. The restructuring provides investors with new long-term notes to replace the short-term ABCP that is currently illiquid. More than 90 percent of 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 in the first quarter of 2008, bringing the total charge for impairment to $2.3 million or 25 percent. The Company's valuation is representative of the expected outcome of the plan, and as such no further write-down was recorded in the second and third quarters of 2008. 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 September 27, 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 the Financial Services segment or CTB. As referenced in section 5.0, 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 any impact on its business as a result of the current third-party ABCP liquidity issue. 5.1.5 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:September September ($ in millions) 27, 2008 29, 2007 ------------------------------------------------------------------------- Securitized $ 2,471.3 $ 2,694.5 Unsecuritized 1,431.9 932.4 ------------------------------------------------------------------------- Net managed loans receivable $ 3,903.2 $ 3,626.9 -------------------------------------------------------------------------Net managed loans receivable continued to increase over the last 12 months as customers' use of the Canadian Tire Options MasterCard and Canadian Tire Gas Advantage MasterCard grew and mortgage volumes increased. At the end of the third quarter of 2008, net managed loans receivable were 7.6 percent higher than at the end of the third quarter of 2007. CTB sells co-ownership interests in credit card loans to GCCT. The Company does not have a controlling interest in GCCT, so we do not include financial results of GCCT in our Consolidated Financial Statements. We record the sale of loans receivable in accordance with CICA's Accounting Guideline 12, "Transfers of Receivables". Please see note 1 in the Notes to the 2007 Consolidated Financial Statements. 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 this increase from the sale of co-ownership interests in credit card loans to GCCT, deposit raising by CTB and bank borrowing. 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 dependent on GCCT's ability to obtain funds from third parties by issuing debt instruments with high credit ratings. Please refer to section 5.0 above for a listing of GCCT's credit ratings and prevailing market conditions. The trustee and custodian for GCCT, Computershare Trust Company of Canada, 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. Pursuant to an asset purchase agreement dated February 26, 2007, all rights and obligations of The Canada Trust Company as custodian have been assigned to Computershare Trust Company of Canada effective September 5, 2008. 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 third quarter of 2008 was $41.45 per share compared to $36.61 at the end of the third 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 September September 27, 2008 29, 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) 495,043 372,463 Shares purchased under NCIB (494,800) (287,000) ------------------------------------------------------------------------- Shares outstanding at end of quarter 78,048,305 78,132,919 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 third quarter of 2008 compared to dividends of $15.1 million in the third 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 third quarterly dividend at the 2008 rate was declared on August 7, 2008 in the amount of $0.21 per share payable on December 1, 2008 to shareholders of record as of October 31, 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, capital market conditions 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 Q3 2008 Capital expenditures program Canadian Tire's capital expenditures totaled $131 million in the third quarter of 2008 (as disclosed in the Consolidated Financial Statements of Cash Flows, see note 12 in the Notes to the Consolidated Financial Statements), approximately 21 percent lower than the $165 million spent in the third quarter of 2007. These capital expenditures were comprised of:- $85 million for real estate projects, including projects associated with the rollout of CTR's new store projects; - $12 million for the Eastern Canada distribution centre; - $14 million for information technology; and - $20 million for other purposesOverall, capital investments for real estate projects has slowed as the 20/20 store rollout nears completion and a large majority of the investment in the construction of the Eastern Canada distribution centre will be substantially completed this year. We have also begun to focus on the next store concept renewals, including our small market stores, which are less capital-intensive. 7.2 2008 Capital expenditures plan The 2008 capital plan was originally to incur gross capital expenditures of $588 million and has now been revised to be in the range of $520 million to $550 million. 2008 gross capital expenditures are now forecasted as follows, which total $543 million:- $385 million for real estate projects, including $244 million associated with the rollout of CTR's store network; - $ 77 million for the Eastern Canada distribution centre; - $ 61 million for information technology; and - $ 20 million for other purposesThese expenditures have been partially funded by various sale and leaseback transactions originally expected to be $145 million but which are now estimated to net $214 million. 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. 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 main issues challenged by the Canada Revenue Agency (CRA) relate to the tax treatments of commissions paid to foreign subsidiaries of the Company (covering periods from 1995 to 2007), 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 on these matters for the corresponding periods. The Company has agreed with the CRA to settle the commissions issue for the period 1995-2003, although the determination of the final tax liability pursuant to the settlement is subject to the verification by the CRA of certain information provided by the Company. The Company believes the provincial tax authorities will also reassess on the same basis. The Company does not have a significant exposure on this issue subsequent to the 2003 taxation year. The reassessments with respect to the dividends received issue are based on multiple grounds, some of which are highly unusual. The Company has appealed the reassessments and the matter is currently pending before the Tax Court of Canada. 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 $188.3 million. Although the Company has appealed these reassessments, current tax legislation requires the Company to remit to the CRA and its provincial counterparts approximately $116.8 million related to this matter, of which $112.6 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 the settlements, finalization on the commissions issue, resolution of the dividends received issue and other tax matters, will not have a material adverse effect on its liquidity, consolidated financial position or results of operations because the Company believes that it has adequate provision for these tax matters. Should the ultimate tax liability materially differ from the provisions, the Company's effective tax rate and its earnings could be affected, positively or negatively, in the period in which the matters are resolved. Income tax expense for the third quarter of 2008 has been favourably impacted by the net tax effect of adjustments to taxes on the sale and leaseback of various properties ($6.6 million) and revisions to the estimate of tax provisions. 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 section 5.1.5 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 third quarter of 2008. 11.1 Financial instruments The following discussion on risks and risk management includes some of the required disclosures under the CICA Handbook Section 3862 - Financial Instruments - Disclosures related to the nature and extent of risks arising from financial instruments, as required by the standard. Further information is also available in note 10 of the Notes to the Consolidated Financial Statements. The Company is exposed to a number of risks associated with financial instruments that have the potential to affect its operating and financial performance. The Company's primary financial instrument risk exposures are allowances for credit losses and liquidity risk. The Company also has financial risk exposures to foreign currency risk and interest rate risk which may be managed through the use of derivative financial instruments to manage these risks. The Company does not use derivative financial instruments for trading or speculative purposes. 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:Credit card loans Other loans(1) ---------------------------------------- September September September September (Dollars in millions) 27, 2008 29 2007 27, 2008 29 2007 ---------------------------------------- Balance, beginning of year $ 51.5 $ 30.4 $ 2.7 $ 2.9 Provision for credit losses 47.1 42.6 8.2 4.5 Recoveries 10.7 7.4 0.4 0.1 Write-offs (59.3) (41.8) (7.5) (4.5) ---------------------------------------- Balance, end of period $ 50.0 $ 38.6 $ 3.8 $ 3.0 ---------------------------------------- Accounts receivable Total(2) ---------------------------------------- September September September September (Dollars in millions) 27, 2008 29 2007 27, 2008 29 2007 ---------------------------------------- Balance, beginning of year $ 5.0 $ 4.6 $ 59.2 $ 37.9 Provision for credit losses 0.8 0.2 56.1 47 3 Recoveries 0.3 (0.2) 11.4 7.3 Write-offs (2.5) (0.1) (69.3) (46.4) ---------------------------------------- Balance, end of period $ 3.6 $ 4.5 $ 57.4 $ 46.1 ---------------------------------------- (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. Refer to section 5.0 above for additional information on our foreign currency hedging program. 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 ------------------------------------------------------------------------- Deposits $ 186.5 $ 11.4 $ 13.1 $ 3.8 Accounts payable and other(1) 1,808.5 - - - Long-term debt 7.1 465.0 9.0 20.9 Interest payment 92.8 84.6 50.4 49.2 Other - 5.5 - - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total $2,094.9 $ 566.5 $ 72.5 $ 73.9 ------------------------------------------------------------------------- (Dollars in millions) 5 years Thereafter Total --------------------------------------------------------------- Deposits $ 86.2 $ - $ 301.0 Accounts payable and other(1) - - 1,808.5 Long-term debt 7.8 863.6 1,373.4 Interest payment 48.8 677.4 1,003.2 Other 0.1 7.2 12.8 --------------------------------------------------------------- --------------------------------------------------------------- Total $ 142.9 $1,548.2 $4,498.9 --------------------------------------------------------------- (1) Includes bank indebtedness 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 a policy in place whereby a minimum of 75 percent of its long-term debt (term greater than one year) must be at fixed versus floating interest rates. The Company is in compliance with the policy. 11.2 Other risks In addition to the Principal Risks identified in our 2007 Financial Report other 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 three In years In years months 2009 - 2011 - After ($ in millions) Total of 2008 2010 2012 2012 ------------------------------------------------------------------------- Long-term debt $1,325.9 $ 0.5 $ 460.3 $ 15.0 $ 850.1 Capital lease obligations 47.5 1.8 13.2 14.2 18.3 Operating leases 2,144.5 57.4 439.7 368.7 1,278.7 Purchase obligations 811.4 552.2 188.3 45.3 25.6 Other obligations 27.3 2.0 11.8 7.8 5.7 ------------------------------------------------------------------------- Total contractual obligations $4,356.6 $ 613.9 $1,113.3 $ 451.0 $2,178.4 ------------------------------------------------------------------------- (1) The long-term debt number in the Consolidated Balance Sheet has been adjusted by $7.4 million due to the implementation of the new Financial Instrument standard.13.0 Changes in accounting policies The numbers indicated in this MD&A follow the same accounting policies and methods of their application as the most recently issued annual financial statements for the 52 weeks ended December 29, 2007 (contained in our 2007 Annual Report), except as noted below. 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 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 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:Increase/(Decrease) ------------------------------------------------------------------------- December September December ($ in millions) 29, 2007 29, 2007 30, 2006 ------------------------------------------------------------------------- Retained earnings $ 14.2 $ 8.0 $ 20.1 Inventories 22.0 11.6 31.5 Income taxes recoverable (5.8) 1.0 - Future income tax assets (2.0) (5.3) (5.3) Accounts payable and other - (0.7) 0.6 Income taxes payable - - 5.5 -------------------------------------------------------------------------In addition, the impact of the retrospective impact on net earnings for the 13 weeks ended September 29, 2007 was a reduction of $3.7 million, or $0.04 per share and for the 26 weeks ended September 29, 2007 was a reduction of $12.2 million, or $0.15 per share. See note 2 in the Notes to the Consolidated Financial Statements for additional information. 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 11.1 in this MD&A and note 10 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, internal control over financial reporting, taxes, IT systems and processes as well as certain contractual arrangements. The Company is currently assessing the impact of the transition to IFRS. Training and hiring additional resources is underway 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, with the exception of intangible items initially recognized as an expense. The Company is currently 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. 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) Q3 2008 Q3 2007(2) YTD 2008 YTD 2007(2) ------------------------------------------------------------------------- EBITDA(3) CTR $ 152.8 $ 148.5 $ 398.0 $ 376.7 Financial Services 52.7 45.7 160.2 162.7 Petroleum 11.7 12.1 32.8 29.1 Mark's 6.7 11.7 24.4 46.4 ------------------------------------------------------------------------- Total EBITDA $ 223.9 $ 218.0 $ 615.4 $ 614.9 ------------------------------------------------------------------------- Less: Depreciation and amortization expense CTR $ 43.2 $ 39.5 $ 127.7 $ 114.9 Financial Services 3.4 3.1 10.0 9.4 Petroleum 4.2 4.2 12.3 12.3 Mark's 5.9 4.4 17.0 13.2 ------------------------------------------------------------------------- Total depreciation and amortization expense $ 56.7 $ 51.2 $ 167.0 $ 149.8 ------------------------------------------------------------------------- Interest expense(3) CTR $ 15.6 $ 14.1 $ 47.7 $ 40.4 Financial Services 2.3 (1.1) 5.8 (4.4) Mark's 1.1 1.1 3.2 2.2 ------------------------------------------------------------------------- Total interest expense $ 19.0 $ 14.1 $ 56.7 $ 38.2 ------------------------------------------------------------------------- Earnings (loss) before income taxes CTR $ 94.0 $ 94.9 $ 222.6 $ 221.4 Financial Services 47.0 43.7 144.4 157.7 Petroleum 7.5 7.9 20.5 16.8 Mark's (0.3) 6.2 4.2 31.0 ------------------------------------------------------------------------- Total earnings before income taxes $ 148.2 $ 152.7 $ 391.7 $ 426.9 ------------------------------------------------------------------------- (1) Differences may occur due to rounding. (2) 2007 figures have been restated for the implementation, on a retrospective basis, of CICA HB 3031 - Inventories. See section 13.1 for additional information. (3) Eliminations of inter-company transactions (eg. a loan of funds from one business unit to another), previously disclosed as a separate line item, are now presented net of these transactions.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. From time to time adjusted earnings may also contain additional unusual and/or non-recurring items which are explained in detail at that time. 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 September 27, 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 third 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 THIRD QUARTER INTERIM REPORT FINANCIALS Consolidated Statements of Earnings (Unaudited) ------------------------------------------------------------------------- (Dollars in millions 13 weeks ended, 39 weeks ended, except per share September September September September amounts) 27, 2008 29, 2007 27, 2008 29, 2007 ------------------------------------------------------------------------- (Restated - (Restated - Notes 2 Notes 2 and 16) and 16) Gross operating revenue $ 2,257.5 $ 2,049.2 $ 6,533.5 $ 6,101.0 ------------------------------------------------------------------------- Operating expenses Cost of merchandise sold and all other operating expenses except for the undernoted items 2,024.3 1,822.0 5,895.0 5,461.9 Net interest expense (Note 7) 19.0 14.1 56.7 38.2 Depreciation and amortization 56.7 51.2 167.0 149.8 Employee Profit Sharing Plan 9.3 9.2 23.1 24.2 ------------------------------------------------------------------------- Total operating expenses 2,109.3 1,896.5 6,141.8 5,674.1 ------------------------------------------------------------------------- Earnings before income taxes 148.2 152.7 391.7 426.9 Income taxes Current 61.6 42.3 140.7 138.3 Future (22.0) 8.2 (22.0) 8.2 ------------------------------------------------------------------------- Income taxes 39.6 50.5 118.7 146.5 ------------------------------------------------------------------------- Net earnings $ 108.6 $ 102.2 $ 273.0 $ 280.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic and diluted earnings per share $ 1.33 $ 1.25 $ 3.35 $ 3.44 ------------------------------------------------------------------------- Weighted average number of Common and Class A Non-Voting Shares outstanding 81,512,981 81,519,870 81,510,371 81,498,943 ------------------------------------------------------------------------- Consolidated Statements of Cash Flows (Unaudited) ------------------------------------------------------------------------- 13 weeks ended, 39 weeks ended, September September September September (Dollars in millions) 27, 2008 29, 2007 27, 2008 29, 2007 ------------------------------------------------------------------------- (Restated - (Restated - Notes 2 Notes 2 and 16) and 16) Cash generated from (used for): Operating activities Net earnings $ 108.6 $ 102.2 $ 273.0 $ 280.4 Items not affecting cash Depreciation and amortization 56.7 51.2 167.0 149.8 Net provision for loans receivable (Note 3) 25.1 21.4 55.3 47.1 Changes in fair value of derivative instruments 1.7 2.6 16.5 5.7 Employee future benefits expense (Note 4) 1.6 1.6 4.8 4.9 Fair market value adjustment and impairments on property and equipment 1.4 0.4 1.7 2.8 Impairment of other long-term investments (Note 11) - 1.3 1.0 1.3 Other (1.8) 0.7 (1.5) 2.5 Gain on disposals of property and equipment (0.1) (6.1) (4.1) (10.1) Future income taxes (22.0) 8.2 (22.0) 8.2 Securitization loans receivable (13.8) (14.1) (40.3) (40.5) Gain on sales of loans receivable (Note 3) (17.4) (21.1) (63.5) (67.0) Gain on disposals/ redemptions of shares - - - (18.4) ------------------------------------------------------------------------- 140.0 148.3 387.9 366.7 ------------------------------------------------------------------------- Changes in other working capital components (287.5) (41.4) (660.1) (855.0) ------------------------------------------------------------------------- Cash generated from (used for) operating activities (147.5) 106.9 (272.2) (488.3) ------------------------------------------------------------------------- Investing activities Additions to property and equipment (121.5) (155.9) (375.7) (420.0) Investment in loans receivable, net (56.3) (1.5) (35.4) (69.4) Purchases of stores (10.4) (2.6) (28.5) (6.8) Other (1.6) (1.4) (3.5) (3.1) Long-term receivables and other assets 9.6 1.3 1.5 19.6 Proceeds on disposition of property and equipment 214.5 10.6 230.6 19.1 Net securitization of loans receivable (382.1) (152.9) 240.3 (16.9) Reclassification of other long-term investments (Note 11) - (8.9) - (8.9) Proceeds on disposals/ redemptions of shares - - - 18.4 ------------------------------------------------------------------------- Cash generated from (used for) investing activities (347.8) (311.3) 29.3 (468.0) ------------------------------------------------------------------------- Financing activities Commercial paper 367.2 135.4 367.2 135.4 Net change in deposits (Note 16) 120.9 11.6 185.7 36.8 Other (0.5) 6.2 1.2 4.6 Dividends (17.1) (15.1) (49.3) (43.6) Repayment of long-term debt (1.6) (1.0) (154.3) (2.4) ------------------------------------------------------------------------- Cash generated from financing activities 468.9 137.1 350.5 130.8 ------------------------------------------------------------------------- Cash generated (used) in the period (26.4) (67.3) 107.6 (825.5) Cash and cash equivalents, beginning of period 28.5 (16.9) (105.5) 741.3 ------------------------------------------------------------------------- Cash and cash equivalents, end of period (Note 8) $ 2.1 $ (84.2) $ 2.1 $ (84.2) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statements of Comprehensive Income (Unaudited) ------------------------------------------------------------------------- 13 weeks ended, 39 weeks ended, September September September September (Dollars in millions) 27, 2008 29, 2007 27, 2008 29, 2007 ------------------------------------------------------------------------- (Restated - (Restated - Note 2) Note 2) Net earnings $ 108.6 $ 102.2 $ 273.0 $ 280.4 Other comprehensive income (loss), net of taxes Gain (loss) on derivatives designated as cash flow hedges, net of tax of $8.1 and $12.2 (2007 - $22.0 and $45.0), respectively 14.3 (41.2) 22.3 (83.5) Reclassification to non-financial asset of loss (gain) on derivatives designated as cash flow hedges, net of tax of $3.3 and $8.4 (2007 - $12.3 and $8.2), respectively (6.1) 22.8 17.9 15.3 Reclassification to earnings of loss (gain) on derivatives designated as cash flow hedges, net of tax of $0.6 and $2.8 (2007 - $0.2 and $1.4), respectively 1.3 0.4 6.0 (2.6) ------------------------------------------------------------------------- Other comprehensive income (loss) 9.5 (18.0) 46.2 (70.8) ------------------------------------------------------------------------- Comprehensive income $ 118.1 $ 84.2 $ 319.2 $ 209.6 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statements of Changes in Shareholders' Equity (Unaudited) ------------------------------------------------------------------------- 39 weeks ended, September September (Dollars in millions) 27, 2008 29, 2007 ------------------------------------------------------------------------- (Restated - Note 2) Share capital Balance, beginning of period $ 700.7 $ 702.7 Transactions, net (Note 5) 5.8 4.4 ------------------------------------------------------------------------- Balance, end of period $ 706.5 $ 707.1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Contributed surplus Balance, beginning of period $ 2.3 $ 0.1 Transactions, net (2.3) 1.8 ------------------------------------------------------------------------- Balance, end of period $ - $ 1.9 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Retained earnings Balance, beginning of period as previously reported $ 2,440.9 $ 2,083.7 Transitional adjustment on adoption of new accounting policies (Note 2) 14.2 20.1 ------------------------------------------------------------------------- Balance, beginning of period as restated 2,455.1 2,103.8 Net earnings for the period 273.0 280.4 Dividends (51.3) (45.2) Repurchase of Class A Non-Voting Shares (2.5) - ------------------------------------------------------------------------- Balance, end of period $ 2,674.3 $ 2,339.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accumulated other comprehensive income (loss) Balance, beginning of period $ (50.0) $ 8.6 Other comprehensive income (loss) for the period 46.2 (70.8) ------------------------------------------------------------------------- Balance, end of period $ (3.8) $ (62.2) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Retained earnings and accumulated other comprehensive income $ 2,670.5 $ 2,276.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Balance Sheets (Unaudited) ------------------------------------------------------------------------- (Dollars in millions) September September December As at 27, 2008 29, 2007 29, 2007 ------------------------------------------------------------------------- (Restated - (Restated - Notes 2 Notes 2 and 16) and 16) ASSETS Current assets Cash and cash equivalents (Note 8) $ 2.1 $ - $ - Accounts receivable 584.1 519.4 715.0 Loans receivable (Note 3) 1,314.6 847.2 1,486.1 Merchandise inventories (Note 2) 1,301.2 1,083.7 778.7 Income taxes recoverable 83.7 117.4 53.2 Prepaid expenses and deposits 56.3 54.3 29.5 Future income taxes 53.6 36.5 75.7 ------------------------------------------------------------------------- Total current assets 3,395.6 2,658.5 3,138.2 ------------------------------------------------------------------------- Long-term receivables and other assets (Note 3) 235.5 254.8 231.2 Other long-term investments, net (Note 11) 6.6 7.6 7.6 Goodwill 72.2 50.0 51.8 Intangible assets 52.5 52.4 52.4 Property and equipment, net 3,320.0 3,119.6 3,283.6 ------------------------------------------------------------------------- Total assets $ 7,082.4 $ 6,142.9 $ 6,764.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES Current liabilities Bank indebtedness (Note 8) $ - $ 84.2 $ 105.5 Commercial paper 367.2 135.4 - Deposits 186.5 37.9 111.5 Accounts payable and other 1,417.5 1,525.9 1,740.4 Current portion of long-term debt 10.5 153.1 156.3 ------------------------------------------------------------------------- Total current liabilities 1,981.7 1,936.5 2,113.7 ------------------------------------------------------------------------- Long-term debt 1,370.3 1,013.8 1,341.8 Future income taxes 51.3 78.8 71.8 Long-term deposits 114.5 1.1 3.8 Other long-term liabilities 187.6 126.9 125.6 ------------------------------------------------------------------------- Total liabilities 3,705.4 3,157.1 3,656.7 ------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Share capital (Note 5) 706.5 707.1 700.7 Contributed surplus - 1.9 2.3 Accumulated other comprehensive loss (3.8) (62.2) (50.0) Retained earnings 2,674.3 2,339.0 2,455.1 ------------------------------------------------------------------------- Total shareholders' equity 3,377.0 2,985.8 3,108.1 ------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 7,082.4 $ 6,142.9 $ 6,764.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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, these financial statements should be read in conjunction with the most recently issued 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 issued 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 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 29, September 29, December 30, 2007 2007 2006 ----------------------------------------- Retained earnings $ 14.2 $ 8.0 $ 20.1 Inventories 22.0 11.6 31.5 Income taxes recoverable (5.8) 1.0 - Future income tax assets (2.0) (5.3) (5.3) Accounts payable and other - (0.7) 0.6 Income taxes payable - - 5.5 In addition, the retrospective impact on net earnings for the 13 weeks ended September 29, 2007 was a reduction of $3.7 million, or $0.04 per share, and for the 39 weeks ended September 29, 2007 a reduction of $12.2 million, or $0.15 per share. Included in "cost of merchandise sold and all other operating expenses except for the undernoted items" for the 13 weeks and 39 weeks ended September 27, 2008 is $1,604.6 million (2007 - $1,410.8 million) and $4,610.1 million (2007 - $4,263.2 million), respectively, of inventory recognized as an expense, which included $16.0 million (2007 - $9.4 million) and $48.9 million (2007 - $31.6 million), respectively, of write-downs of inventory as a result of net realizable value being lower than cost. Inventory write-downs recognized in previous periods and reversed in the current quarter and year to date and the comparative quarter and year to date 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 replaced the existing CICA Handbook Section 3861 "Financial Instruments - Disclosure and Presentation". They 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 did not require any changes to the Company's accounting, but does require additional note disclosure, which is included in note 10. 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 did not require any changes to the Company's accounting, but does require additional note disclosure, which is included in note 9. 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 with the exception of intangible items initially recognized as an expense. 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 expects the transition to IFRS to impact accounting, financial reporting, internal control over financial reporting, taxes, IT systems and processes as well as certain contractual arrangements. The Company is currently assessing the impact of the transition to IFRS. Training and hiring additional resources is underway to ensure the timely conversion 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 CICA 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 and for the credit card loan securitization, the additional enhancement required to be maintained. 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: Total principal amount (Dollars in millions) of receivables as at (1) -------------------------------------- September September December 27, 2008 29, 2007 29, 2007 ------------ ------------ ------------ Total net managed credit card loans $ 3,677.6 $ 3,441.7 $ 3,681.3 Credit card loans sold (2,471.2) (2,625.5) (2,233.7) ------------ ------------ ------------ Credit card loans held 1,206.4 816.2 1,447.6 Total net managed personal loans (2) 101.1 163.4 140.2 Personal loans sold - (69.1) (56.0) ------------ ------------ ------------ Personal loans held 101.1 94.3 84.2 Total net managed mortgage loans (3) 102.3 21.9 35.4 ------------ ------------ ------------ Total net managed line of credit loans (4) 22.1 - - ------------ ------------ ------------ Total loans receivable 1,431.9 932.4 1,567.2 Less: long-term portion (5) (117.3) (85.2) (81.1) ------------ ------------ ------------ Current portion of loans receivable $ 1,314.6 $ 847.2 $ 1,486.1 ------------ ------------ ------------ ------------ ------------ ------------ Average balances (Dollars in millions) for the 39 weeks ended ------------------------- September September 27, 2008 29, 2007 ------------ ------------ Total net managed credit card loans $ 3,571.1 $ 3,325.7 Credit card loans sold (2,704.6) (2,685.1) ------------ ------------ Credit card loans held 866.5 640.6 Total net managed personal loans (2) 121.5 189.2 Personal loans sold (23.7) (92.6) ------------ ------------ Personal loans held 97.8 96.6 Total net managed mortgage loans (3) 61.4 8.0 ------------ ------------ Total net managed line of credit loans (4) 24.5 - ------------ ------------ Total loans receivable $ 1,050.2 $ 745.2 ------------ ------------ ------------ ------------ Less: long-term portion (5) Current portion of loans receivable (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. The original portfolio of personal loans of $43.7 million was repurchased in May 2008 for $26.7 million. (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 and 39 weeks ended September 27, 2008 were $25.1 million (2007 - $21.4 million) and $55.3 million (2007 - $47.1 million), respectively. Net credit losses for the total managed portfolio for the 13 weeks and 39 weeks ended September 27, 2008 were $60.6 million (2007 - $56.9 million) and $181.6 million (2007 - $158.8 million), respectively. 4. Employee Future Benefits The net employee future benefit expense for the 13 weeks and 39 weeks ended September 27, 2008 was $1.6 million (2007 - $1.6 million) and $4.8 million (2007 - $4.9 million), respectively. 5. Share Capital September 27, September 29, December 29, (Dollars in millions) 2008 2007 2007 ------------- ------------- ------------- Authorized 3,423,366 Common Shares 100,000,000 Class A Non-Voting Shares Issued 3,423,366 Common Shares (September 29, 2007 - 3,423,366) $ 0.2 $ 0.2 $ 0.2 78,048,305 Class A Non-Voting Shares (September 29, 2007 - 78,132,919) 706.3 706.9 700.5 ------------- ------------- ------------- $ 706.5 $ 707.1 $ 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: (Dollars in 39 weeks ended 39 weeks ended millions) September 27, 2008 September 29, 2007 ------------------------- ------------------------- Number $ Number $ ----------------- ------- ----------------- ------- Shares outstanding at the beginning of the period 78,048,062 700.5 78,047,456 702.5 Issued 495,043 29.8 372,463 28.5 Repurchased (494,800) (28.8) (287,000) (22.3) Excess of repurchase price over issue price (issue price over repurchase price) - 4.8 - (1.8) ----------------- ------- ----------------- ------- Shares outstanding at the end of the period 78,048,305 706.3 78,132,919 706.9 ----------------- ------- ----------------- ------- ----------------- ------- ----------------- ------- 6. Stock-based Compensation Plans All stock-based compensation plans are as disclosed in the most recently issued annual financial statements for the 52 weeks ended December 29, 2007 except as follows: 2008 Performance Share Unit Plan The Company has granted 2008 performance share units (2008 PSUs) to certain employees. Each 2008 PSU entitles the participant to receive a cash payment in an amount equal to the weighted average closing price of Class A Non-Voting Shares traded on the Toronto Stock Exchange for the 20-day period prior to and including the last day of the performance period, multiplied by an applicable multiplier determined by specific performance-based criteria. Compensation expense related to 2008 PSUs is accrued over the performance period based on the expected total compensation to be paid out at the end of the performance period. For the 13 weeks and 39 weeks ended September 27, 2008, $0.6 million and $1.5 million of compensation expense was recorded for the 2008 PSUs, respectively. 7. Segmented Information - Statement of Earnings --------------------------------------------------------------------- 13 weeks 39 weeks ended ended September September 13 weeks 29, 2007 39 weeks 29, 2007 ended (Restated - ended (Restated - September Notes 2 September Notes 2 (Dollars in millions) 27, 2008 and 16) 27, 2008 and 16) --------------------------------------------------------------------- Gross operating revenue CTR $ 1,399.3 $ 1,304.0 $ 4,032.7 $ 3,889.8 Financial Services 197.8 187.2 608.0 555.6 Petroleum 519.3 424.0 1,456.9 1,232.4 Mark's 168.7 159.8 516.8 499.1 Eliminations (27.6) (25.8) (80.9) (75.9) ----------------------------------------------- Total gross operating revenue $ 2,257.5 $ 2,049.2 $ 6,533.5 $ 6,101.0 --------------------------------------------------------------------- --------------------------------------------------------------------- Earnings (loss) before income taxes CTR $ 94.0 $ 94.9 $ 222.6 $ 221.4 Financial Services 47.0 43.7 144.4 157.7 Petroleum 7.5 7.9 20.5 16.8 Mark's (0.3) 6.2 4.2 31.0 ----------------------------------------------- Total earnings before income taxes 148.2 152.7 391.7 426.9 Income taxes 39.6 50.5 118.7 146.5 ----------------------------------------------- Net earnings $ 108.6 $ 102.2 $ 273.0 $ 280.4 --------------------------------------------------------------------- --------------------------------------------------------------------- Net Interest expense(1) CTR $ 15.6 $ 14.1 $ 47.7 $ 40.4 Financial Services 2.3 (1.1) 5.8 (4.4) Mark's 1.1 1.1 3.2 2.2 ----------------------------------------------- Total interest expense $ 19.0 $ 14.1 $ 56.7 $ 38.2 --------------------------------------------------------------------- --------------------------------------------------------------------- Depreciation and amortization expense CTR $ 43.2 $ 39.5 $ 127.7 $ 114.9 Financial Services 3.4 3.1 10.0 9.4 Petroleum 4.2 4.2 12.3 12.3 Mark's 5.9 4.4 17.0 13.2 ----------------------------------------------- Total depreciation and amortization expense $ 56.7 $ 51.2 $ 167.0 $ 149.8 --------------------------------------------------------------------- --------------------------------------------------------------------- (1) Net interest expense includes interest on short-term and long- term debt, offset by passive interest income. Interest on long- term debt for the 13 weeks and 39 weeks ended September 27, 2008 was $18.6 million (2007 - $16.6 million) and $57.6 million (2007 - $46.6 million), respectively. Segmented Information - Total Assets --------------------------------------------------------------------- September 29, December 29, 2007 2007 September (Restated - (Restated - (Dollars in millions) 27, 2008 Note 2) Note 2) --------------------------------------------------------------------- CTR $ 6,208.9 $ 5,509.3 $ 5,732.4 Financial Services 2,147.2 1,504.0 1,852.0 Petroleum 281.5 290.0 573.4 Mark's 568.6 519.8 464.1 Eliminations (2,123.8) (1,680.2) (1,857.1) ---------------------------------------- Total $ 7,082.4 $ 6,142.9 $ 6,764.8 --------------------------------------------------------------------- 8. Cash and Cash Equivalents (Bank Indebtedness) The components of cash and cash equivalents (bank indebtedness) are: September September December (Dollars in millions) 27, 2008 29, 2007 29, 2007 ----------- ----------- ----------- Cash (bank overdraft) $ (58.0) $ (108.9) $ 71.8 Line of credit borrowings (49.8) (49.8) (316.8) Short-term investments 109.9 74.5 139.5 ----------- ----------- ----------- Cash and cash equivalents (bank indebtedness) $ 2.1 $ (84.2) $ (105.5) ----------- ----------- ----------- ----------- ----------- ----------- 9. 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: (Dollars September % of September % of December % of in millions) 27, 2008 total 29, 2007 total 29, 2007 total ---------- -------- ---------- -------- ---------- -------- Current portion of long-term debt $ 10.5 0.2% $ 153.1 3.6% $ 156.3 3.4% Long-term debt 1,370.3 28.1% 1,013.8 24.0% 1,341.8 28.8% Long-term deposits 114.5 2.4% 1.1 0.0% 3.8 0.1% Other long-term liabilities(1) 0.3 0.0% 12.4 0.3% 10.6 0.2% Share capital 706.5 14.5% 707.1 16.7% 700.7 15.0% Contributed surplus - -% 1.9 0.0% 2.3 0.0% Components of accumulated other comprehensive loss(2) (12.1) (0.2)% (6.0) (0.1)% (8.5) (0.2)% Retained earnings 2,674.3 55.0% 2,339.0 55.5% 2,455.1 52.7% ---------- -------- ---------- -------- ---------- -------- Net capital under management $4,864.3 100.0% $4,222.4 100.0% $4,662.1 100.0% ---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- (1) Long-term liabilities that are derivative or hedge instruments related to capital items only. (2) Components of other comprehensive loss relating to derivative or hedged items only. The Company has in place various policies which it uses to manage capital, including a leverage and liquidity policy and a 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. September September December (Dollars in millions) 27, 2008 29, 2007(1) 29, 2007(1) ------------------------------------- Debt ratio Long-term debt to total capitalization(2) 25.2% 26.0% 31.2% Coverage ratio Interest coverage(3) 8.1 times 11.5 times 10.7 times ------------------------------------- ------------------------------------- (1) 2007 results have been restated for the implementation, on a retrospective basis, of CICA HB 3031 - Inventories. (2) Long-term debt includes the current portion of long-term debt. Capitalization is based on current and long-term debt, commercial paper, long-term deposits, future income taxes, other long-term liabilities and shareholders' equity. (3) Interest coverage is calculated on a rolling 12-month basis after annualizing short-term and long-term interest on 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 September 30, 2008 (the bank's fiscal third 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 12% 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 nine months ended September 27, 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"). 10. 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: Credit card loans Other loans(1) ------------------------------------------------------- (Dollars September 27, September 29, September 27, September 29, in millions) 2008 2007 2008 2007 ------------------------------------------------------- Balance, beginning of year $ 51.5 $ 30.4 $ 2.7 $ 2.9 Provision for credit losses 47.1 42.6 8.2 4.5 Recoveries 10.7 7.4 0.4 0.1 Write-offs (59.3) (41.8) (7.5) (4.5) ------------------------------------------------------- Balance, end of period $ 50.0 $ 38.6 $ 3.8 $ 3.0 ------------------------------------------------------- ------------------------------------------------------- Accounts receivable Total(2) ------------------------------------------------------- (Dollars September 27, September 29, September 27, September 29, in millions) 2008 2007 2008 2007 ------------------------------------------------------- Balance, beginning of year $ 5.0 $ 4.6 $ 59.2 $ 37.9 Provision for credit losses 0.8 0.2 56.1 47.3 Recoveries 0.3 (0.2) 11.4 7.3 Write-offs (2.5) (0.1) (69.3) (46.4) ------------------------------------------------------- Balance, end of period $ 3.6 $ 4.5 $ 57.4 $ 46.1 ------------------------------------------------------- ------------------------------------------------------- (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 ------------------------------------------------------ Deposits $ 186.5 $ 11.4 $ 13.1 $ 3.8 Accounts payable and other(1) 1,808.5 - - - Long-term debt 7.1 465.0 9.0 20.9 Interest payment 92.8 84.6 50.4 49.2 Other - 5.5 - - ------------------------------------------------------ Total $ 2,094.9 $ 566.5 $ 72.5 $ 73.9 ------------------------------------------------------ ------------------------------------------------------ (Dollars in millions) 5 years Thereafter Total ---------------------------------------- Deposits $ 86.2 $ - $ 301.0 Accounts payable and other(1) - - 1,808.5 Long-term debt 7.8 863.6 1,373.4 Interest payment 48.8 677.4 1,003.2 Other 0.1 7.2 12.8 ---------------------------------------- Total $ 142.9 $ 1,548.2 $ 4,498.9 ---------------------------------------- ---------------------------------------- (1) Includes commercial paper and bank indebtedness. Interest rate risk The Company is exposed to interest rate risk, which it manages through the use of interest rate swaps. The Company has a policy in place that requires a minimum of 75% of its long term debt (term greater than one year) to be at fixed versus floating interest rates. The Company is in compliance with the policy. 11. Other Long-Term Investments The market for Canadian third-party asset-backed commercial paper (ABCP), which was greatly impacted by the global disruption in the market experienced in August 2007, 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, included a controversial clause that would give all players in the market immunity from lawsuits. Subsequent court hearings were held regarding these clauses in the plan and after slight modifications were made to the plan, the court has permitted the plan to proceed. Several parties appealed the court's decision and on September 19, 2008, the Supreme Court of Canada denied a challenge to the restructuring plan approved on April 25, 2008. The restructuring plan has been delayed due to the recent market upheavals and it is expected that the restructuring will close by the end of November 2008. More than 90 percent of 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. The Company's valuation is representative of the expected outcome of the plan, and as such no further write down was recorded in the third quarter of 2008. The total charge for impairment is $2.3 million or 25 percent of the original value of the ABCP. 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 September 27, 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 the Financial Services segment or Canadian Tire Bank. The Company does not expect a material adverse impact on its business as a result of the current third-party ABCP liquidity issue. 12. Supplementary Cash Flow Information The Company paid income taxes during the 13 weeks ended September 27, 2008 of $57.1 million (2007 - $47.8 million) and made interest payments of $14.8 million (2007 - $13.9 million). For the 39 weeks ended September 27, 2008, the Company paid income taxes of $170.6 million (2007 - $304.0 million) and made interest payments of $73.2 million (2007 - $57.1 million). During the 13 weeks ended September 27, 2008, property and equipment were acquired at an aggregate cost of $131.3 million (2007 - $165.1 million). During the 39 weeks ended September 27, 2008, property and equipment were acquired at an aggregate cost of $337.0 million (2007 - $397.9 million). The amount of property and equipment acquired that is included in accounts payable and other at September 27, 2008 was $27.7 million (2007 - $38.0 million). 13. 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. 14. 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 main issues challenged by the Canada Revenue Agency (CRA) relate to the tax treatment of commissions paid to foreign subsidiaries of the Company (covering periods from 1995 to 2007), 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 on these matters for the corresponding periods. The Company has agreed with the CRA to settle the commissions issue for the period 1995-2003, although the determination of the final tax liability pursuant to the settlement is subject to the verification by the CRA of certain information provided by the Company. The Company believes the provincial tax authorities will also reassess on the same basis. The Company does not have a significant exposure on this issue subsequent to the 2003 taxation year. The reassessments with respect to the dividends received issue are based on multiple grounds, some of which are highly unusual. The Company has appealed the reassessments and the matter is currently pending before the Tax Court of Canada. 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 $188.3 million. Although the Company has appealed these reassessments, current tax legislation requires the Company to remit to the CRA and its provincial counterparts approximately $116.8 million related to this matter, of which $112.6 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 the settlements, finalization of the commissions issue, resolution of the dividends received issue and other tax matters, 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 provision, the Company's effective tax rate and its earnings could be affected positively or negatively in the period in which the matters are resolved. 15. Sale and Leaseback of Retail Properties The Company completed the sale and leaseback of 13 Canadian Tire retail properties to third parties during the quarter. The proceeds from the sale of these stores totaled $214.0 million, resulting in a net pre-tax gain of approximately $66.8 million. As the Company entered into long-term leasebacks of the 13 stores from the third parties, the gain will be amortized over the term of the leases. The unamortized gain is included in other long-term liabilities. 16. 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 $77.0 million and $223.0 million for the 13 weeks and 39 weeks ended September 29, 2007, respectively 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 on the consolidated statement of earnings. The Company's wholly-owned subsidiary, Canadian Tire Bank, began taking deposits from customers commencing in 2007. Previously, these amounts were classified in accounts payable and other in the consolidated balance sheets and in changes in other working capital components in the consolidated statements of cash flows. Commencing in the second quarter of 2008, these deposits are shown as current and long-term deposits in the consolidated balance sheets and a separate line in financing activities in the consolidated statements of cash flows. The prior period's figures have been reclassified to conform to the current year's presentation. Interest Coverage Exhibit to the Consolidated Financial Statements (unaudited) --------------------------------------------------------------------- The Company's long-term interest requirements for the 39 weeks ended September 27, 2008, after annualizing interest on long-term debt issued and retired during this period, amounted to $87.2 million. The Company's earnings before interest on long-term debt and income taxes for the 39 weeks then ended were $653.2 million, which is 7.5 times the Company's long-term interest requirements for this period.%SEDAR: 00000534EF
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For further information: Media: Lisa Gibson, (416) 544-7655, lisa.gibson@cantire.com; Investors: Karen Meagher, (416) 480-8058, karen.meagher@cantire.com