Canadian Tire releases second quarter earnings - adjusted net earnings up 8.8%; quarterly dividend maintained at 21 cents
TORONTO, Aug. 13 /CNW/ - Canadian Tire Corporation, Limited (CTC, CTC.a)
released its second quarter results today. Despite softer retail sales due to
challenging market conditions and unseasonable weather, the Company reported
an 8.8% increase in adjusted net earnings compared to the same period last
year. The growth in earnings year-over-year reflects healthy margins across
the retail businesses and lower operating expenses.
"Our focus on maintaining our gross margins and managing our operating
expenses has allowed us to deliver modest growth in earnings this quarter
compared to 2008 despite a challenging retail environment," said Stephen
Wetmore, President and CEO, Canadian Tire. "However, a significant amount of
our annual earnings are achieved in the third and fourth quarters and our
performance for the balance of the year will be very much influenced by the
economy and, of course, seasonal weather patterns."------------------------------------------
Consolidated 2009 2008(2)
Highlights(1): 2nd Quarter 2nd Quarter Change
-------------------------------------------------------------------------
CTC retail sales $2.79 billion $2.95 billion (5.4)%
Gross operating revenue $2.32 billion $2.45 billion (5.1)%
Adjusted earnings before income
taxes (excludes non-operating
gains and losses)(3) $151.5 million $140.4 million 8.0%
Net earnings $103.7 million $97.7 million 6.1%
Adjusted net earnings (excludes
non-operating gains and
losses)(3) $103.0 million $94.7 million 8.8%
Basic earnings per share $1.27 $1.20 5.9%
Adjusted basic earnings per
share (excludes non-operating
gains and losses)(3) $1.26 $1.16 8.6%
(1) All dollar figures in this table are rounded.
(2) The 2008 earnings figures have been restated for implementation, on a
retrospective basis, of the CICA HB 3064 - Goodwill and Intangible
Assets and the amendments to CICA HB 1000 - Financial Statement
Concepts. Please refer to Note 2 in the Consolidated Financial
Statements.
(3) Non-GAAP measure. Please refer to section 15.0 of Management's
Discussion and Analysis.
Business Overview
CANADIAN TIRE RETAIL
($ in millions) Q2 2009 Q2 2008(1) Change YTD 2009 YTD 2008(1) Change
-------------------------------------------------------------------------
Retail sales(2) $2,153.2 $2,174.5 (1.0)% $3,421.1 $3,393.3 0.8%
Same store
sales(3) (year-
over-year %
change) (2.7)% (0.5)% (0.8)% (1.8)%
Gross operating
revenue $1,550.0 $1,562.1 (0.8)% $2,649.3 $2,633.4 0.6%
Net shipments
(year-over-year
% change) (1.4)% 3.2% (0.1)% 1.8%
Earnings before
income taxes $95.2 $85.1 12.0% $128.0 $128.7 (0.5)%
-------------------------------------------------------------------------
Less adjustment
for:
Non-operating
gains and
losses(4) (0.3) 0.1 (0.7) 4.0
Former CEO
retirement
obligations - 0.5 0.5 0.9
-------------------------------------------------------------------------
Adjusted earnings
before income taxes
and minority
interest(5) $95.5 $84.5 13.0% $128.2 $123.8 3.6%
-------------------------------------------------------------------------
(1) 2008 figures have been restated for implementation, on a
retrospective basis, of the CICA HB 3064 Goodwill and Intangible
Assets and the amendments to CICA HB 1000 - Financial Statement
Concepts. Please refer to Note 2 in the Consolidated Financial
Statements.
(2) Includes sales from Canadian Tire stores, PartSource stores 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 15.0 in Management's
Discussion and Analysis.Canadian Tire Retail's sales decreased 1.0% from the same quarter in 2008
with unseasonably cool wet weather impacting some seasonal categories such as
outdoor living and climate control and challenging economic conditions
impacting other categories including tools and electronics. Despite overall
softer sales, Canadian Tire Retail did see an increase in sales in home repair
and maintenance and paint reflecting a focus by customers on repair projects.
The second quarter was also impacted by the timing of the Easter and
Canada Day holidays which reduced sales and same store sales by approximately
0.6%.
Canadian Tire Retail's second quarter adjusted earnings before taxes were
$95.5 million, up 13.0% compared to a year ago due to strong margins and
well-managed operating expenses, offset slightly by increased expenses from
the new Eastern Canada Distribution Centre and continued investments in
productivity initiatives.
Canadian Tire Retail opened five Smart stores in the quarter, two of
which contain a full-size Mark's Work Wearhouse offering, and closed one
traditional store, bringing the total number of stores in the network to 475.
Customer reaction to both the Smart store and Small Market store
continues to be very positive. Both concepts are generally performing above
expectations with higher than projected traffic count and basket size.
PartSource experienced double-digit year-over-year sales increases driven
by both the continued expansion of the network and improved product
assortment. PartSource opened one new store in the quarter bringing the
network total to 88 locations.CANADIAN TIRE PETROLEUM (Petroleum)
($ in millions) Q2 2009 Q2 2008 Change 2009 YTD 2008 YTD Change
-------------------------------------------------------------------------
Sales volume
(millions of
litres) 435.1 429.6 1.3% 843.9 843.4 0.1%
Retail sales $425.7 $541.9 (21.4)% $779.1 $990.9 (21.4)%
Gross operating
revenue $390.8 $514.8 (24.1)% $712.7 $937.6 (24.0)%
Earnings before
income taxes $7.8 $8.0 (2.7)% $13.8 $13.0 6.2%
-------------------------------------------------------------------------
Less adjustment
for:
Non-operating
losses(1) (0.3) - (0.3) (0.2)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(2) $8.1 $8.0 1.0% $14.1 $13.2 6.7%
-------------------------------------------------------------------------
(1) Includes asset impairment losses.
(2) Non-GAAP measure. Please refer to section 15.0 in Management's
Discussion and Analysis.While there was a slight increase in gasoline sales volume over the
comparable period in 2008 due to lower prices at the pumps, Petroleum
experienced declines of more than 20% in gross operating revenues and retail
sales due to significantly lower retail gasoline prices.
Convenience store sales, however, were very strong this quarter due to an
increase in convenience store traffic.
Despite significantly lower revenues, margins in the quarter were
consistent year-over-year and Petroleum delivered another strong quarter based
on continued effective execution of promotional programs and good expense
management.
Petroleum replaced one gas station and closed one location during the
quarter bringing the total number of gas bars in the network to 273.MARK'S WORK WEARHOUSE (Mark's)
($ in millions) Q2 2009 Q2 2008(1) Change 2009 YTD 2008 YTD(1) Change
-------------------------------------------------------------------------
Total retail
sales(2) $210.2 $233.1 (9.8)% $378.7 $405.6 (6.6)%
Same store
sales(3) (year-
over-year %
change) (11.3)% 0.9% (8.2)% (2.8)%
Gross operating
revenue(4) $182.2 $200.6 (9.2)% $329.3 $348.1 (5.4)%
-------------------------------------------------------------------------
Earnings before
income taxes $7.1 $7.3 (2.7)% $2.2 $3.9 (43.4)%
-------------------------------------------------------------------------
Less adjustment
for:
Non-operating
losses (0.1) (0.1) (0.3) (0.1)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(5) $7.2 $ 7.4 (1.3)% $2.5 $4.0 (36.2)%
-------------------------------------------------------------------------
(1) 2008 figures have been restated for implementation, on a
retrospective basis, of the CICA HB 3064 Goodwill and Intangible
Assets and the amendments to CICA HB 1000 - Financial Statement
Concepts. Please refer to Note 2 in the Consolidated Financial
Statements.
(2) Includes retail sales from corporate and franchise stores.
(3) Mark's same store sales exclude new stores, stores not open for the
full period in each year and store closures.
(4) Gross operating revenue includes retail sales at corporate stores
only
(5) Non-GAAP measure. Please refer to section 15.0 in Management's
Discussion and Analysis.Mark's second quarter total retail sales were $210.2 million down 9.8%
from the $233.1 million recorded a year ago, reflecting lower sales in all
parts of the country due to softer economic conditions, with Ontario and
Alberta posting the largest decreases. At the category level, while corporate
store sales in ladies wear experienced a modest decline, ladies accessories
and health wear posted double digit increases. Corporate store sales in
industrial wear, men's casual and casual footwear, however, were all down
significantly year-over-year.
Adjusted pre-tax earnings were $7.2 million down 1.3% from the $7.4
million recorded the previous year. The adjusted pre-tax earnings were similar
to a year ago because the gross margin rate improved significantly by 470
basis points principally due to a lower shrink expense during 2009 compared to
the prior year. Operating expenses were also well-managed.
During the quarter, Mark's opened two new stores, relocated three stores,
renovated one store and closed one store, bringing the total number of stores
in the network to 375.CANADIAN TIRE FINANCIAL SERVICES (Financial Services)
($ in millions) Q2 2009 Q2 2008(1) Change 2009 YTD 2008 YTD(1) Change
-------------------------------------------------------------------------
Total managed
portfolio end
of period $4,109.9 $3,926.7 4.7%
Gross operating
revenue $232.9 $201.5 15.6% $450.2 $410.2 9.8%
Earnings before
income taxes $42.3 $44.4 (4.7)% $74.8 $98.6 (24.2)%
-------------------------------------------------------------------------
Less adjustment
for:
Non-operating
losses (0.1) - (0.2) -
Net effect of
securitization
activities(2) 1.7 3.9 2.2 16.8
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(3) $40.7 $40.5 0.5% $72.8 $81.8 (11.0)%
-------------------------------------------------------------------------
(1) 2008 figures have been restated for implementation, on a
retrospective basis, of the CICA HB 3064 Goodwill and Intangible
Assets and the amendments to CICA HB 1000 - Financial Statement
Concepts. Please refer to Note 2 in the Consolidated Financial
Statements.
(2) Includes initial gain/loss on the sale of loans receivable,
amortization of servicing liability, change in securitization reserve
and gain/loss on reinvestment.
(3) Non-GAAP measure. Please refer to section 15.0 in Management's
Discussion and Analysis.Financial Services' total managed portfolio of loans receivable was $4.1
billion at the end of the second quarter, a 4.7% increase over the $3.9
billion portfolio at the end of the comparable 2008 period.
Financial Services' gross operating revenue was $232.9 million in the
quarter, a 15.6% increase over the $201.5 recorded in the prior year,
reflecting an increase in yield resulting from various pricing initiatives and
slowing of customer payments.
Adjusted pre-tax earnings were relatively flat for the second quarter
with higher revenues and well-managed operating expenses offset by increases
in provision for credit losses and an increase in interest expense caused by
the substantial increase in broker deposits. However, last year's earnings
were impacted by a $9.7 million investment in the Options MasterCard re-issue.
Excluding these re-issue costs, adjusted pre-tax earnings for the quarter were
19.0% lower than the same quarter in 2008, reflecting the impact of the higher
write-offs and bankruptcies noted below.
The net write-off rate for the total managed portfolio on a rolling
12-month basis was 6.82%, compared to 5.98% in the comparable 2008 period.
Overall aging of past due accounts deteriorated by 46 basis points. While
bankruptcy costs increased, analysis of Financial Services' performance versus
national statistics indicates that Financial Services continues to experience
lower bankruptcies than would be expected due to its effective credit risk
strategies.
Financial Services continued its investment in the retail banking pilot
and at quarter-end had more than $541 million in retail deposits, $167 million
in mortgages and approximately $1.6 billion in broker deposits. The average
term of maturity for the broker deposits is approximately 30 months.
2009 COMMENTARY
CTC plans to continue with its long-term productivity and efficiency
investments in Automotive Infrastructure, CTR Marketing Change Program and IT
Renewal projects. These programs are now expected to cost approximately $40
million in 2009 (net of benefits realized).
FUNDING AND LIQUIDITY
While the term securitization market through Glacier remains closed,
Financial Services continues to have access to multiple sources of funding
including:- Operating cash flow
- Broker deposits
- High interest savings accountsIn addition, more than $800 million of the total $1.2 billion of the
Corporation's committed bank lines are available to Financial Services.
By the end of the second quarter, Financial Services had pre-funded
approximately $680 million of the approximately $1.0 billion which is expected
to be required during the balance of the year to repay maturing short-term GIC
deposits and finance the increase in receivables that will result when Glacier
term notes mature. The cost of this conservative approach was approximately
$4.2 million for the quarter.
At the CTC level, $200 million of Medium Term Notes were issued in the
quarter for seven years at 5.65% to pre-fund maturing corporate debt in 2010.
Overall, Management remains confident that given the various sources of
funding available, particularly for Financial Services, the Corporation has
more than sufficient cost-effective funding to support its businesses for the
foreseeable future.
CAPITAL EXPENDITURES
As a result of adjustments to the timing of projects and lower actual
project costs, Management now expects capital expenditures for the 2009 fiscal
year to be approximately $326 million, down from the originally planned $390
million and approximately $30 million lower than the capital forecast provided
at the end of the first quarter.
QUARTERLY DIVIDEND
Canadian Tire Corporation has declared a quarterly dividend of $0.21 per
share on each Common and Class A Non-Voting share. The dividend is payable
December 1, 2009 to Common and Class A shareholders of record as of October
30, 2009. The dividend is considered an "eligible dividend" for tax purposes.
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 2008 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, 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 expected performance in 2009 that have the potential to affect the
operating performance and financial results of the Company's divisions are
outlined in Section 11.0 of the MD&A.
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 August
13, 2009. The conference call will be available simultaneously and in its
entirety to all interested investors and the news media through a webcast at
http://corp.canadiantire.ca/EN/investors, and will be available through replay
at this website for 12 months.
Canadian Tire Corporation, Limited (TSX: CTC.a, CTC), operates more than
1,200 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 475 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 research
more than 25,000 products online. PartSource is an automotive parts specialty
chain with 88 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 273 gas bars, 267 convenience
stores and kiosks, and 73 car washes. Mark's Work Wearhouse is one of the
country's leading apparel retailers operating 375 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)
-------------------------------------------------------------------------
IntroductionThis Management's Discussion and Analysis (MD&A) provides management's
perspective on our Company, our performance and our strategy for the future.
Definitions
In this document, the terms "we", "us", "our", "Company" and "Canadian
Tire" refer to Canadian Tire Corporation, Limited and its business units and
subsidiaries. For commonly used terminology (such as retail sales and same
store sales), see section 5.3 (Business segment performance) and our Glossary
of Terms (pages 93 to 95) in our 2008 Financial Report, which can be found
online on SEDAR's website at www.sedar.com and our Canadian Tire website in
our Investor Relations section at http://corp.canadiantire.ca/en/investors.
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 August 13, 2009.
Quarterly and annual comparisons in this MD&A
Unless otherwise indicated, all comparisons of results for the second
quarter (13 weeks ended July 4, 2009) are against results for the second
quarter of 2008 (13 weeks ended June 28, 2008).
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. See section 14.1 and 14.2 of this MD&A and note 2 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. See section 12.0 in this MD&A for
further information.
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. See section 18.0 for additional important
information and a caution on the use of forward-looking information. This is
especially important in view of the current uncertain economic environment.
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 businessCanadian 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 1,200 general merchandise and apparel
retail stores and gas bars. The Canadian Tire Financial Services® (Financial
Services) division of the Company also offers a variety of financial services
to Canadians, primarily its proprietary Options® MasterCard®, personal
loans, lines of credit, insurance and warranty products, guaranteed investment
certificates (GICs) offered through third-party brokers, and a retail banking
pilot offering products to customers in certain test markets.
Canadian Tire's four main businesses are described below.
Canadian Tire Retail (CTR) is Canada's most shopped general merchandise
retailer with a network of 475 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 distribution channel and PartSource. PartSource is a chain of 88
specialty automotive hard parts stores that cater to serious
"do-it-yourselfers" and professional installers of automotive parts. The
PartSource network consists of 30 franchise stores and 58 corporate stores.
Mark's Work Wearhouse (Mark's) is one of Canada's leading clothing and
footwear retailers, operating 375 stores nationwide, including 332 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 name "Imagewear, a Division of Mark's Work Wearhouse™".
Canadian Tire Petroleum (Petroleum) is one of Canada's largest
independent retailers of gasoline with a network of 273 gas bars, including
267 convenience stores and kiosks, 73 car washes, 12 Pit Stops and 87 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.
Canadian Tire Financial Services (Financial Services) markets a range of
Canadian Tire-branded credit cards, including the Canadian Tire Options
MasterCard and Gas Advantage® MasterCard. Financial Services also markets
personal loans, lines of credit, insurance and warranty products 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, the personal loan and line of
credit portfolios and is the issuer of GICs offered through third-party
brokers. CTB also offers high-interest savings accounts, retail GICs and
residential mortgages as well as the Canadian Tire One-and-Only™ account,
which consolidates customers' chequing, savings, loans and mortgage loan
balances into one account, in three pilot markets.1.2 Store network at a glance
July June
4, 28,
Number of stores and retail square footage 2009 2008
-------------------------------------------------------------------------
Consolidated store count
CTR retail stores1 475 473
PartSource stores 88 75
Mark's retail stores(1) 375 364
Petroleum gas bar locations 273 267
-------------------------------------------------------------------------
Total stores 1,211 1,179
Consolidated retail square footage (in millions)
CTR 18.9 18.4
PartSource 0.3 0.2
Mark's 3.2 3.1
-------------------------------------------------------------------------
Total retail square footage(2) (in millions) 22.4 21.7
-------------------------------------------------------------------------
(1) Store count numbers reflect individual selling locations; therefore,
both CTR and Mark's totals include stores that are co-located.
(2) The average retail square footage for Petroleum's convenience stores
was 452 square feet per store in Q2 2009. It has not been included in
the total above.
1.3 Business unit performance at a glance
(year-over-year percentage change) Q2 2009 Q2 2008
-------------------------------------------------------------------------
CTR retail sales(1) (1.0)% 1.5%
CTR gross operating revenue (0.8)% 3.1%
CTR net shipments (1.4)% 3.2%
Mark's retail sales(2) (9.8)% 5.3%
Petroleum retail sales (21.4)% 14.8%
Petroleum gasoline volume (litres) 1.3% (1.8)%
Financial Services' credit card sales 1.1% 5.0%
Financial Services' gross average receivables 5.3% 6.8%
-------------------------------------------------------------------------
(1) Includes sales from Canadian Tire stores, PartSource stores and the
labour portion of CTR's auto service sales.
(2) Includes retail sales from Mark's corporate and franchise stores.
2.0 Our Strategic Plan
2.1 Rolling Five-Year Strategic Plan to 2013 (2013 Plan)The 2013 Plan outlines our strategy to build Canadian Tire through a
continued focus on growth and productivity throughout the Plan period. The key
growth initiatives of the 2013 Plan include network expansion across all of
our retail businesses (CTR and PartSource, Petroleum and Mark's), store
concept renewals and the continued evolution of products and services at
Financial Services. Key productivity initiatives include continued upgrading
of our automotive supply chain, renewing our technology infrastructure and
streamlining our organizational design.
Specific objectives related to these programs are included in section 3.2
and section 3.3 of this MD&A and section 4.0 of the MD&A contained in the 2008
Financial Report.
2.2 Financial aspirations
The 2013 Plan included financial aspirations for the Company for the
five-year period ending in December 2013. In light of the credit market
disruption experienced since August 2007 and the subsequent economic downturn,
management is currently re-assessing its long-term financial aspirations in
the context of its annual review of our Strategic Plan and its ongoing
assessment of economic conditions.3.0 Our performance in 2009
3.1 Consolidated financial results
($ in millions
except per share
amounts) Q2 2009 Q2 2008(1) Change 2009 YTD 2008 YTD(1) Change
-------------------------------------------------------------------------
Retail sales(2) $2,789.1 $2,949.5 (5.4)% $4,578.9 $4,789.8 (4.4)%
Gross operating
revenue 2,324.8 2,450.7 (5.1)% 4,082.9 4,276.0 (4.5)%
EBITDA(3) 250.1 216.6 15.5% 406.2 391.1 3.9%
Earnings before
income taxes 152.4 144.8 5.3% 218.8 244.2 (10.4)%
Effective tax rate 32.0% 32.5% 29.9% 32.5%
Net earnings $ 103.7 $ 97.7 6.1% $ 153.4 $ 164.8 (6.9)%
Basic earnings
per share $ 1.27 $ 1.20 5.9% $ 1.88 $ 2.02 (7.1)%
Adjusted basic
earnings per
share(3) $ 1.26 $ 1.16 8.6% $ 1.87 $ 1.84 1.3%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) 2008 figures have been restated for the implementation, on a
retrospective basis, of CICA HB 3064 - Goodwill and Intangible Assets
and the amendments to CICA HB 1000 - Financial Statement Concepts.
See section 14.1 and 14.2 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 15.0 for non-GAAP measures.Consolidated gross operating revenue
Gross operating revenue for the quarter declined 5.1 percent from the
prior year primarily as a result of a 24.1% decline in Petroleum's revenue,
due to lower pump prices compared with the second quarter of 2008. Mark's
gross operating revenue declined by 9.2% due to the impact of a softer economy
on sales of men's wear and industrial wear. CTR's gross operating revenue, in
spite of a softer economy, declined only marginally, by 0.8 percent. Financial
Services remained strong in the second quarter with gross operating revenue up
15.6% due to a higher yield and the growth in account balances.
Consolidated net earnings
Consolidated net earnings for the quarter increased from the prior year
by 6.1%, due to higher product margins in CTR and effective operating cost
management across all businesses. Partially offsetting this was higher loan
loss provisioning at Financial Services due to the economic environment and
higher interest expense, attributable to the rapid expansion of broker
deposits at Financial Services which are being used to prefund the increase of
credit card receivables arising from the maturation of the Glacier notes in
late 2009.
Consolidated net earnings were also impacted by non-operating items as
noted below.
Impact of non-operating items
The following table shows our adjusted consolidated earnings on a pre-tax
and after-tax basis.Adjusted consolidated earnings before and after income taxes(1)
($ in millions
except per share
amounts) Q2 2009 Q2 2008(2) Change 2009 YTD 2008 YTD(2) Change
-------------------------------------------------------------------------
Earnings before
income taxes $ 152.4 $ 144.8 5.3% $ 218.8 $ 244.2 (10.4)%
Less pre-tax
adjustment for:
Former CEO
retirement
obligation(3) - 0.5 0.5 0.9
Net effect of
securitization
activities(4) 1.7 3.9 2.2 16.8
Gain (loss) on
disposals of
property and
equipment (0.8) - (1.5) 3.7
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(1) $ 151.5 $ 140.4 8.0% $ 217.6 $ 222.8 (2.3)%
Income taxes 48.5 45.7 65.0 72.5
-------------------------------------------------------------------------
Adjusted earnings
after income
taxes(1) $ 103.0 $ 94.7 8.8% $ 152.6 $ 150.3 1.5%
-------------------------------------------------------------------------
Basic earnings
per share $ 1.27 $ 1.20 5.9% $ 1.88 $ 2.02 (7.1)%
Adjusted basic
earnings per
share(1) $ 1.26 $ 1.16 8.6% $ 1.87 $ 1.84 1.3%
-------------------------------------------------------------------------
(1) See section 15.0 on non-GAAP measures.
(2) 2008 figures have been restated for the implementation, on a
retrospective basis, of CICA HB 3064 - Goodwill and Intangible Assets
and the amendments to CICA HB 1000 - Financial Statement Concepts.
See section 14.1 and 14.2 for additional information.
(3) The former CEO retirement obligation has been recorded in CTR. See
section 3.3.1.
(4) Includes initial gain/loss on the sale of loans receivable,
amortization of servicing liability, change in securitization reserve
and gain/loss on reinvestment.Consolidated net earnings in the second quarter were negatively affected
by a marginal loss on the sale of property and equipment compared with the
prior year, as well as a decrease of $2.2 million with respect to the net
effect of securitization activities.
Seasonal impact
The second and fourth quarters of each year are typically when we
experience stronger revenues and earnings in our retail businesses because of
the seasonal nature of some merchandise at CTR and Mark's and the timing of
marketing programs. The following table shows our financial performance by
quarter for the last two years.Consolidated quarterly results(1)
($ in millions except
per share amounts) Q2 2009 Q1 2009 Q4 2008 Q3 2008
-------------------------------------------------------------------------
Gross operating revenue $2,324.8 $1,758.1 $2,587.8 $2,257.5
Net earnings 103.7 49.7 101.5 109.1
Basic and diluted earnings per
share 1.27 0.61 1.24 1.34
-------------------------------------------------------------------------
($ in millions except
per share amounts) Q2 2008 Q1 2008 Q4 2007 Q3 2007
-------------------------------------------------------------------------
Gross operating revenue $2,450.7 $1,825.3 $2,503.1 $2,049.2
Net earnings 97.7 67.1 131.3 102.2
Basic and diluted earnings per
share 1.20 0.82 1.61 1.25
-------------------------------------------------------------------------
(1) 2008 quarterly results have been restated for the implementation, on
a retrospective basis, of CICA HB 3064 - Goodwill and Intangible
Assets and the amendments to CICA HB 1000 - Financial Statement
Concepts. See section 14.1 and 14.2 for additional information. 2007
results have not been restated as the information required to
calculate the restatement on a quarterly basis is not readily
available.
Items that affected the usual seasonal pattern noted above include:
- Q2 2008 was negatively impacted by a $12.0 million pre-tax book-to-
physical inventory adjustment at Mark's;
- Q2 2008 was negatively impacted by a $9.7 million pre-tax expense
related to the Options MasterCard relaunch at Financial Services;
- Q3 2008 was positively impacted by an $8.6 million reduction in the
tax provision, most of which related to the impact of the sale-
leaseback transactions entered into since 2005; and
- Q4 2008 was negatively impacted by a $28.7 million pre-tax expense
related to a delayed-start interest rate swap adjustment.
3.2 Business unit Q2 2009 performance overview
-------------------------------------------------------------------------
Canadian Tire Retail Mark's Work Wearhouse
-------------------------------------------------------------------------
Q2 2009 Performance highlights Q2 2009 Performance highlights
- continued development of new - opened two new corporate stores,
store formats; one of which was a Combo store
- replaced one traditional and and closed one corporate store;
four "expanded and updated" - increased total retail space by
stores with five Smart stores, approximately 5.6 percent year-
two of which contains a full- over-year; store network totals
size Mark's; and 375 locations; and
- improved margins through - improved gross margins by over
effective management of 400 basis points due to
regular/promotional sales mix enhancements in inventory
and product cost controls. control and markdown management.
PartSource Q2 2009 Performance
highlights
- opened one new corporate store;
and
- increased the retail square
footage by approximately 13.7
percent year-over-year as a
result of ongoing network
expansion.
-------------------------------------------------------------------------
Canadian Tire Financial Services Petroleum
-------------------------------------------------------------------------
Q2 2009 Performance highlights Q2 2009 Performance highlights
- 5.3 percent increase in gross - grew store network by six gas
average receivables for the bars (since Q2 2008);
total managed portfolio; - grew convenience store business
- increase in insurance and by 19.1 percent over the prior
warranty products revenue; year; and
- continued growth in the broker - continued focus on improving the
GIC portfolio; and overall customer experience at
- continued testing of the retail Petroleum sites.
banking initiative.
-------------------------------------------------------------------------The following sections outlining the Company's business segment
performance highlight the respective segment's achievements to date against
key initiatives identified in the 2013 Plan. The initiatives have been divided
into growth (increase sales primarily through network growth, new stores and
new products) and productivity (improve customer service metrics, service
levels, cost-effectiveness and rates of return).3.3 Business segment performance
3.3.1 Canadian Tire Retail
3.3.1.1 Q2 2009 Strategic Plan performance
The following outlines CTR's performance for the second quarter of 2009 in
the context of our 2013 Plan.
-------------------------------------------------------------------------
Canadian Tire Retail Growth Initiatives
-------------------------------------------------------------------------
New store program
20/20 stores have been the cornerstone of CTR's growth agenda since 2003.
This program is now complete and CTR has developed new store concepts
which are designed to build on the successes of the 20/20 store program
with a greater focus on improving sales and productivity at a lower
capital cost. Plans for 2009 include opening new Smart stores that will
have the same focus on improving sales and productivity, as well as
providing a more exciting customer experience, and Small Market stores
which are designed to expand our presence in smaller markets.
-------------------------------------------------------------------------
2009 Key initiatives 2009 Performance
-------------------------------------------------------------------------
With the completion of the 20/20 Second quarter
program in 2008, CTR's strategy is
to test/rollout the next versions During the second quarter CTR
of the CTR store. This includes replaced one traditional store and
the building of, and conversion to, four "expanded and updated" stores
the new Smart stores and new Small with five Smart stores, two of
Market stores which are an which contain a full-size Mark's.
important aspect of the 2013 Plan. We also closed one traditional
store. At the end of the second
quarter, there were nine Smart
stores and five Small Market
stores.
The store network now totals 475
stores, 48 of which include a
Mark's component.
-------------------------------------------------------------------------
Customers for Life
Canadian Tire is committed to building customer loyalty through fostering
a positive, consistent and memorable customer experience. In 2008, CTR
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 and will continue this work through 2009.
-------------------------------------------------------------------------
2009 Key initiatives 2009 Performance
-------------------------------------------------------------------------
CTR plans to continue to make key Second quarter
improvements to the customer
experience to support continued CTR survey results show a 2.8
sales growth. percent improvement in overall
satisfaction when compared to
2008 results for the first half of
the year. The Store Support and
Dealer Relations teams continued
working with the Canadian Tire
Dealers to implement a new web-
based version of the Customer
Service Index program, which is
currently being tested.
-------------------------------------------------------------------------
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.
-------------------------------------------------------------------------
2009 Key initiatives 2009 Performance
-------------------------------------------------------------------------
Key initiatives for PartSource Second quarter
include building CTR as a new
commercial account for emergency During the quarter, PartSource
shipments, updating the continued making significant
organizational structure, testing progress on building the CTR
new operating systems and a new commercial account. The entire
auto parts catalogue. PartSource network (which consists
of hub stores, corporate stores
and franchise stores) supplies
emergency auto parts to
approximately 200 Canadian Tire
stores.
PartSource opened one new corporate
store, converted one franchise
store to a corporate store and
converted one unbranded corporate
store to the PartSource banner
during the quarter. This brings the
network total to 88 stores,
including nine hub stores. (Details
of the hub store are discussed
below in the "Automotive
Infrastructure initiative" section.)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Canadian Tire Retail Productivity Initiatives
-------------------------------------------------------------------------
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. The benefits of these projects include the ability to make
faster and better decisions and improve our agility and speed to market.
-------------------------------------------------------------------------
2009 Key initiatives 2009 Performance
-------------------------------------------------------------------------
In 2009, CTR plans to implement Second quarter
productivity/control initiatives in
the area of sales and operational Progress made on the CTR Change
planning; and analyze and build Program included:
requirements for 2010 - Completed and implemented
implementation in the areas of first phase of sales and
promotional planning and vendor operational planning
relationship management. enhancements across all CTR
merchandise divisions;
- completed design of new
processes and technology
solutions for promotional
planning capability; and
- continued analysis of vendor
relationship management
capability including scope
definition and process
design work.
-------------------------------------------------------------------------
Automotive Infrastructure initiative
Revitalizing the cornerstone automotive business is a key priority over
the 2013 Plan period as CTC continues to expand the network through
opening 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 CTR and PartSource
customers. In 2009, CTR plans to open an additional eight hub stores. In
addition, the Company is investing in infrastructure and technological
enhancements and is re-engineering customer facing processes.
-------------------------------------------------------------------------
2009 Key initiatives 2009 Performance
-------------------------------------------------------------------------
Throughout 2009, CTC plans to open Second quarter
eight hub stores. In addition,
there will be further investment in Progress on the Automotive
the physical retrofit of the Infrastructure initiative included:
automotive distribution centres as
well as a new project commissioned Emergency supply implementation:
to implement the Manhattan - completed the roll out of do-it-
warehouse management software into yourself emergency supply
the Calgary auto parts distribution processes in nine PartSource hub
centre. The investment in store markets which serve 140
distribution assets will support an CTR stores.
increase in the auto parts SKU
(stock keeping units) assortment by Assortment deployment processes:
an additional 20%. Work to - now stocking more than 50,000
implement an industry-leading SKUs in two auto parts
automotive hard parts catalogue distribution centres;
will be completed and rolled out to - developing the work plan to
CTR stores in 2010. implement the new warehouse
management system in the
Calgary auto parts
distribution centre; and
- solution design is underway
to improve the automotive
parts assortment planning
process.
Customer Experience processes:
- the preferred software vendor
has completed one third of
the functional design
specifications needed to
support the customer
experience processes; and
- the parts data management
business requirements have
been completed.
-------------------------------------------------------------------------
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) Q2 2009 Q2 2008 YTD 2009 YTD 2008
-------------------------------------------------------------------------
Total retail sales(1) (1.0)% 1.5% 0.8% 0.3%
Same store sales(2) (2.7)% (0.5)% (0.8)% (1.8)%
-------------------------------------------------------------------------
(1) Includes sales from Canadian Tire and PartSource stores 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 retail sales
Second quarterWhile our retail stores continue to be influenced by the challenging
economic conditions that are currently affecting Canada and unseasonably cool
wet weather in Ontario and Quebec, the modest 1.0% decline in retail sales
during the second quarter is considered to be a relatively good result,
especially considering that there were fewer selling days compared with the
prior year due to the timing of public holidays (Easter and Canada Day).
The unseasonably cool wet weather impacted some seasonal businesses such
as outdoor living and climate control and challenging economic conditions
impacted some of our other categories such as tools and electronics. Same
store sales were down 2.7% compared to the second quarter of 2008. On a
regional basis we experienced weaker sales in Ontario and Quebec than in other
provinces.
PartSource experienced another quarter of year-over-year double-digit
sales increases driven by both the continued expansion of the network and
improved product assortment. The nature of PartSource's business also makes it
somewhat resilient during economic downturns as consumers will tend to repair
rather than replace their vehicles at such times, especially in view of the
uncertainty in the North American auto sector. In addition, PartSource
shipments to CTR Dealers continue to increase as components of the Automotive
Infrastructure initiative project are rolled out.
CTR store network definitions
Our store network has evolved as we have introduced new store formats
into our store categories, which we define as follows:-------------------------------------------------------------------------
Smart store format Small Market store Updated & Expanded
(late 2008) Average format (mid-2008) store format (1994 to
retail square Average retail square mid-2008) Average
footage: 63,000 footage: 18,000 retail square footage:
44,000
-------------------------------------------------------------------------
Next store concept Smaller format launched A combination of our
renewal, building off in July 2008, ranging newer format stores,
the 20/20 store with a in size from 14,000 to including "20/20",
focus on growth and 19,000 square feet. "Class-of" and "Next
improving productivity Small Market stores Generation" stores.
through inspiring meet the needs of These stores,
layouts, refreshed underserved rural previously referred to
assortments and more markets and include as "standard stores",
environmentally customized product range in size from
responsible options. selection to serve a 16,000 to 89,000
Stores range in size particular region, easy- square feet, most of
from 41,000 to 83,000 to navigate signage and which were opened or
square feet. There are walkways, prominent converted to these
currently nine Smart heritage departments formats between 1994
stores in the network (e.g.: hockey) and and mid-2008.
the first of which generously sized outdoor "Updated and
opened in November 2008. areas that "expand" the expanded" format
store in peak periods. stores make up
There are currently five approximately 90.4
Small Market stores in per cent of the
the network. retail square footage
in the CTR network
(excluding
PartSource).
-------------------------------------------------------------------------
---------------------------------------------------
Traditional store PartSource stores (2008
format (1994 and and prior) Average
prior) Average retail retail square footage:
square footage: 16,000 7,000
---------------------------------------------------
Smaller than the PartSource is an
"updated and expanded" automotive parts
store format on average. specialty store designed
Traditional stores have to meet the needs of
various sizes and major purchasers of auto
layouts ranging in size parts, professional
from 3,000 to 36,000 automotive installers
square feet. Traditional and serious do-it-
stores make up yourselfers. Stores
approximately 6.1 per carry a tailored product
cent of the retail assortment based on local
square footage in the vehicle needs and are
CTR network (excluding easily recognizable with
PartSource). the checkerboard
flooring design.
Beginning in 2007, new
larger warehouse
locations (hub stores)
were opened to help
bring more parts
inventory closer to
customers at both CTR
and PartSource stores.
---------------------------------------------------
CTR store count
Q2 2009(1) 2008(2) 2007(2) 2006(2) 2005(2)
-------------------------------------------------------------------------
Updated and expanded
stores(3) 388 393 381 363 345
Traditional stores 73 76 92 105 117
Small Market stores 5 4 - - -
Smart stores 9 2 - - -
-------------------------------------------------------------------------
Total updated and expanded,
traditional, Small Market
and Smart stores 475 475 473 468 462
PartSource stores 88 86 71 63 57
-------------------------------------------------------------------------
(1) Store count at the end of Q2 2009.
(2) Store count at the end of the year.
(3) "Updated and expanded" stores decreased by 5 in 2009. They were
converted into five Smart stores (one Smart store in Q1 and four
Smart stores in Q2).CTR continues to retrofit its store network with a focus on converting
selected new or replacement stores and "updated and expanded" existing stores
to the latest formats. The 20/20 store format program was completed by the end
of 2008 and two new formats (Small Market and Smart stores) were tested in
late 2008 and in early 2009. Our latest formats have been well received by
customers to date. For the remainder of 2009 and in subsequent years, we will
continue to roll out the two new formats, consistent with the goals of the
2013 Plan.Average retail sales per CTR store(1),(2)
For the 12 For the 12
months ended months ended
($ in millions) July 4, 2009 June 28, 2008
-------------------------------------------------------------------------
Updated and expanded stores $ 16.0 $ 16.0
Traditional stores 7.9 7.9
-------------------------------------------------------------------------
(1) Retail sales are shown on a 52-week basis in each year and exclude
sales from PartSource stores, CTR's online web store and the labour
portion of CTR's auto service sales.
(2) Only includes stores that have been open for a minimum of two years
as at the end of the quarter.
The "updated and expanded" stores typically experience higher customer
traffic and increases in average transaction value compared to traditional
store formats. For the rolling 12-month period, the average retail sales for
the "updated and expanded" stores, as well as the traditional stores, remained
flat.
Average sales per square foot of CTR retail space(1),(2),(3)
For the 12 For the 12
months ended months ended
July 4, 2009 June 28, 2008
-------------------------------------------------------------------------
Retail square footage(1),(3) (millions of
square feet) 18.9 18.4
Updated and expanded stores(2),(3)
($ sales per square foot) $ 382 $ 381
Traditional stores(2),(3) 497 496
-------------------------------------------------------------------------
(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.
It represents a point in time (instead of a rolling 12-month period)
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.Retail square footage increased by approximately 0.5 million square feet,
year-over-year as noted above.
Average sales per square foot of retail space in the larger "updated and
expanded" 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 "updated and expanded" stores do
however, on average, generate more total sales and have a lower operating cost
for Dealers per retail square foot.3.3.1.3 CTR's financial results
($ in millions) Q2 2009 Q2 2008(1) Change 2009 YTD 2008 YTD(1) Change
-------------------------------------------------------------------------
Retail sales $2,153.2 $2,174.5 (1.0)% $3,421.1 $3,393.3 0.8%
Net shipments
(year-over-year
% change) (1.4)% 3.2% (0.1)% 1.8%
Gross operating
revenue $1,550.0 $1,562.1 (0.8)% $2,649.3 $2,633.4 0.6%
EBITDA(2) 163.1 143.2 13.9% 259.9 245.3 5.9%
-------------------------------------------------------------------------
Earnings before
income taxes 95.2 85.1 12.0% 128.0 128.7 (0.5)%
Less adjustment for:
Gain (loss) on
disposals of
property and
equipment (0.3) 0.1 (0.7) 4.0
Former CEO
retirement
obligation - 0.5 0.5 0.9
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(2) $ 95.5 $ 84.5 13.0% $ 128.2 $ 123.8 3.6%
-------------------------------------------------------------------------
(1) 2008 figures have been restated for the implementation, on a
retrospective basis, of CICA HB 3064 - Goodwill and Intangible Assets
and the amendments to CICA HB 1000 - Financial Statement Concepts.
See sections 14.1 and 14.2 for additional information.
(2) See section 15.0 on non-GAAP measures.
Explanation of CTR's financial resultsSecond quarter
Shipments and gross operating revenue experienced marginal declines in
the second quarter due to the impact of a softer economy and unseasonable
weather conditions, as noted above. The proportionately larger decline in
shipments compared with retail sales reflects ongoing efforts by Dealers to
manage their inventory levels in the face of economic uncertainty. As noted
above, these results are considered reasonable considering the fewer selling
days compared with the prior year due to the timing of holidays.
In spite of the decline in revenue, CTR earnings before taxes improved
12% over the prior year. This was attributable to stronger margins due to
effective management of pricing, regular/promotional shipments mix and product
cost controls. Operating expenses increased modestly as increased expenses for
the new Eastern Canada Distribution Centre, higher store occupancy costs and
continued investments in major initiatives (Automotive Infrastructure, CTR
Change Program and IT Renewal as well as ongoing expansion of the PartSource
store network) were partially offset by effective cost management in other
areas, such as personnel and administration.
3.3.1.4 CTR's business risks
CTR is exposed to a number of risks in the normal course of its business
that have the potential to affect its operating performance. These include,
but are not limited to, supply chain disruption, seasonality and environmental
risks. Please see section 5.3.1.6 of our 2008 Financial Report for an
explanation of these business-specific risks. See also section 11.0 of this
MD&A for a discussion on Enterprise risk management and section 14.0 of our
2008 Financial Report for a discussion of some other industry-wide and
Company-wide risks affecting the business.3.3.2 Mark's Work Wearhouse
3.3.2.1 Q2 2009 Strategic Plan performance
The following outlines Mark's performance for the second quarter of 2009
in the context of our 2013 Plan.
-------------------------------------------------------------------------
Mark's Work Wearhouse Growth Initiatives
-------------------------------------------------------------------------
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.
-------------------------------------------------------------------------
2009 Key initiatives Q2 2009 Performance
-------------------------------------------------------------------------
Mark's will continue network Second quarter
development through opening new
stores, relocating or expanding - opened two new corporate stores,
existing stores and renovating one of which was a Combo store;
older stores to the newest Mark's - relocated three corporate
format. For 2009, we plan to: stores, one of which was a Combo
store;
- Open 14 new stores; - renovated one corporate store;
- Relocate 10 stores; and
- Expand 3 stores; and - closed one corporate store.
- Grow the retail square footage
by 5% Mark's total retail square footage
at the end of the quarter was
3.2 million square feet, an increase
of 5.6% vs. Q2 2008.
In light of current economic
conditions, we have reduced our
expected store build activity for
2009 as follows:
- Open 10 new stores;
- Relocate 9 stores;
- Expand 2 stores; and
- Grow the retail square footage
by 3%.
-------------------------------------------------------------------------
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.
-------------------------------------------------------------------------
2009 Key initiatives Q2 2009 Performance
-------------------------------------------------------------------------
While participating in the Mark's Second quarter
portion of the newly-developed
concepts for CTR/Mark's Combo The two Combo stores opened in the
stores, such as Smart stores and second quarter, one new and one
Small Market stores, Mark's is relocation as noted above, were the
developing a new, stand-alone new format Smart Stores. Work is
"CLOTHES THAT WORK®" store that also in progress on Mark's first
will be tested in 2009. complete "CLOTHES THAT WORK®"
prototype store.
-------------------------------------------------------------------------
Category expansion
Mark's has set aggressive growth goals for the 2013 Plan period which
will be supported by category expansion in its three major product lines.
Although growth was modest in 2007 and 2008 and decreased slightly in
2009 to date, 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 is expected to bring continued growth during
the Plan period.
-------------------------------------------------------------------------
2009 Key initiatives Q2 2009 Performance
-------------------------------------------------------------------------
In 2009, Mark's will continue to Second quarter - corporate sales
expand its product assortment in - sales of women's wear decreased
the three main categories of by 1.3 percent;
apparel and footwear with a focus - sales of industrial wear
on the Clothes That Work campaign. decreased by 10.7 percent and
- sales of men's wear decreased by
14.1 percent.
In the second quarter of 2009, after
some testing in previous quarters,
Mark's completed its formal launch
of dri-WEAR® and this technology
is now used in Mark's underwear,
socks, T-shirts, polo shirts and is
being incorporated in the lining of
some of the Company's outerwear.
Mark's also continued to leverage
previously launched products such as
CURVETECH™ shape-enhancing
technology in its women's wear
category and QUAD COMFORT®
footwear for men and women. For the
second quarter, the company
established an interactive website
for consumers to answer their
questions about various footwear
product lines and health-related
benefits.
-------------------------------------------------------------------------
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) Q2 2009 Q2 2008 2009 YTD 2008 YTD
-------------------------------------------------------------------------
Total retail sales(1) (9.8)% 5.3% (6.6)% 1.5%
Same store sales(2) (11.3)% 0.9% (8.2)% (2.8)%
-------------------------------------------------------------------------
(1) Includes retail sales from corporate and franchise stores.
(2) Mark's same store sales excludes new stores, stores not open for the
full period in each year and store closures.Second quarter
Mark's retail sales during the second quarter of 2009 continued to be
impacted by a further softening of economic conditions across Canada,
especially in the key Ontario and Alberta markets. Corporate store sales in
industrial wear were down double digit with the largest dollar decreases
occurring in men's industrial footwear and men's industrial work wear. This is
reflective of weakness in the labour market conditions in the manufacturing
sector in Ontario and the oil regions of Alberta. Corporate store sales of
men's casual clothing also declined double digit with categories such as
casual bottoms, jeans, woven shirts and T-shirts leading the decline.
Corporate store sales in ladies' wear were relatively better. While this
category experienced a modest decline, ladies accessories and healthwear
posted double digit increases.
Mark's continues to focus on its "CLOTHES THAT WORK®" strategy and has
maintained its pricing to focus on optimizing margins rather than driving
sales volumes.Average corporate store sales(1)
For the For the For the
12 months 12 months 12 months
ended, ended, ended,
July 4, June 28, June 30,
2009 2008 2007
-------------------------------------------------------------------------
Average retail sales per store
($ thousands)(2) $ 2,619 $ 2,735 $ 2,867
Average sales per square foot
($)(3) 302 323 347
-------------------------------------------------------------------------
(1) Calculated on a rolling 12-month basis.
(2) Average retail sales per corporate store include corporate stores
that have been open for 12 months or more.
(3) Average sales per square foot is based on sales from corporate
stores. We have prorated square footage for corporate stores that
have been open for less than 12 months.Mark's average retail sales per store and average sales per square foot
have been declining since the end of the second quarter of 2007, primarily due
to the economic slowdown which began then, combined with the fact that Mark's
has, through new stores, store relocations, store expansions and franchise
repatriations, increased its corporate store retail square footage by 20% over
that time frame.
According to a market research company that tracks the clothing industry
retail trends, Mark's continued to increase its market share of the total
Canadian apparel market in 2008 and maintained its market share through the
first quarter of 2009, the latest data available. Mark's believes that with
its continued network expansion it will be well positioned to increase its
market share and resume improving its average retail sales per store and
average sales per square foot when the Canadian apparel market recovers from
the current recession.3.3.2.3 Mark's financial results
($ in millions) Q2 2009 Q2 2008(1) Change 2009 YTD 2008 YTD(1) Change
-------------------------------------------------------------------------
Retail sales(2) $ 210.2 $ 233.1 (9.8)% $ 378.7 $ 405.6 (6.6)%
Gross operating
revenue(3) 182.2 200.6 (9.2)% 329.3 348.1 (5.4)%
EBITDA(4) 14.0 14.2 (0.8)% 16.2 17.2 (5.3)%
-------------------------------------------------------------------------
Earnings before
income taxes 7.1 7.3 (2.7)% 2.2 3.9 (43.4)%
Less adjustment for:
Loss on disposals
of property and
equipment (0.1) (0.1) (0.3) (0.1)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(4) $ 7.2 $ 7.4 (1.3)% $ 2.5 $ 4.0 (36.2)%
-------------------------------------------------------------------------
(1) 2008 figures have been restated for the implementation, on a
retrospective basis, of CICA HB 3064 - Goodwill and Intangible Assets
and the amendments to CICA HB 1000 - Financial Statement Concepts.
See sections 14.1 and 14.2 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 15.0 on non-GAAP measures.Explanation of Mark's financial results
Second quarter
Gross operating revenue declined 9.2% in the second quarter vs. the prior
year, in line with the decline in retail sales as referenced above.
Mark's pre-tax earnings decreased in the second quarter of 2009 primarily
as a result of the decrease in gross operating revenue. The gross margin rate
on merchandise sold was very strong, up 470 basis points due to improved
inventory control and count processes, resulting in shrinkage returning to
historical norms. The year-to-date gross margin rate was also favourably
impacted by lower markdowns through the application of a new advanced
integrated merchandising planning system.
Total expenses were well managed during the second quarter of 2009,
increasing by only $0.6 million, or less than 1%, despite having 15 more
corporate stores in the network versus the second quarter of 2008. This was
due to aggressive management of store payroll expenses and reduced
advertising.
3.3.2.4 Mark's business risks
Mark's is exposed to a number of risks in the normal course of its
business that have the potential to affect its operating performance. These
include, but are not limited to, seasonality and market obsolescence risks.
Please see section 5.3.2.5 of our 2008 Financial Report for an explanation of
these business-specific risks. See also section 11.0 of this MD&A for a
discussion on Enterprise risk management and section 14.0 of our 2008
Financial Report for a discussion of some other industry-wide and Company-wide
risks affecting the business.3.3.3 Canadian Tire Petroleum
3.3.3.1 Q2 2009 Strategic Plan performancePetroleum 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 second quarter of
2009 in the context of our 2013 Plan.-------------------------------------------------------------------------
Canadian Tire Petroleum Growth Initiatives
-------------------------------------------------------------------------
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 2013 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 to enhance the customer
experience.
-------------------------------------------------------------------------
2009 Key initiatives Q2 2009 Performance
-------------------------------------------------------------------------
In 2009, Petroleum will continue to Second quarter
strengthen the existing network by
opening new sites and refurbishing - opened one new convenience
or rebuilding existing sites. store;
- replaced one gas bar; and
- closed one gas bar, one car wash
and one convenience store.
At the end of the quarter, Petroleum
had 273 gas bars, including 37
re-branded sites.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Canadian Tire Petroleum Productivity Initiatives
-------------------------------------------------------------------------
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.
-------------------------------------------------------------------------
2009 Key initiatives Q2 2009 Performance
-------------------------------------------------------------------------
In 2009, Petroleum will Second quarter
aggressively seek out additional
cross-marketing opportunities to - executed cross-marketing
further leverage its national contest at gas bars
interrelatedness strategy to drive driving traffic to CTR and
customer traffic, transactions, Mark's stores and Financial
customer loyalty and earnings Services' Options MasterCard
across the enterprise. - issued multiplier coupons that
increase the Canadian Tire
'Money' offered on gas purchases
paid for in cash or by Canadian
Tire Options MasterCard; and
- offered discount coupons on
Canadian Tire merchandise with
the purchase of gas.
-------------------------------------------------------------------------
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
Q2 2009 Q2 2008 Change 2009 YTD 2008 YTD Change
-------------------------------------------------------------------------
Sales volume
(millions of
litres) 435.1 429.6 1.3% 843.9 843.4 0.1%
-------------------------------------------------------------------------
Gasoline sales volumes in the second quarter were up 1.3%, the first
increase in eight quarters as consumers benefited from lower pump prices and
additional locations.
Petroleum's convenience and car wash sales
(year-over-year percentage change) Q2 2009 Q2 2008 2009 YTD 2008 YTD
-------------------------------------------------------------------------
Total retail sales
Convenience store sales 19.1% 5.0% 18.0% 8.0%
Car wash sales 0.8% (8.6)% 8.6% (17.2)%
-------------------------------------------------------------------------
Same store sales
Convenience 15.6% 3.5% 14.9% 6.4%
Car wash 1.0% (8.5)% 8.6% (17.4)%Convenience store sales were very strong in the second quarter of 2009
especially in the confectionary, tobacco and lottery categories which are more
resilient during economic downturns. Sales also benefited from the exit of
competitors in certain markets. Car washes were relatively flat in comparison
to the second quarter of the prior year, which is considered to be a good
result considering the economic environment.3.3.3.3 Petroleum's financial results
($ in millions) Q2 2009 Q2 2008 Change 2009 YTD 2008 YTD Change
-------------------------------------------------------------------------
Retail sales $ 425.7 $ 541.9 (21.4)% $ 779.1 $ 990.9 (21.4)%
Gross operating
revenue 390.8 514.8 (24.1)% 712.7 937.6 (24.0)%
EBITDA(1) 12.1 12.1 (0.1)% 22.5 21.1 6.4%
-------------------------------------------------------------------------
Earnings before
income taxes 7.8 8.0 (2.7)% 13.8 13.0 6.2%
Less adjustment
for:
Loss on disposals
of property and
equipment (0.3) - (0.3) (0.2)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(1) $ 8.1 $ 8.0 1.0% $ 14.1 $ 13.2 6.7%
-------------------------------------------------------------------------
(1) See section 15.0 on non-GAAP measures.Explanation of Petroleum's financial results
Second quarter
Retail sales and gross operating revenues declined more than 20% in the
second quarter of 2009, due to a 25.5 percent decrease in retail gasoline
prices year-over-year. Despite the decrease in pump-prices, Petroleum's
pre-tax earnings were only down 2.7 percent due to strong Convenience sales,
relatively stable gasoline margins and well managed operating expenses which
were held flat in spite of the growth in the Petroleum network.
3.3.3.4 Petroleum's business risks
Petroleum is exposed to a number of risks in the normal course of its
business that have the potential to affect its operating performance. These
include, but are not limited to, environmental and commodity price and
disruption risks. Please see section 5.3.3.5 of our 2008 Financial Report for
an explanation of these business-specific risks. See also section 11.0 of this
MD&A for a discussion on Enterprise risk management and section 14.0 of our
2008 Financial Report for a discussion of some other industry-wide and
Company-wide risks affecting the business.3.3.4 Canadian Tire Financial Services
3.3.4.1 Q2 2009 Strategic Plan performance
The following outlines Financial Services' performance for the second
quarter of 2009 in the context of our 2013 Plan.
-------------------------------------------------------------------------
Canadian Tire Financial Services Growth Initiatives
-------------------------------------------------------------------------
Total managed portfolio of loans receivable (credit card, personal, line
of credit and mortgage loans)
Financial Services plans to grow its portfolio through increases in
average balances, new account acquisition and the introduction of new
credit cards.
-------------------------------------------------------------------------
2009 Key initiatives Q2 2009 Performance
-------------------------------------------------------------------------
For 2009, Financial Services has Second quarter
targeted the increase of gross
average credit card receivables Gross average loans receivable were
mainly through increases in the $4.0 billion in the second quarter.
average account balances. The growth reflects an 8.9 percent
increase in the average account
balance, partially offset by a
decrease in the number of accounts
carrying a balance versus the same
period last year.
-------------------------------------------------------------------------
Retail banking
Financial Services began offering retail banking products including high-
interest savings accounts, retail GICs and residential mortgages in two
pilot markets in October 2006. 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 that Canadian Tire Financial Services has earned
over the last 40 years providing financial services to millions of
customers.
-------------------------------------------------------------------------
2009 Key initiatives Q2 2009 Performance
-------------------------------------------------------------------------
Financial Services' retail banking Second quarter
plans include increasing the ending
mortgage portfolio balance and Financial Services had accumulated
retail deposit balances. over $541 million in retail deposits
and over $167 million in mortgages
Financial Services will incur as at the end of the second quarter
approximately $17 million in net of 2009.
expenses associated with the
marketing and operations of the Financial Services incurred
retail banking initiative in 2009. $3.9 million in net expenses
associated with the marketing and
operation of the retail banking
initiative during the second quarter
of 2009.
-------------------------------------------------------------------------
Insurance and other ancillary products
Financial Services plans to enhance its insurance and warranty product
offering to credit card customers. Revenues from insurance and warranty
products have increased significantly in the last five years through
direct marketing to Canadian Tire's growing base of customers.
-------------------------------------------------------------------------
2009 Key initiatives Q2 2009 Performance
-------------------------------------------------------------------------
Financial Services plans to Revenues from insurance and warranty
increase revenues from insurance products increased 6.2 percent in
and warranty products during 2009. the second quarter versus the same
period last year.
-------------------------------------------------------------------------
3.3.4.2 Key performance indicators
The following are key indicators of Financial Services' performance:
- size of the total managed portfolio
- profitability of the portfolio
- quality of the portfolio
Financial Services' total managed portfolio of loans receivable
($ in millions,
except where
noted) Q2 2009 Q2 2008 Change 2009 YTD 2008 YTD Change
-------------------------------------------------------------------------
Average number of
accounts with a
balance
(thousands) 1,799 1,861 (3.4)% 1,801 1,855 (2.9)%
Average account
balance ($) $ 2,250 $ 2,066 8.9% $ 2,236 $ 2,069 8.1%
Gross average
receivables (GAR) 4,047.9 3,844.9 5.3% 4,028.5 3,838.3 5.0%
Total managed
portfolio (end
of period) 4,109.9 3,926.7 4.7%
Net managed
portfolio
(end of period) 3,996.6 3,830.2 4.3%
-------------------------------------------------------------------------As management believes that the full picture of trends in Financial
Services' business can best be derived by evaluating the performance of both
securitized and non-securitized loans receivable portfolios, the portfolios
have been presented to include all securitized loans receivable. Financial
Services presents loans receivable information on a managed basis to evaluate
the credit performance and overall financial performance of the underlying
loans.
Financial Services' gross average receivables were up 5.3% in the second
quarter, due primarily to higher average credit card balances and increased
mortgage volumes. The continued success of the Gas Advantage MasterCard and an
increase in balance transfers also contributed to the total portfolio growth,
partially offset by a decline in personal loan accounts and balances.
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 retail banking products
as another potential channel for growth in the longer term.Financial Services' portfolio of credit card loans receivable
($ in millions,
except where
noted) Q2 2009 Q2 2008 Change 2009 YTD 2008 YTD Change
-------------------------------------------------------------------------
Average number of
accounts with a
balance
(thousands) 1,772 1,823 (2.8)% 1,773 1,816 (2.4)%
Average account
balance ($) $ 2,144 $ 1,994 7.5% $ 2,132 $ 1,999 6.6%
Gross average
receivables 3,799.5 3,636.0 4.5% 3,779.2 3,630.7 4.1%
Total managed
portfolio (end
of period) 3,866.6 3,710.7 4.2%
-------------------------------------------------------------------------Gross average credit card loans receivable grew 4.5 percent to $3.8
billion at the end of the quarter primarily due to a 7.5 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 achieve this objective.
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)
Q2 2009 Q2 2008 Q2 2007 Q2 2006 Q2 2005
-------------------------------------------------------------------------
Total revenue as a % of
GAR(2) 24.93% 24.42% 24.88% 25.10% 26.13%
Gross margin as a % of
GAR(2) 11.65% 12.47% 13.13% 13.17% 13.57%
Operating expenses as a %
of GAR(3) 7.02% 7.83% 7.82% 8.21% 8.91%
Return on average total
managed portfolio(2,3,4) 4.65% 4.65% 5.32% 4.97% 4.66%
-------------------------------------------------------------------------
(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) Figures have been restated for the implementation, on a retrospective
basis, of CICA HB 3064 - Goodwill and Intangible Assets and the
amendments to CICA HB 1000 - Financial Statement Concepts. See
section 14.1 and 14.2 for additional information.
(4) Return is calculated as adjusted earnings before taxes as a
percentage of GAR.The return on the total managed portfolio is unchanged in comparison to
the second quarter of 2008 as increased revenue and improved operating
efficiency was offset by increased write-offs.
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 second
quarters over the last five years.Portfolio quality
Q2 2009 Q2 2008 Q2 2007 Q2 2006 Q2 2005
-------------------------------------------------------------------------
Net write-off rate
(rolling 12-month basis) 6.82% 5.98% 5.89% 5.95% 5.96%
Account balances less than
30 days overdue at end of
period 95.97% 96.43% 96.57% 96.39% 96.63%
Allowance rate 2.76% 2.46% 2.32% 2.47% 2.40%
-------------------------------------------------------------------------The target range for the net write-off rate is between 5.0 percent and
6.0 percent. With the exception of 2009, the five-year historic trend
illustrates our successful ability to manage the write-off rates through
initiatives such as improving collections and seeking credit-worthy customers.
The 2009 rolling 12-month net write-off rate on the total loans portfolio has
been impacted by an increase in write-offs and consumer bankruptcies as a
result of a more challenging economic environment.
While bankruptcy costs increased, analysis of the business segment's
performance versus national statistics indicates that Financial Services
continues to experience lower costs than would be expected due to its
effective credit risk strategies which improved the quality of the loan
portfolio.
Periodic fluctuations in write-offs, aging and allowances occur as a
result of a variety of economic influences such as job growth or losses,
personal debt levels and personal bankruptcy rates, as well as changes caused
by adjustments to collection strategies. The increase in the allowance rate
compared to the second quarter of 2008 is due to an increase in the credit
card portfolio aging due to challenging economic conditions and the impact of
changes in collection practices in 2008. However a number of actions have
already been taken to manage the quality of the portfolio and write-off rates
are expected to return to acceptable levels over the longer term.3.3.4.3 Financial Services' financial results
($ in millions) Q2 2009 Q2 2008(1) Change 2009 YTD 2008 YTD(1) Change
-------------------------------------------------------------------------
Gross operating
revenue $ 232.9 $ 201.5 15.6% $ 450.2 $ 410.2 9.8%
EBITDA(2) 60.9 47.1 29.2% 107.6 107.5 0.1%
-------------------------------------------------------------------------
Earnings before
income taxes 42.3 44.4 (4.7)% 74.8 98.6 (24.2)%
Less adjustment for:
Loss on disposals
of property and
equipment (0.1) - (0.2) -
Net effect of
securitization
activities(3) 1.7 3.9 2.2 16.8
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(2) $ 40.7 $ 40.5 0.5% $ 72.8 $ 81.8 (11.0)%
-------------------------------------------------------------------------
(1) 2008 figures have been restated for the implementation, on a
retrospective basis, of CICA HB 3064 - Goodwill and Intangible Assets
and the amendments to CICA HB 1000 - Financial Statement Concepts.
See section 14.1 and 14.2 for additional information.
(2) See section 15.0 on non-GAAP measures.
(3) Includes initial gain/loss on the sale of loans receivable,
amortization of servicing liability, change in securitization reserve
and gain/loss on re-investment.Explanation of Financial Services' financial results
Second quarter
Financial Services' gross operating revenue increased by 15.6% over the
second quarter of 2008 largely as a result of an increase in credit interest
earned due to an increase in yield. Revenues from insurance and other
ancillary services also experienced strong growth.
Earnings before income taxes for the second quarter were impacted by a
lower net effect from securitization activities. After adjusting for this, as
well as the impact of the $9.7 million investment in the Options MasterCard
relaunch in Q2 2008, Financial Services' earnings declined by 19% from the
previous year. The primary reason for the decline in earnings growth during
the quarter was the increase in loan loss provisioning resulting from a
softening economy and credit market conditions and its consequent impact on
consumer bankruptcy and write off rates, as noted above. It was also
attributable to a substantial increase in interest expense caused by the rapid
expansion of broker deposits at Financial Services which are being used to
prefund the maturation of the Glacier notes and GICs in late 2009. The cost of
this conservative approach was approximately $4.2 million for the quarter.
These increased costs were partially offset by a continued effort to reduce
operating costs.
3.3.4.4 Financial Services' business risks
Financial Services is exposed to a number of risks in the normal course
of its business that have the potential to affect its operating performance.
These include, but are not limited to, consumer credit, securitization
funding, interest rate and regulatory risk. Please see section 5.3.4.8 of our
2008 Financial Report for an explanation of these business-specific risks as
well as section 5.1.4 of this MD&A for a description of the securitization
program and Canadian Tire's liquidity and capital market activity. Also see
section 11.0 of this MD&A for a discussion on Enterprise risk management and
section 14.0 of our 2008 Financial Report for a discussion of some other
industry-wide and Company-wide risks affecting the business.
4.0 Capital management
In order to support our growth agenda and meet the objectives enumerated
in our 2013 Plan, the Company actively manages its capital. The Company's
objectives are:- minimizing the after-tax cost of capital;
- maintaining healthy liquidity reserves and access to capital; and
- maintaining flexibility in capital structure to ensure the ongoing
ability to execute the Strategic Plan.The current economic environment has not changed the Company's objectives
in managing capital.
The definition of capital varies from company to company and from
industry to industry. Our definition of capital includes the current-portion
of long-term debt, long-term debt, long-term deposits, long-term liabilities
that are derivative or hedge instruments related to capital items only, share
capital, contributed surplus, components of accumulated other comprehensive
income (loss) related to capital items only, and retained earnings. For a full
listing of these amounts and further information, please refer to note 11 in
the Notes to the Consolidated Financial Statements.
Under existing debt agreements, key financial covenants are monitored on
an on-going basis by Management to ensure compliance with the agreements. The
Company was in compliance with these covenants during the second quarter of
2009.
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.During the second quarter of 2009 and for the comparative period, 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 further information on capital management, see note 11 in the Notes
to the Consolidated Financial Statements and section 7.0 (Capital Management)
in our 2008 Financial Report.
5.0 Financing
While the credit markets remain challenged in their lending operations,
Canadian Tire's financing capabilities are strong and have improved since Q4
2008, evidenced by a $200 million, 7-year debt transaction completed in May
2009 and the execution of a two year committed credit facility completed in
June 2009. We have 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
-------------------------------------------------------------------------
Amount
Financing Source Available Description
-------------------------------------------------------------------------
Committed bank lines of $1.22 billion Provided by 11 domestic and
credit international financial
institutions 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. No amounts were
drawn on the bank lines as at
July 4, 2009 and the full
amount was available.
Commercial paper program $800 million Canadian Tire had no
commercial paper outstanding
as at July 4, 2009.
Medium Term Notes (MTN) $750 million A new Shelf Prospectus was
program completed as of April 8, 2009,
providing the Company with
access of up to $750 million
for the next 25 months.
$200 million was drawn upon as
an MTN issuance in June.
Securitization of Transaction Securitization transactions
receivables specific handled through Glacier Credit
Card Trust ("GCCT") have
historically proved to be a
relatively cost-effective form
of financing. Financial
Services has not securitized
any credit card receivables in
2009 to date.
Broker GIC deposits No specified This avenue of fund-raising
limit ramped up in the second half
of 2008 and funds continue to
be readily available through
broker networks. As at the end
of Q2 2009, Financial Services
held $1.6 billion in broker
GIC deposits.
High Interest Savings No specified This avenue of fund-raising
Accounts limit increased in the second
quarter of 2009. At the end of
Q2 2009, Financial Services
held $490 million in High
Interest Savings deposits.
Sale/leaseback transactions Transaction Additional sources of funding
specific available on strategic
transactions involving Company
owned properties as
appropriate.Broker GIC deposits and High Interest Savings accounts are available to
provide liquidity to CTB.
As indicated in the table above, as of July 4, 2009, the Company had
$1.22 billion in committed bank lines of credit, of which $800 million
pertains to a syndicated credit facility that was executed on June 9, 2009
with an initial term of two years, which can be extended for a further year on
each anniversary. On June 29, 2009, the Company executed new bilateral credit
facilities to replace certain of its previously existing bilateral credit
agreements. These new bilateral credit agreements have an initial term of one
year and can be extended quarterly for an additional quarter. The remaining
bilateral credit lines are committed at least until late 2009.
As of July 4, 2009, the GCCT commercial paper program has access of up to
$800 million of the total Canadian Tire committed lines. GCCT has achieved
compliance with DBRS® Global Liquidity Standards.
Debt market conditions
Credit markets have shown signs of continuous improvement over the course
of 2009 to date; however the public asset-backed securities market is still
relatively illiquid, with only one transaction completed in Canada so far in
2009. Canadian Tire participates in the asset-backed security markets through
the use of commercial paper and issuance of MTNs. Throughout 2008 and 2009,
GCCT has continued to refinance certain of its maturing commercial paper and
had $63 million of commercial paper outstanding as of July 4, 2009, fully
backed by the bank credit lines.
For 2009, no corporate debt maturities are scheduled. Late in the year,
GCCT term notes of $625 million will mature, which will result in a
corresponding increase in receivables at Financial Services, unless the notes
are refinanced.
Should the Company not complete a credit card securitization transaction
in the near-to-medium term due to the unstable financial market conditions,
the Company has access to other sufficient sources of financing as indicated
in the table above.
In December 2008, Canadian Tire received confirmation from both of its
rating agencies on its various funding programs, all of which had a stable
outlook. As at July 4, 2009 there had 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.Long-term debt
On June 1, 2009, the Company issued $200 million, 7 year medium term
notes, which mature and are repayable on June 1, 2016, and bear interest at
5.65 percent, payable semi-annually.
Broker deposits
CTB has been very successful in issuing broker GICs since the fourth
quarter of 2007. 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 Canada Deposit Insurance Corporation (CDIC) insured. CTB broker
GICs are offered for varying terms ranging from 30 days to five years, and all
issued GICs are non-redeemable prior to maturity (except in certain rare
circumstances). Given that the overall size of the broker GIC market is
estimated to be $66 billion in Canada, CTB believes that there is ample room
in the market to take advantage of CTB broker GIC deposits as a cost-effective
alternative funding source to the securitization of credit card receivables.
As at the end of the second quarter of 2009, CTB had approximately $1.6
billion in total short-term and long-term CTB broker GIC deposits outstanding.
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.
High Interest Savings deposits
More recently, CTB has been successful in generating deposits from High
Interest Savings (HIS) account balances and at the end of the second quarter,
CTB had $490 million in HIS deposits. HIS provide another cost effective
alternative funding source to credit card securitization and broker deposits.
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 normal course issuer bid (NCIB) (as
described in section 6.0 below), from a combination of sources. In the second
quarter of 2009, the primary sources of funding were:- $628 million of cash arising from an increase in net deposits; and
- $200 million of cash arising from the issuance of medium term notes.5.1.2 Cash and cash equivalents
At July 4, 2009, the Company's cash and cash equivalents totaled $1,346.0
million versus $28.5 million at June 28, 2008. This change in cash balance was
positively impacted by the increase in net deposits. This cash balance will be
used, in part, to fund the repurchase of outstanding receivables of Glacier in
the fourth quarter of 2009. There was no commercial paper outstanding at the
end of the second quarter of 2009 or 2008. During the second quarter of 2009,
we used cash primarily for the following:- $172 million for the investment in short-term investments;
- $146 million for the investment in loans receivable;
- $82 million for the repayment of commercial paper;
- $43 million for additions to property and equipment; and
- $18 million for additions to intangible assets, primarily computer
software.5.1.3 Working capital
Optimizing our working capital continues to be a long-term priority in
order to maximize cash flow for use in the operations of the Company. The
table below shows the change in the value of our working capital components at
the end of the second quarter of 2009 from the second quarter of 2008.Comparable working capital components
Increase/
(decrease)
July 4, June 28, in working
($ in millions) 2009 2008(1) capital
-------------------------------------------------------------------------
Short-term investments $ 171.6 $ - $ 171.6
Accounts receivable 478.7 362.5 116.2
Merchandise inventories 991.2 996.6 (5.4)
Income taxes recoverable 111.5 86.7 24.8
Prepaid expenses and deposits 72.8 62.4 10.4
Accounts payable and other (1,160.0) (1,200.2) 40.2
-------------------------------------------------------------------------
$ 357.8
-------------------------------------------------------------------------
(1) 2008 figures have been restated for the implementation, on a
retrospective basis, of CICA HB 3064 - Goodwill and Intangible Assets
and the amendments to CICA HB 1000 - Financial Statement Concepts.
See section 14.1 and 14.2 for additional information.The increase in short-term investments was due to cash raised from an
increase in CTB deposits that will subsequently be used to fund the increase
of credit card loans receivable upon the maturity of GCCT asset-backed notes
in November 2009 (see below). The cost of this conservative approach was
approximately $4.2 million for the quarter.
The increase in accounts receivable was due to a temporary extension of
payment terms with our Dealers under a program designed to rebuild Dealer
inventories to optimal levels.
5.1.4 Loans receivable
Our loans receivable securitization program is designed to provide a
cost-effective source of funding for Financial Services. Loans receivable were
as follows at the indicated dates:July 4, June 28,
($ in millions) 2009 2008
-------------------------------------------------------------------------
Securitized $ 2,208.1 $ 2,848.8
Non-securitized 1,788.5 981.4
-------------------------------------------------------------------------
Net managed loans receivable $ 3,996.6 $ 3,830.2
-------------------------------------------------------------------------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 second quarter of 2009, net managed loans receivable were 4.3 percent
higher than at the end of the second quarter of 2008.
CTB sells co-ownership interests in credit card loans to GCCT. Since the
Company does not have a controlling interest in GCCT, 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". See note 1 in the Notes
to the 2008 Consolidated Financial Statements.
We expect the continued growth in the average balances of Canadian Tire
MasterCard credit card accounts to lead to an increase in total loans
receivable in 2009. Financial Services expects to continue to fund this
increase from the sale of co-ownership interests in credit card loans to GCCT
and raising deposits by CTB. 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. 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. 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
second quarter of 2009 was $43.92 per share compared to $40.17 at the end of
the second quarter of 2008.
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 12, 2009, we announced our intention to initiate a NCIB to
purchase up to 3.4 million of the issued and outstanding Class A Non-Voting
Shares over the 12-month period ending February 18, 2010. In the prior year, a
total of approximately 0.5 million Class A Non-Voting Shares were purchased
under the previous NCIB.
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.Shares outstanding
July 4, June 28,
2009 2008
-------------------------------------------------------------------------
Class A Non-Voting Shares (CTC.A)
Shares outstanding at beginning of year 78,178,066 78,048,062
Shares issued under plans(1) 500,482 359,610
Shares purchased under NCIB (440,200) (350,800)
-------------------------------------------------------------------------
Shares outstanding at end of quarter 78,238,348 78,056,872
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 $17.1 million were declared on Common and
Class A Non-Voting Shares in the second quarter of 2009 compared to dividends
of $17.1 million in the second quarter of 2008, reflecting the Board of
Directors' decision in February 2009 to maintain the annual dividend rate at
$0.84 per share. The first quarterly dividend at the 2009 rate was declared on
February 12, 2009 in the amount of $0.21 per share payable on June 1, 2009 to
shareholders of record as of April 30, 2009. The second quarterly dividend was
declared on May 14, 2009 in the amount of $0.21 per share payable on September
1, 2009 to shareholders of record as of July 31, 2009. The third quarterly
dividend was declared on August 13, 2009 in the amount of $0.21 per share
payable on December 1, 2009 to shareholders of record as of October 30, 2009.
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 excludes gains
and losses on the sale of credit card and loans receivable and non-recurring
items but includes gains and losses on the ordinary course disposition of
property and equipment.
7.0 Investing activities
7.1 Q2 2009 Capital expenditures program
Canadian Tire's capital expenditures, on an accrual basis, totaled $48
million in the second quarter of 2009 (including intangible assets such as
software acquisitions), approximately 48 percent lower than the $93 million
spent in the second quarter of 2008. These capital expenditures were comprised
of:- $21 million for real estate projects, including projects associated
with the rollout of CTR's new store formats;
- $13 million for information technology;
- $3 million for CTR distribution centres;
- $3 million for Automotive Infrastructure; and
- $8 million for other purposes.Overall, capital investment has slowed since the second quarter of 2008,
as construction of the Eastern Canada Distribution Centre is complete. We have
also begun to focus on the next store concept renewals, such as our Smart and
Small Market stores. This renewal program is a less capital-intensive effort
than the 20/20 store rollout.
7.2 2009 Capital expenditures plan
In light of current market conditions, the 2009 capital expenditure plan
which had originally been set at $390 million, was reduced to $360 million at
the end of the first quarter and was further reduced to approximately $326
million at the end of the second quarter. Our revised capital plan includes
the following expenditures:- $163 million for real estate projects, including $130 million
associated with the rollout of CTR's new store formats;
- $64 million for information technology;
- $24 million for CTR distribution centres;
- $14 million for Automotive Infrastructure;
- $12 million for energy management and lighting; and
- $49 million for other purposes.8.0 Foreign operations
The Company has established operations outside of Canada including
offshore activities in Bermuda and the Pacific Rim. For an overview of our
foreign operations, see section 11.0 of the MD&A contained in the 2008
Financial Report.
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 $192.5 million. Although the Company has appealed these
reassessments, current tax legislation requires the Company to remit to the
CRA and its provincial counterparts approximately $119.7 million related to
this matter, all of which 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.
The year to date tax provision has been reduced by $4.6 million due to
the retroactive change in legislation relating to the taxation of gains
realized from the disposition of shares during 2006 and 2007.10.0 Off-balance sheet arrangements
10.1 Glacier Credit Card TrustAs 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 5.1.4 of this MD&A for additional information on GCCT.
10.2 Trust financing for Dealers
A financing program has been established to provide an efficient and
cost-effective way for Dealers to access the majority of the financing they
require for their store operations.
We are aware that the participating banks wish to amend the program on
termination of the existing agreement. They must provide a six month notice
period before any amendments are effective. As a result, while we are under no
contractual obligation to provide financial support to our Dealers who
participate in the arrangement, we are actively working with the Dealers and a
number of banks, including the existing participating banks, to extend the
availability of financing to the Dealers on appropriate terms and conditions.
Refer to MD&A section 13.2 of our 2008 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. The total is
approximately $34 million. Refer to MD&A section 13.3 of our 2008 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 13.4 of our 2008 Financial Report for additional
information on derivative financial instruments.
11.0 Enterprise risk management
The Company approaches the management of risk strategically through its
Enterprise Risk Management (ERM) framework in order to mitigate the impact of
principal risks on its business and operations. Introduced in 2003, the ERM
framework sets out principles and tools for identifying, evaluating,
prioritizing, monitoring and managing risk effectively and consistently across
the Company.
The ERM framework and the principal risks that the Company manages on an
ongoing basis are described in detail in sections 14.0 and 14.2, respectively,
of the MD&A in our 2008 Financial Report.
Management reviews risks on an ongoing basis and did not identify any new
principal risks during the second quarter of 2009. During the second quarter
there was a mild outbreak of the H1N1 flu virus (Human Swine Flu) with
confirmed cases in Canada. The Company's crisis management and emergency
response structures and protocols are in place to address these and other
types of hazards and business interruptions. These practices are being applied
during this outbreak to protect our employees, customers and suppliers and the
Company is also taking the opportunity to review and enhance our existing
practices.
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 12 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. 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 provide for future credit losses. A continuity of
the Company's allowances for credit losses is as follows:Credit card loans Other loans(1)
----------------------------------------
July 4, June 28, July 4, June 28,
($ in millions) 2009 2008 2009 2008
----------------------------------------
Balance, beginning of year $ 51.8 $ 51.5 $ 3.5 $ 2.7
Provision for credit losses 70.4 24.0 3.0 6.2
Recoveries 8.8 6.3 0.4 0.3
Write-offs (68.0) (40.5) (4.0) (4.5)
----------------------------------------
Balance, end of period $ 63.0 $ 41.3 $ 2.9 $ 4.7
----------------------------------------
----------------------------------------
Accounts receivable Total
----------------------------------------
July 4, June 28, July 4, June 28,
($ in millions) 2009 2008 2009 2008
----------------------------------------
Balance, beginning of year $ 3.3 $ 5.0 $ 58.6 $ 59.2
Provision for credit losses 1.1 0.8 74.5 31.0
Recoveries 0.1 0.1 9.3 6.7
Write-offs (2.1) (2.5) (74.1) (47.5)
----------------------------------------
Balance, end of period $ 2.4 $ 3.4 $ 68.3 $ 49.4
----------------------------------------
----------------------------------------
(1) Other loans include personal loans, mortgages loans and lines of
credit loans.Foreign currency risk
The Company has significant demand for U.S. 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 has a comprehensive foreign exchange risk management policy in place
which establishes ranges for the proportion of forecast US dollar purchases
that must be hedged for various time periods. Consequently, when dramatic
swings in foreign currency rates occur (as experienced early in the fourth
quarter of 2008) the Company had already hedged a significant portion of its
U.S. dollar-denominated forecast purchases. The current foreign currency hedge
portfolio has allowed the Company to have some margin stability for the first
half of 2009 as a significant amount of the U.S. dollars required for U.S.
dollar-denominated purchases in 2009 year to date were available at hedge
rates more favourable than the average year to date spot reference rate. The
outcome of the Company's hedge portfolio for the balance of 2009 will be
dependent on the volatility of the currency markets for the remainder of the
year. The Company may also be able to pass on changes in foreign currency
exchange rates through pricing, subject to competitive conditions.
Liquidity risk
The following table summarizes the Company's contractual maturity for its
financial liabilities. The table includes both interest and principal cash
flows.($ in millions) 1 year 2 years 3 years 4 years
----------------------------------------
Deposits $ 988.7 $ 211.9 $ 252.6 $ 175.3
Accounts payable and other 1,140.1 - - -
Long-term debt 159.5 309.3 21.3 8.2
Interest payment(1) 113.6 87.0 88.1 86.9
Other - 0.3 - -
----------------------------------------
Total $2,401.9 $ 608.5 $ 362.0 $ 270.4
----------------------------------------
----------------------------------------
There-
($ in millions) 5 years after Total
------------------------------
Deposits $ 545.5 $ - $2,174.0
Accounts payable and other - - 1,140.1
Long-term debt 6.9 1,062.9 1,568.1
Interest payment(1) 176.0 663.4 1,215.0
Other 5.4 - 5.7
------------------------------
Total $ 733.8 $1,726.3 $6,102.9
------------------------------
------------------------------
(1) Includes interest payments on deposits and long-term debt.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 Legal risk
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 its consolidated earnings, cash flows, or financial position.
In October 2004, a motion for authorization to proceed with a class
action against Canadian Tire Bank (CTB) and a number of other banks was filed
by Option Consommateurs, a Quebec-based consumers' group. The class action
alleges that the cash advance transaction fees charged by CTB (and other
banks) are not permitted under the Consumer Protection Act (Quebec). The claim
seeks a return of all fees assessed against cardholders for cash advances,
plus interest and punitive damages of $200 per class member. The class action
was certified against CTB on November 1, 2006. The class is comprised of all
persons in Quebec who have a credit card agreement with CTB and who have paid
CTB fees for cash advances in Canada or abroad since October 1, 2001. CTB
believes it has a solid defense to the claim on the basis that banks are not
required to comply with provincial legislation because banking and cost of
borrowing disclosure is a matter of exclusive federal jurisdiction.
Accordingly, no provision has been made for amounts (if any) that would be
payable in the event of an adverse outcome.
In June 2009, however, a similar lawsuit (Marcotte vs Bank of Montreal)
was heard by the Quebec Supreme Court questioning the legality of foreign
exchange fees on credit cards transactions. The court ruled in favour of the
plaintiff, however the decision is being appealed to the Quebec Court of
Appeal. One consequence of this decision is that it may affect other
outstanding lawsuits, including the action filed by Option Consommateurs
against CTB noted above. If adversely decided, the present total aggregate
exposure to CTB is expected to be approximately $15 million.
11.3 Regulatory risk
As a result of increased focus by the Federal government on the credit
card industry, new credit card regulations have been proposed which will, once
implemented, have a negative impact on all credit card issuers in Canada,
including Financial Services. Although there has been no indication as to when
these regulations will be finalized, it is expected that implementation will
be some time in 2010. Financial Services is currently reviewing the draft
regulations to assess the potential financial impacts and any mitigating
actions that can be taken.
11.4 Other risks
In addition to the Principal Risks noted in section 11.0 above, and the
business-specific risks identified in section 3.3.1.4 for CTR, section 3.3.2.4
for Mark's, section 3.3.3.4 for Petroleum and section 3.3.4.4 for Financial
Services, other risks may also have a significant impact on earnings, business
operations, and our reputation. These other risks include, but are not limited
to, the Company's ability to acquire and develop real estate properties,
disruptions in the capital markets to finance the expansion of the retail
network, the ability of our Dealers to secure financing through the
aforementioned third-party Trusts (see section 10.2) or through other means,
changes in commodity prices that could affect the Company's profitability,
fluctuating foreign currency exchange rates which could impact cross-border
shopping patterns and the purchase price of our goods, disruptions in the
global supply of gasoline and customers' inability to repay their Canadian
Tire credit card or loan balances.
12.0 Critical accounting estimates
The Company estimates certain amounts reflected in its financial
statements 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, the accounting policies and estimates detailed in
note 1 of the Notes to the Consolidated Financial Statements for the quarter
ended July 4, 2009 do not require us to make assumptions about matters that
are highly uncertain and accordingly none of the estimates is considered a
"critical accounting estimate" as defined in Form 51-102F1 published by the
Ontario Securities Commission, except as noted below.
In view of the recent turmoil in credit markets and economic recession
being experienced in Canada, the Company reviewed the allowance for credit
losses at Financial Services and considers it to be a "critical accounting
estimate". The allowance for credit losses adjusts the value of the Financial
Services loan portfolio to reflect its estimated realizable value. Financial
Services' allowance for impaired loans receivable for each of credit card,
personal, mortgage and line of credit loans is determined using historical
loss experience of account balances based on the aging and arrears status,
with certain adjustments for other relevant circumstances influencing the
recoverability of the loans receivables. A robust model is used and is based
on economic conditions and trends specific to Financial Services. The
allowance for impaired credit card loans (the largest portfolio) is comprised
of general, bankruptcy and fraud risk components. Changes in circumstances
including, but not limited to, changes in the aging of accounts and changes in
the bankruptcies experienced may cause future assessments of credit risk to be
materially different from current assessments, which could require an increase
or decrease in the allowance for credit losses. The impairment provisions for
personal loans, line of credit loans and mortgages operate in similar fashion.
Further details on consumer credit risk may be found in section 5.3.4.8
(Financial Services' business risk) of our 2008 Financial Report.
13.0 Contractual obligations
Contractual obligations due by periodIn the
remaining
six In years In years
months 2010 - 2012 - After
($ in millions) Total of 2009 2011 2013 2013
-------------------------------------------------------------------------
Long-term debt(1) $1,521.9 $ 4.8 $ 466.0 $ 1.1 $1,050.0
Capital lease
obligations 46.2 3.5 14.9 14.9 12.9
Operating leases 2,135.9 116.8 433.1 372.9 1,213.1
Purchase obligations 1,001.1 754.2 179.0 53.1 14.8
Financial Services'
deposits 2,174.0 860.7 431.8 632.0 249.5
Other obligations 34.5 6.4 12.4 6.4 9.3
-------------------------------------------------------------------------
Total contractual
obligations $6,913.6 $1,746.4 $1,537.2 $1,080.4 $2,549.6
-------------------------------------------------------------------------
(1) Interest obligations are not included.14.0 Changes in accounting policies
The numbers reflected in this MD&A have been calculated using the same
accounting policies and methods of their application as the most recently
issued annual financial statements for the 53 weeks ended January 3, 2009
(contained in our 2008 Annual Report), except as noted below.
14.1 Financial Statement Concepts
Effective, January 4, 2009 (the first day of the Company's 2009 fiscal
year), the Company applied the amendments issued by the CICA to HB 1000 -
Financial Statement Concepts, which clarify the criteria for recognition of an
asset and the timing of expense recognition, specifically, deleting the
guidance permitting the deferral of costs. The new requirements are effective
for interim and annual financial statements for fiscal years beginning on or
after October 1, 2008. The Company applied the amendments to CICA HB 1000 in
conjunction with CICA HB 3064 - Goodwill and Intangible Assets.
14.2 Goodwill and Intangible Assets
Effective, January 4, 2009, the Company implemented, on a retrospective
basis with restatement, the CICA HB 3064 - Goodwill and Intangible Assets,
which was effective for interim and annual financial statements for fiscal
years beginning on or after October 1, 2008.
This new standard provides guidance on the recognition, measurement,
presentation and disclosure of goodwill and intangible assets, including
internally developed intangibles, and is consistent with the revised asset
definition and recognition criteria in CICA HB 1000 - Financial Statement
Concepts. Under the new standard, costs related to development projects can be
recorded as assets only if they meet the definition of an intangible asset.
Additionally, the new standard requires that internally developed
computer software that is not an integral part of the related hardware
(previously included in property and equipment) be included in intangible
assets. As these costs have a limited useful life, they continue to be
amortized over a five year period.
As a result of the retrospective implementation of these standards, the
cumulative impact on previously reported balances on the following dates is as
follows:Increase/(Decrease)
-------------------------------------------------------------------------
January 3, June 28, December 29,
($ in millions) 2009 2008 2007
-------------------------------------------------------------------------
Retained earnings $ (3.1) $ (3.9) $ (4.3)
Long-term receivables and other
assets (3.3) (4.6) (4.6)
Intangible assets 189.5 174.0 174.0
Property and equipment (190.9) (175.1) (175.8)
Income taxes recoverable 0.4 0.1 0.4
Future income tax liabilities (1.2) (1.7) (1.7)
-------------------------------------------------------------------------In addition, the retrospective impact on depreciation and amortization
for the 13 weeks and 26 weeks ended June 28, 2008 was a decrease of $0.5
million and $1.1 million, respectively. The retrospective impact on net
earnings for the 13 weeks ended June 28, 2008 was not significant ($nil per
share), and for the 26 weeks ended June 28, 2008 an increase of $0.4 million,
or $nil per share. See note 2 in the Notes to the Consolidated Financial
Statements for additional information.14.3 Credit Risk and the Fair Value of Financial Assets and Financial
LiabilitiesEffective, January 4, 2009, the Company implemented, on a retrospective
basis without restatement of prior periods, the CICA Emerging Issues Committee
(EIC) 173 - Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities, which is effective for interim and annual financial statements
for periods ending on or after January 20, 2009.
This EIC clarifies that an entity's own credit risk and the credit risk
of the counterparty should be taken into account in determining the fair value
of financial assets and financial liabilities, including derivative
instruments, rather than using a risk free rate.
Entities are required to re-measure the financial assets and liabilities,
including derivative instruments, as at the beginning of period of adoption
(i.e. the beginning of fiscal 2009) to take into account its own credit risk
and counterparty credit risk. Any resulting difference would be recorded as an
adjustment to retained earnings, except a) derivatives in a fair value hedging
relationship accounted for by the "shortcut method", in which case the
resulting difference would adjust the basis of the hedged item; and b)
derivatives in cash flow hedging relationships, in which case the resulting
difference would be recorded in accumulated Other Comprehensive Income (OCI).
As a result of the retrospective implementation of this new standard,
opening accumulated other comprehensive income decreased by $2.5 million and
opening retained earnings increased by $1.1 million.
14.4 Business Combinations
In January 2009, the CICA issued CICA HB 1582 - Business Combinations,
which will replace CICA HB 1581 - Business Combinations. The CICA also issued
CICA HB 1601 - Consolidated Financial Statements and CICA HB 1602 -
Non-Controlling Interests, which will replace CICA HB 1600 - Consolidated
Financial Statements. The new standards are effective for fiscal years
beginning on or after January 1, 2011, with early adoption permitted. The
objective of the new standards is to harmonize Canadian GAAP for business
combinations and consolidated financial statements with the International and
U.S. accounting standards. The new standards are to be applied prospectively
to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after January
1, 2011, with earlier application permitted. Assets and liabilities that arose
from business combinations whose acquisition dates preceded the application of
the new standards will not be adjusted upon application of these new
standards.
14.5 Financial Instruments - Recognition and Measurement
In April 2009, the CICA amended CICA HB 3855 - Financial Instruments -
Recognition and Measurement by adding a paragraph regarding the application of
the effective interest method to previously impaired financial assets. This
amendment is effective from the date of issuance. Additionally, a paragraph
relating to embedded prepayment options was amended. This amendment is
effective for interim and annual financial statements relating to fiscal years
beginning on or after January 1, 2011 with early adoption permitted. The
Company is assessing the potential impact of the amendments to this standard.
14.6 Financial Instruments - Disclosures
In June 2009, the CICA amended CICA HB 3862 - Financial Instruments -
Disclosures, which adopted the amendments recently issued by the IASB to IFRS
7 - Financial Instruments: Disclosures, which was issued in March 2009. These
amendments are applicable to publicly accountable enterprises and those
private enterprises, co-operative business enterprises, rate-regulated
enterprises and not-for-profit organizations that choose to apply Section
3862. The amendments enhance disclosures about fair value measurements,
including the relative reliability of the inputs used in those measurements,
and about the liquidity risk, of financial instruments. The amendments are
effective for annual financial statements for fiscal years ending after
September 30, 2009, with early adoption permitted. To provide relief for
financial statement preparers, and consistent with IFRS 7, the CICA decided
that an entity need not provide comparative information for the disclosures
required by the amendments in the first year of application. The Company is
assessing the potential impact of the amendments to this standard.
14.7 International Financial Reporting Standards
In February 2008, the CICA announced that Canadian GAAP for publicly
accountable enterprises will be replaced by International Financial Reporting
Standards (IFRS) for fiscal years beginning on or after January 1, 2011.
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, information systems and processes as
well as certain contractual arrangements.
Given the magnitude of the effort involved in this conversion, the
project (which employs formal project management practices) has been developed
in three main phases.
Phase One: Preliminary Scoping and Diagnostic Impact Assessment
This phase consisted of a high-level assessment to identify key areas of
Canadian GAAP - IFRS differences that were most likely to impact the Company.
The assessment was completed over the period 2007-2008 and was integral in
prioritizing and resourcing the work streams identified below to enable the
subsequent steps in the process. Activities in this phase also included the
recruitment and training of core internal technical resources to be deployed
on the conversion project and retained afterwards to support ongoing training
of other finance personnel dealing with the more complex technical accounting
requirements of IFRS.
Phase Two: Detailed Analysis and Design
This phase, commenced in Q4 2008, involves the detailed assessment, from
an accounting, reporting and business perspective, of the changes that will be
caused by the conversion to IFRS. This phase initiated the launch of 13
accounting topic-specific "work streams" that are most relevant to the Company
and 4 general work streams. This phase also included the standardization of
criteria used to assess the appropriateness of accounting policy choices in
cases where choices are permissible under IFRS.
Accounting specific work streams include revenue recognition, tangible
assets (including leases), impairments, provisions, contingent liabilities and
contingent assets, business combinations, consolidations, securitization
transactions, borrowing costs, compensation and benefits, financial
instruments, income taxes, software and intangibles and financial statement
presentation and disclosure. General work streams include contracts review,
employee education and training, information systems and communication. The
design deliverables coming out of these accounting specific work streams
include the documentation of the rationale supporting accounting policy
choices, new disclosure requirements and their sources and implementation
guidance for business units and corporate groups as they undertake the
execution phase noted below. The deliverable for 8 accounting specific work
streams were completed by the end of Q2 2009. The deliverables for the
remaining 5 accounting specific work streams will be completed in Q3 2009.
These will include the selection of accounting policies under IFRS as
currently enacted, including transitional elections. Some of the general work
streams, such as the education and training and communication work streams
will continue throughout the duration of the conversion project. The latter
will involve not only key finance employees but also other staff and
management as well as the Audit Committee, Board and external parties such as
investors and analysts.
Phase Three: Execution
This phase involves executing the work completed in phase two by making
changes to business and accounting processes and supporting information
systems within each business unit and corporate group as well as the formal
documentation of the final approved accounting policies and procedures
compliant with IFRS. A quantification of anticipated business impacts will be
undertaken as well as a drafting of the pro-forma financial statement formats
and notes thereto that will be existent under IFRS. Details surrounding the
collection of comparative financial and other data in 2010 will also be
finalized during this stage. This stage will also involve the cascading of the
training plan to all staff having key accounting and reporting and investor
relations functions.
This phase is expected to be completed by the end of Q4 2010.
The following table summarizes our progress to date against the
milestones contained in the key elements of the transition plan:IFRS transition progress
-------------------------------------------------------------------------
Progress to
Key Activity Milestones/Target Dates July 31, 2009
-------------------------------------------------------------------------
Project governance December 31, 2008 - governance practices
- steering committee established
formation - program office,
- project resourcing steering committee
- progress reporting and working committee
protocols formed
- project management - project status
practices reporting developed
and implemented
-------------------------------------------------------------------------
Financial statement Ready for commencement - fundamental Canadian/
preparation for 2011 financial IFRS differences
- identification of year; quantification of identified
differences in effects of change for - criteria for
Canadian GAAP/IFRS IFRS 1 disclosures and accounting policy
accounting policies comparative 2010 choice selection
and choices financial statements established
- selection of including note - critical work stream
entity's continuing disclosure by the end teams dealing with
accounting of Q1 2011 individual policy
IFRS policies selection
- selection of IFRS 1 recommendations in
accounting policy progress
choices
- changes in note
disclosure
- financial statement
format, including
alternative
performance measures
- quantification of
IFRS 1 disclosures
for 2010
-------------------------------------------------------------------------
Infrastructure: Internal education and - resource requirements
IFRS expertise communication ready for identified
- retraining of key issuance in Q2 2010 - internal and
finance and recruited resources
operational staff External education and deployed
- education of communication ready for - additional consulting
management, Audit issuance in Q4 2010 support identified
Committee and - initial training
external completed for core
constituents project staff, senior
regarding IFRS management, Board of
implications Directors, Audit
Committee and work
stream members
-------------------------------------------------------------------------
Infrastructure: Ready for capturing - assessment of impact
- information systems 2010 comparative data on systems is
changes to support in Q4 2010 and ready on-going as
IFRS requirements for capturing 2011 data requirements are
by the end of Q4 2010 still being developed
-------------------------------------------------------------------------
Business implications GAAP-based clauses - process to review
assessment: financial to be identified for contracts has been
covenants and renegotiation with established
practices (including counterparties by Q2
securitization) 2010. Renegotiation is
- business contract a business matter that
review/renegotiation is outside the scope of
- financial debt the conversion project.
covenant assessments
- off-balance sheet
Trust assessments
-------------------------------------------------------------------------
Control environment: Approval and sign-off - not yet commenced
Internal control of all accounting
over financial changes and CEO/CFO
reporting (ICFR) certification process
complete by end of
Q4 2010
-------------------------------------------------------------------------
15.0 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)
Q2 Q2 2009 2008
($ in millions) 2009 2008(2) YTD YTD(2)
-------------------------------------------------------------------------
EBITDA(3)
CTR $ 163.1 $ 143.2 $ 259.9 $ 245.3
Financial Services 60.9 47.1 107.6 107.5
Petroleum 12.1 12.1 22.5 21.1
Mark's 14.0 14.2 16.2 17.2
-------------------------------------------------------------------------
Total EBITDA $ 250.1 $ 216.6 $ 406.2 $ 391.1
-------------------------------------------------------------------------
Less:
Depreciation and amortization
expense
CTR $ 47.1 $ 42.5 $ 93.0 $ 84.5
Financial Services 3.1 2.8 5.6 5.4
Petroleum 4.3 4.1 8.7 8.1
Mark's 6.6 5.8 13.1 11.2
-------------------------------------------------------------------------
Total depreciation and
amortization expense $ 61.1 $ 55.2 $ 120.4 $ 109.2
-------------------------------------------------------------------------
Interest expense(3)
CTR $ 20.8 $ 15.6 $ 38.9 $ 32.1
Financial Services 15.5 (0.1) 27.2 3.5
Mark's 0.3 1.1 0.9 2.1
-------------------------------------------------------------------------
Total interest expense $ 36.6 $ 16.6 $ 67.0 $ 37.7
-------------------------------------------------------------------------
Earnings before income taxes
CTR $ 95.2 $ 85.1 $ 128.0 $ 128.7
Financial Services 42.3 44.4 74.8 98.6
Petroleum 7.8 8.0 13.8 13.0
Mark's 7.1 7.3 2.2 3.9
-------------------------------------------------------------------------
Total earnings before income
taxes $ 152.4 $ 144.8 $ 218.8 $ 244.2
-------------------------------------------------------------------------
(1) Differences may occur due to rounding.
(2) 2008 figures have been restated for the implementation, on a
retrospective basis, of CICA HB 3064 - Goodwill and Intangible Assets
and the amendments to CICA HB 1000 - Financial Statement Concepts.
See section 14.1 and 14.2 for additional information.
(3) Eliminations of inter-company transactions (e.g. 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 (in a 52-week fiscal year)
or 54 weeks (in a 53-week fiscal year, such as in the case of the fiscal year
ended January 3, 2009) and therefore allows for a more consistent comparison
to other stores open during the period and to results in the prior year.
16.0 Controls and procedures
Changes in internal control over financial reporting
During the second quarter of 2009, there have been no changes in the
Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's
financial reporting.
17.0 Corporate Social Responsibility
Canadian Tire's signature charitable program is Canadian Tire Jumpstart
charities. This organization, formerly the Canadian Tire Foundation for
Families which underwent a name change this year due to the success of the
Jumpstart program, is a community-based organization that helps kids in
financial need participate in organized sports and recreation so they can
develop important life skills, self-esteem and confidence. National in scope
but local in focus, Canadian Tire Jumpstart has delivered support since 2005
to children through a Canadian-wide network of local chapters. To date there
has been over 279 Jumpstart chapters in communities across the country and
over 176,000 children have been helped by the program.
In Q2 2009, we held the first ever "Canadian Tire Jumpstart Days" event.
Over the course of a weekend, Canadian Tire donated $1 to Jumpstart on behalf
of every customer who shopped at our stores. Thanks to contributions from
customers, employees, Dealers, Canadian Tire Petroleum, Canadian Tire
Financial Services, Mark's Work Wearhouse, PartSource and select vendors, we
raised $1.8 million to give approximately 18,000 children the opportunity to
participate in sports and recreation programs this summer.
During the first six months of 2009, Jumpstart has raised over $5.4
million for Jumpstart chapters across Canada ($4.2 million during the first
six months of 2008), helping 25,408 children participate in sports and
recreation programs (19,797 children helped during the first six months of
2008). Jumpstart is on track to help over 55,000 children in 2009.
18.0 Other Investor Communication
Caution regarding forward-looking information
This MD&A contains forward-looking information that reflects management's
expectations related to expected future events, financial performance and
operating results of the Company. All statements other than statements of
historical facts included in this MD&A, including statements regarding the
prospects of the industries in which the Company operates, future plans,
expected financial position and business strategy of the Company, may
constitute forward-looking information. Forward-looking information and
statements include, but are not limited to, statements concerning possible or
assumed future results set out herein, our strategic goals and our priorities,
and the economic and business outlook for us, for each of our business
segments and for the Canadian economy. Often, but not always, forward-looking
information can be identified by the use of forward-looking terminology such
as "may", "will", "expect", "believe", "estimate", "plan", "could", "should",
"would", "outlook", "forecast", "anticipate", "foresee", "continue" or the
negative of these terms or variations of them or similar terminology.
Forward-looking information is based on the reasonable assumptions, estimates,
analysis and opinions of management made in light of its experience and
perception of trends, current conditions and expected developments, as well as
other factors that management believes to be relevant and reasonable at the
date that such statements are made. The forward-looking information contained
in this MD&A is presented for the purpose of assisting the Company's security
holders in understanding its financial position and results of operation as at
and for the periods ended on the dates presented and the Company's strategic
priorities and objectives and may not be appropriate for other purposes. By
its very nature, forward-looking information requires the Company to make
assumptions and is subject to inherent risks and uncertainties, which give
rise to the possibility that the Company's predictions, forecasts,
projections, expectations or conclusions will not prove to be accurate, that
the Company's assumptions may not be correct and that the Company's
objectives, strategic goals and priorities will not be achieved. Although the
Company believes that the predictions, forecasts, projections, expectations or
conclusions reflected in the forward-looking information are reasonable, it
can give no assurance that such matters will prove to have been correct. Such
forward-looking information is not fact but only reflections of management's
estimates and expectations. Although the Company believes that this
forward-looking information is based on information and assumptions which are
current, reasonable and complete, this information is necessarily subject to a
number of factors that could cause actual results to differ materially from
management's predictions, forecasts, projections, expectations or conclusions
as set forth in such forward-looking information for a variety of reasons.
These factors include (a) credit, market, operational, liquidity and funding
risks, including changes in interest rates or tax rates; (b) 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; (c) the willingness of
customers to shop at our stores or acquire our financial products and
services; (d) risks and uncertainties relating to information management,
technology, product safety, competition, seasonality, commodity price and
business disruption, consumer credit, securitization funding, and foreign
currency; and (e) the risks and uncertainties that could cause actual results
or the material factors and assumptions applied in preparing forward-looking
information to differ materially from predictions, forecasts, projections,
expectations or conclusions, which risks and uncertainties are discussed in
section 11.0 (Enterprise risk management) for the quarter-ended July 4, 2009.
Additional risks related to specific business segments can be found in section
3.3.1.4 (CTR's business risks), section 3.3.2.4 (Mark's business risks),
section 3.3.3.4 (Petroleum's business risks) and section 3.3.4.4 (Financial
Services' business risks).
For more information on the risks, uncertainties and assumptions that
could cause the Company's actual results to differ from current expectations,
please also refer to the Company's public filings available at www.sedar.com
and at corp.canadiantire.ca/en/investors. We caution that the foregoing list
of important factors is not exhaustive and other factors could also adversely
affect our results. Investors and other readers are urged to consider the
foregoing risks, uncertainties and assumptions carefully in evaluating the
forward-looking information and are cautioned not to place undue reliance on
such forward-looking information. Statements that include forward-looking
statements do not take into account the effect that transactions or
non-recurring or other special items announced or occurring after the
statements are made have on the Company's business. For example, they do not
include the effect of dispositions, acquisitions, other business transactions,
asset write-downs or other charges announced or occurring after such
statements are made. The forward-looking information in this MD&A reflects the
Company's assumptions and expectations as of August 13, 2009, and is subject
to change after this date. The Company does not undertake to update any
forward-looking information, whether written or oral, that may be made from
time to time by or on its behalf, to reflect new information, future events or
otherwise, unless required by applicable securities laws.
Information contained in or otherwise accessible through the websites
referenced above does not form part of this MD&A. All references in this MD&A
to websites are inactive textual references and are for your information only.
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.2009 SECOND QUARTER
INTERIM REPORT FINANCIALS
Consolidated Statements of Earnings (Unaudited)
-------------------------------------------------------------------------
(Dollars in millions 13 weeks ended, 26 weeks ended,
except per July 4, June 28, July 4, June 28,
share amounts) 2009 2008 2009 2008
-------------------------------------------------------------------------
(Restated - (Restated -
Note 2) (Note 2)
Gross operating
revenue $ 2,324.8 $ 2,450.7 $ 4,082.9 $ 4,276.0
-------------------------------------------------------------------------
Operating expenses
Cost of merchandise
sold and all other
operating expenses
except for the
undernoted items
(Note 14) 2,065.9 2,226.6 3,663.7 3,871.1
Net interest
expense (Note 8) 36.6 16.6 67.0 37.7
Depreciation and
amortization 61.1 55.2 120.4 109.2
Employee profit
sharing plan 8.8 7.5 13.0 13.8
-------------------------------------------------------------------------
Total operating
expenses 2,172.4 2,305.9 3,864.1 4,031.8
Earnings before
income taxes 152.4 144.8 218.8 244.2
Income taxes
Current 48.7 47.1 56.1 79.4
Future - - 9.3 -
-------------------------------------------------------------------------
Income taxes 48.7 47.1 65.4 79.4
-------------------------------------------------------------------------
Net earnings $ 103.7 $ 97.7 $ 153.4 $ 164.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted
earnings per share $ 1.27 $ 1.20 $ 1.88 $ 2.02
-------------------------------------------------------------------------
Weighted average
number of Common
and Class A Non-
Voting Shares
outstanding 81,685,799 81,499,525 81,658,284 81,509,066
-------------------------------------------------------------------------
Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------------------------------------------
13 weeks ended, 26 weeks ended,
July 4, June 28, July 4, June 28,
(Dollars in millions) 2009 2008 2009 2008
-------------------------------------------------------------------------
(Restated - (Restated -
Note 2) (Note 2)
Cash generated
from (used for):
Operating activities
Net earnings $ 103.7 $ 97.7 $ 153.4 $ 164.8
Items not
affecting cash
Depreciation 47.8 41.2 94.5 81.8
Net provision for
loans receivable
(Note 3) 35.1 12.9 73.4 30.2
Amortization of
intangible
assets 13.3 14.1 25.9 27.5
Future income
taxes - - 9.3 -
Employee future
benefits expense
(Note 5) 1.5 1.6 3.0 3.2
Other (7.6) 0.1 1.0 0.3
Impairments on
property and
equipment 0.1 0.3 0.8 0.3
Loss (Gain) on
disposals of
property and
equipment 0.7 (0.2) 0.6 (4.0)
Impairment of
other long-term
investments
(Note 13) - - 0.5 1.0
Changes in fair
value of
derivative
instruments (4.4) 8.1 (4.4) 14.8
Securitization
loans receivable (10.3) (14.3) (21.1) (26.5)
Gain on sales of
loans receivable
(Note 3) (9.8) (23.0) (23.1) (46.1)
-------------------------------------------------------------------------
170.1 138.5 313.8 247.3
-------------------------------------------------------------------------
Changes in other
working capital
components 299.4 160.3 (193.3) (372.4)
-------------------------------------------------------------------------
Cash generated from
(used for) operating
activities 469.5 298.8 120.5 (125.1)
-------------------------------------------------------------------------
Investing activities
Short-term
investments (171.6) - (171.6) -
Additions to
property and
equipment (42.5) (99.6) (118.6) (225.4)
Other long-term
investments (0.3) - (50.4) -
Additions to
intangible
assets (18.3) (15.9) (37.6) (28.4)
Investment in loans
receivable, net (145.5) (146.2) (7.7) 20.9
Long-term
receivables and
other assets 5.6 (2.0) (2.7) (8.1)
Purchases of stores (2.1) (2.7) (2.7) (18.1)
Other (0.8) (1.0) (1.7) (1.9)
Net securitization
of loans
receivable 1.2 0.5 1.5 622.4
Proceeds on
disposition of
property and
equipment 2.5 1.2 3.2 16.1
-------------------------------------------------------------------------
Cash (used for)
generated from
investing activities (371.8) (265.7) (388.3) 377.5
-------------------------------------------------------------------------
Financing activities
Net change in
deposits 627.5 32.7 1,023.7 64.8
Issuance of long-
term debt (Note 4) 200.0 0.1 200.1 0.2
Class A Non-Voting
Share
transactions 2.4 1.1 2.5 1.5
Repayment of
long-term debt (1.9) (151.7) (7.1) (152.7)
Dividends (17.3) (17.2) (34.4) (32.2)
Commercial paper (81.9) (158.2) - -
-------------------------------------------------------------------------
Cash generated from
(used for) financing
activities 728.8 (293.2) 1,184.8 (118.4)
-------------------------------------------------------------------------
Cash generated (used)
in the period 826.5 (260.1) 917.0 134.0
Cash and cash
equivalents,
beginning of period 519.5 288.6 429.0 (105.5)
-------------------------------------------------------------------------
Cash and cash
equivalents, end of
period (Note 9) $ 1,346.0 $ 28.5 $ 1,346.0 $ 28.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income (Unaudited)
-------------------------------------------------------------------------
13 weeks ended, 26 weeks ended,
July 4, June 28, July 4, June 28,
(Dollars in millions) 2009 2008 2009 2008
-------------------------------------------------------------------------
(Restated - (Restated -
Note 2) (Note 2)
Net earnings $ 103.7 $ 97.7 $ 153.4 $ 164.8
Other comprehensive
income (loss),
net of taxes
Gain (loss) on
derivatives
designated as cash
flow hedges, net of
tax of $12.5 and
$5.1 (2008 - $5.6
and $4.1),
respectively (33.5) (11.8) (18.0) 8.0
Reclassification to
non-financial
asset of loss (gain)
on derivatives
designated as cash
flow hedges, net of
tax of $15.7 and
$41.0 (2008 - $4.1
and $11.6),
respectively (25.7) 8.5 (79.1) 24.0
Reclassification to
earnings of loss
(gain) on derivatives
designated as cash
flow hedges, net of
tax of $0.6 and $0.7
(2008 - $0.7 and $2.2),
respectively (1.3) 1.7 (1.3) 4.7
-------------------------------------------------------------------------
Other comprehensive
(loss) income (60.5) (1.6) (98.4) 36.7
-------------------------------------------------------------------------
Comprehensive income $ 43.2 $ 96.1 $ 55.0 $ 201.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
-------------------------------------------------------------------------
26 weeks ended,
July 4, June 28,
(Dollars in millions) 2009 2008
-------------------------------------------------------------------------
(Restated -
(Note 2)
Share capital
Balance, beginning of period $ 715.4 $ 700.7
Transactions, net (Note 6) 8.5 4.2
-------------------------------------------------------------------------
Balance, end of period $ 723.9 $ 704.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contributed surplus
Balance, beginning of period $ - $ 2.3
Transactions, net - (2.3)
-------------------------------------------------------------------------
Balance, end of period $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings
Balance, beginning of period
as previously reported $ 2,755.5 $ 2,455.1
Transitional adjustment on adoption
of new accounting policies -
HB 1000/3064 (Note 2) (3.1) (4.3)
-------------------------------------------------------------------------
Balance, beginning of period as restated 2,752.4 2,450.8
Transitional adjustment on adoption
of new accounting policies -
EIC 173 (Note 2) 1.1 -
Net earnings for the period 153.4 164.8
Dividends (34.4) (34.2)
Repurchase of Class A Non-Voting Shares (6.0) (0.4)
-------------------------------------------------------------------------
Balance, end of period $ 2,866.5 $ 2,581.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Balance, beginning of period $ 97.2 $ (50.0)
Transitional adjustment on adoption
of new accounting policies -
EIC 173 (Note 2) (2.5) -
Other comprehensive (loss)
income for the period (98.4) 36.7
-------------------------------------------------------------------------
Balance, end of period $ (3.7) $ (13.3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings and accumulated
other comprehensive income (loss) $ 2,862.8 $ 2,567.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Balance Sheets (Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Dollars in millions) July 4, June 28, January 3,
As at 2009 2008 2009
-------------------------------------------------------------------------
(Restated - (Restated -
Note 2) Note 2)
ASSETS
Current assets
Cash and cash equivalents
(Note 9) $ 1,346.0 $ 28.5 $ 429.0
Short-term investments (Note 9) 171.6 - -
Accounts receivable 478.7 362.5 824.1
Loans receivable (Note 3) 1,688.0 877.0 1,683.4
Merchandise inventories 991.2 996.6 917.5
Income taxes recoverable 111.5 86.7 64.6
Prepaid expenses and deposits 72.8 62.4 40.2
Future income taxes 58.9 58.8 20.2
-------------------------------------------------------------------------
Total current assets 4,918.7 2,472.5 3,979.0
-------------------------------------------------------------------------
Long-term receivables and
other assets (Note 3) 211.6 232.5 262.1
Other long-term investments,
net (Note 13) 75.1 6.6 25.2
Goodwill 71.3 62.8 70.7
Intangible assets 262.7 226.4 247.9
Property and equipment, net 3,190.4 3,208.2 3,198.9
-------------------------------------------------------------------------
Total assets $ 8,729.8 $ 6,209.0 $ 7,783.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Deposits (Note 10) $ 979.7 $ 155.8 $ 540.7
Accounts payable and other 1,160.0 1,200.2 1,444.2
Current portion of
long-term debt 159.5 6.1 14.8
-------------------------------------------------------------------------
Total current liabilities 2,299.2 1,362.1 1,999.7
-------------------------------------------------------------------------
Long-term debt 1,422.9 1,361.9 1,373.5
Future income taxes 45.2 70.5 44.7
Long-term deposits (Note 10) 1,185.3 24.3 598.7
Other long-term liabilities 190.5 117.6 202.2
-------------------------------------------------------------------------
Total liabilities 5,143.1 2,936.4 4,218.8
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 6) 723.9 704.9 715.4
Accumulated other comprehensive
income (loss) (3.7) (13.3) 97.2
Retained earnings 2,866.5 2,581.0 2,752.4
-------------------------------------------------------------------------
Total shareholders' equity 3,586.7 3,272.6 3,565.0
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 8,729.8 $ 6,209.0 $ 7,783.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 53
weeks ended January 3, 2009 contained in our 2008 Annual Report.
The preparation of the financial statements in conformity with
Canadian 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 a number of items
including, but not limited to, 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 53 weeks ended January 3, 2009, except
as noted below.
Financial Statement Concepts
Effective, January 4, 2009 (the first day of the Company's 2009
fiscal year), the Company applied the amendments issued by the
Canadian Institute of Chartered Accountants (CICA) to HB 1000 -
Financial Statement Concepts, which clarify the criteria for
recognition of an asset and the timing of expense recognition,
specifically, deleting the guidance permitting the deferral of costs.
The new requirements are effective for interim and annual financial
statements for fiscal years beginning on or after October 1, 2008.
The Company applied the amendments to CICA HB 1000 in conjunction
with CICA HB 3064 - Goodwill and Intangible Assets.
Goodwill and Intangible Assets
Effective, January 4, 2009, the Company implemented, on a
retrospective basis with restatement, the CICA HB 3064 - Goodwill and
Intangible Assets, which was effective for interim and annual
financial statements for fiscal years beginning on or after October
1, 2008.
This new standard provides guidance on the recognition, measurement,
presentation and disclosure of goodwill and intangible assets,
including internally developed intangibles, and is consistent with
the revised asset definition and recognition criteria in CICA HB 1000
- Financial Statement Concepts. Under the new standard, costs related
to development projects can be recorded as assets only if they meet
the definition of an intangible asset.
Additionally, internally developed computer software that is not an
integral part of the related hardware was previously included in
property and equipment. The new standard requires these costs to be
included in intangible assets. As these costs have a limited useful
life, they continue to be amortized over a 5 year period.
As a result of the retrospective implementation of these standards,
the cumulative impact on previously reported balances on the
following dates is as follows:
($ in millions) Increase/(Decrease)
---------------------------------------
January 3, June 28, December 29,
2009 2008 2007
---------------------------------------
Retained earnings $ (3.1) $ (3.9) $ (4.3)
Long-term receivables and other
assets (3.3) (4.6) (4.6)
Intangible assets 189.5 174.0 174.0
Property and equipment (190.9) (175.1) (175.8)
Income taxes recoverable 0.4 0.1 0.4
Future income tax liabilities (1.2) (1.7) (1.7)
In addition, the retrospective impact on depreciation and
amortization for the 13 weeks and 26 weeks ended June 28, 2008 was a
decrease of $0.5 million and $1.1 million, respectively. The
retrospective impact on net earnings for the 13 weeks ended June 28,
2008 was not significant ($nil per share), and for the 26 weeks ended
June 28, 2008 an increase of $0.4 million, or $nil per share.
Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities
Effective, January 4, 2009, the Company implemented, on a
retrospective basis without restatement of prior periods, the CICA
Emerging Issues Committee (EIC) 173 - Credit Risk and the Fair Value
of Financial Assets and Financial Liabilities, which is effective for
interim and annual financial statements for periods ending on or
after January 20, 2009.
This EIC clarifies that an entity's own credit risk and the credit
risk of the counterparty should be taken into account in determining
the fair value of financial assets and financial liabilities,
including derivative instruments, rather than using a risk free rate.
Entities are required to re-measure the financial assets and
liabilities, including derivative instruments, as at the beginning of
period of adoption (i.e. the beginning of fiscal 2009) to take into
account its own credit risk and counterparty's credit risk. Any
resulting difference would be recorded as an adjustment to retained
earnings, except a) derivatives in a fair value hedging relationship
accounted for by the "shortcut method", in which case the resulting
difference would adjust the basis of the hedged item; and b)
derivatives in cash flow hedging relationships, in which case the
resulting difference would be recorded in accumulated OCI.
As a result of the retrospective implementation of this new standard,
opening accumulated other comprehensive income decreased by
$2.5 million and opening retained earnings increased by $1.1 million.
Future Accounting Changes
International Financial Reporting Standards (IFRS)
In February 2008, the CICA announced that Canadian GAAP for publicly
accountable enterprises will be replaced by International Financial
Reporting Standards (IFRS) for fiscal years beginning on or after
January 1, 2011. 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 2010
information will be prepared under IFRS. The Company expects the
transition to IFRS to impact accounting, financial reporting,
internal control over financial reporting, taxes, information systems
and processes as well as certain contractual arrangements. The
Company is currently assessing the impact of the transition to IFRS
in the above areas and has deployed additional trained resources and
formal project Management practices and governance to ensure the
timely conversion to IFRS.
Business Combinations
In January 2009, the CICA issued CICA HB 1582 - Business
Combinations, which will replace CICA HB 1581 - Business
Combinations. The CICA also issued CICA HB 1601 - Consolidated
Financial Statements and CICA HB 1602 - Non-Controlling Interests,
which will replace CICA HB 1600 - Consolidated Financial Statements.
The new standards are effective for fiscal years beginning on or
after January 1, 2011, with early adoption permitted. The objective
of the new standards is to harmonize Canadian GAAP for business
combinations and consolidated financial statements with the
International and U.S. accounting standards. The new standards are to
be applied prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual
reporting period, commencing January 1, 2011, with earlier
application permitted. Assets and liabilities that arose from
business combinations whose acquisition dates preceded the
application of the new standards will not be adjusted upon
application of these new standards.
Financial Instruments - Recognition and Measurement
In April 2009, the CICA amended CICA HB 3855 - Financial Instruments
- Recognition and Measurement by adding a paragraph regarding the
application of the effective interest method to previously impaired
financial assets. This amendment is effective from the date of
issuance. Additionally, a paragraph relating to embedded prepayment
options was amended This amendment is effective for interim and
annual financial statements relating to fiscal years beginning on or
after January 1, 2011 with early adoption permitted. The Company is
assessing the potential impact of the amendments to this standard.
Financial Instruments - Disclosures
In June 2009, the CICA amended CICA HB 3862 - Financial Instruments -
Disclosures, which adopted the amendments recently issued by the IASB
to IFRS 7 - Financial Instruments: Disclosures, which was issued in
March 2009. These amendments are applicable to publicly accountable
enterprises and those private enterprises, co-operative business
enterprises, rate-regulated enterprises and not-for-profit
organizations that choose to apply Section 3862.
The amendments enhance disclosures about fair value measurements,
including the relative reliability of the inputs used in those
measurements, and about the liquidity risk, of financial instruments.
The amendments are effective for annual financial statements for
fiscal years ending after September 30, 2009, with early adoption
permitted. To provide relief for financial statement preparers, and
consistent with IFRS 7, the CICA decided that an entity need not
provide comparative information for the disclosures required by the
amendments in the first year of application. The Company is assessing
the potential impact of the amendments to this standard.
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. For personal loan securitization, 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
($ in millions) of receivables as at(1)
July 4, June 28, January 3,
2009 2008 2009
--------------------------------------
Total net managed credit card
loans $ 3,756.8 $ 3,619.4 $ 3,780.4
Credit card loans sold (2,208.1) (2,848.8) (2,216.0)
------------ ------------ ------------
Credit card loans held 1,548.7 770.6 1,564.4
Total net managed personal
loans(2) 54.8 119.4 83.8
Personal loans sold - - -
------------ ------------ ------------
Personal loans held 54.8 119.4 83.8
Total net managed mortgage
loans(3) 167.1 66.9 138.8
------------ ------------ ------------
Total net managed line of
credit loans 17.9 24.5 20.6
------------ ------------ ------------
Total loans receivable 1,788.5 981.4 1,807.6
Less: long-term portion(4) (100.5) (104.4) (124.2)
------------ ------------ ------------
Current portion of loans
receivable $ 1,688.0 $ 877.0 $ 1,683.4
------------ ------------ ------------
------------ ------------ ------------
Average balances
($ in millions) for the 26 weeks ended
July 4, June 28,
2009 2008
-------------------------
Total net managed credit card
loans $ 3,675.8 $ 3,539.3
Credit card loans sold (2,213.7) (2,696.0)
------------ ------------
Credit card loans held 1,462.1 843.3
Total net managed personal
loans(2) 68.5 127.1
Personal loans sold - (35.6)
------------ ------------
Personal loans held 68.5 91.5
Total net managed mortgage
loans(3) 157.7 49.4
------------ ------------
Total net managed line of
credit loans 19.3 25.1
------------ ------------
Total loans receivable $ 1,707.6 $ 1,009.3
------------ ------------
------------ ------------
(1) Amounts shown are net of allowance for credit losses.
(2) Personal loans are unsecured loans that are provided to qualified
existing credit cardholders for terms of three to five years.
Personal loans have fixed monthly payments of principal and
interest; however, the personal loans can be repaid at any time
without penalty.
(3) Mortgage loans are issued for terms of up to ten years, have
fixed or variable interest rates, are secured and include a mix
of both high and low ratio loans. High ratio loans are fully
insured and low ratio loans are partially insured.
(4) 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 26
weeks ended July 4, 2009 were $35.1 million (2008 - $12.9 million)
and $73.4 million (2008 - $30.2 million), respectively. Net credit
losses for the total managed portfolio for the 13 weeks and 26 weeks
ended July 4, 2009 were $82.4 million (2008 - $58.7 million) and
$161.6 million (2008 - $121.0 million), respectively. Net credit
losses consist of total write-offs (including regular and bankruptcy
write-offs and consumer proposals), net of recoveries and any changes
in allowances.
4. Long-Term Debt
On June 1, 2009, the Company issued $200.0 million of 7 year medium
term notes, which mature and are repayable on June 1, 2016, and bear
interest at 5.65 percent, payable semi-annually.
5. Employee Future Benefits
The net employee future benefit expense for the 13 weeks and 26 weeks
ended July 4, 2009 was $1.5 million (2008 - $1.6 million) and
$3.0 million (2008 - $3.2 million), respectively.
6. Share Capital
($ in millions) July 4, June 28, January 3,
2009 2008 2009
------------ ------------ ------------
Authorized
3,423,366 Common Shares
100,000,000 Class A Non-Voting
Shares
Issued
3,423,366 Common Shares
(June 28, 2008 - 3,423,366) $ 0.2 $ 0.2 $ 0.2
78,238,348 Class A Non-Voting
Shares (June 28, 2008 -
78,056,872) 723.7 704.7 715.2
------------ ------------ ------------
$ 723.9 $ 704.9 $ 715.4
------------ ------------ ------------
------------ ------------ ------------
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:
26 weeks ended 26 weeks ended
($ in millions) July 4, 2009 June 28, 2008
------------ ------------ ------------ ------------
Number $ Number $
------------ ------------ ------------ ------------
Shares outstanding
at the beginning
of the period 78,178,066 715.2 78,048,062 700.5
Issued 500,482 23.1 359,610 22.8
Repurchased (440,200) (20.6) (350,800) (21.3)
Excess of repurchase
price over issue
price - 6.0 - 2.7
------------ ------------ ------------ ------------
Shares outstanding
at the end of the
period 78,238,348 723.7 78,056,872 704.7
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
7. Stock-based Compensation Plans
All stock-based compensation plans are as disclosed in the most
recently issued annual financial statements for the 53 weeks ended
January 3, 2009 except as follows:
2009 Performance Share Unit Plan
The Company has granted 2009 Performance Share Units (2009 PSUs) to
certain employees. Each 2009 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 2009 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 26 weeks ended July 4,
2009, $1.7 million and $2.0 million of compensation expense was
recorded for the 2009 PSUs, respectively.
8. Segmented Information - Statement of Earnings
---------------------------------------------------------------------
13 weeks 26 weeks
ended ended
13 weeks June 28, 26 weeks June 28,
ended 2008 ended 2008
July 4, (Restated July 4, (Restated
($ in millions) 2009 - Note 2) 2009 - Note 2)
---------------------------------------------------------------------
Gross operating revenue
CTR $ 1,550.0 $ 1,562.1 $ 2,649.3 $ 2,633.4
Financial Services 232.9 201.5 450.2 410.2
Petroleum 390.8 514.8 712.7 937.6
Mark's 182.2 200.6 329.3 348.1
Eliminations (31.1) (28.3) (58.6) (53.3)
----------------------------------------------
Total gross operating
revenue $ 2,324.8 $ 2,450.7 $ 4,082.9 $ 4,276.0
---------------------------------------------------------------------
---------------------------------------------------------------------
Earnings before income
taxes
CTR $ 95.2 $ 85.1 $ 128.0 $ 128.7
Financial Services 42.3 44.4 74.8 98.6
Petroleum 7.8 8.0 13.8 13.0
Mark's 7.1 7.3 2.2 3.9
----------------------------------------------
Total earnings before
income taxes 152.4 144.8 218.8 244.2
Income taxes 48.7 47.1 65.4 79.4
----------------------------------------------
Net earnings $ 103.7 $ 97.7 $ 153.4 $ 164.8
---------------------------------------------------------------------
---------------------------------------------------------------------
Net Interest expense(1)
CTR $ 20.8 $ 15.6 $ 38.9 $ 32.1
Financial Services 15.5 (0.1) 27.2 3.5
Mark's 0.3 1.1 0.9 2.1
----------------------------------------------
Total interest
expense $ 36.6 $ 16.6 $ 67.0 $ 37.7
---------------------------------------------------------------------
---------------------------------------------------------------------
Depreciation and
amortization expense
CTR $ 47.1 $ 42.5 $ 93.0 $ 84.5
Financial Services 3.1 2.8 5.6 5.4
Petroleum 4.3 4.1 8.7 8.1
Mark's 6.6 5.8 13.1 11.2
----------------------------------------------
Total depreciation
and amortization
expense $ 61.1 $ 55.2 $ 120.4 $ 109.2
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Net interest expense includes interest on short-term and
long-term debt, offset by passive interest income (includes
interest income earned on bank deposits, ancillary investments
and all inter-company interest income). Interest on long-term
debt for the 13 weeks and 26 weeks ended July 4, 2009 was
$31.1 million (2008 - $18.3 million) and $58.5 million (2008 -
$39.0 million),respectively.
Segmented Information - Total Assets
---------------------------------------------------------------------
June 28, January 3,
2008 2009
July 4, (Restated - (Restated -
($ in millions) 2009 Note 2) Note 2)
---------------------------------------------------------------------
CTR $ 6,049.2 $ 5,515.5 $ 5,801.8
Financial Services 3,631.8 1,658.6 2,550.6
Petroleum 274.8 274.3 352.9
Mark's 519.4 474.8 509.0
Eliminations (1,745.4) (1,714.2) (1,430.5)
--------------------------------------
Total $ 8,729.8 $ 6,209.0 $ 7,783.8
---------------------------------------------------------------------
9. Cash and Cash Equivalents
The components of cash and cash equivalents are:
July 4, June 28, January 3,
($ in millions) 2009 2008 2009
------------ ------------ ------------
Cash (bank overdraft) $ (57.7) $ (78.6) $ 59.2
Cash equivalents 1,403.7 107.1 369.8
------------ ------------ ------------
Cash and cash equivalents $ 1,346.0 $ 28.5 $ 429.0
------------ ------------ ------------
------------ ------------ ------------
Cash equivalents are highly liquid and rated certificates of deposit
or commercial paper with a maturity of 3 months or less.
Investments in highly liquid and rated certificates of deposits or
commercial paper with a maturity of more than 3 months and less than
one year are classified as short-term investments.
10. Deposits
Deposits consist of broker deposits and retail deposits.
Broker deposits raise cash through sales of guaranteed investment
certificates (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
Canada Deposit Insurance Corporation (CDIC) insured. Broker deposits
are offered for varying terms ranging from 30 days to five years, and
all issued GICs are non-redeemable prior to maturity (except in
certain rare circumstances). Total short-term and long-term broker
deposits outstanding at July 4, 2009 were $1,623.5 million (2008 -
$nil million).
Retail deposits consist of high interest savings deposits and retail
GICs. Retail deposits outstanding at July 4, 2009 total
$541.5 million (2008 - $180.1 million).
11. Capital Management Disclosures
The Company's objectives when managing capital are:
- minimizing the after-tax cost of capital;
- maintaining healthy liquidity reserves and access to capital; and
- maintaining flexibility in capital structure to ensure the ongoing
ability to execute the Strategic Plan.
The current economic environment has not changed the Company's
objectives in managing capital.
Management includes the following items in its definition of capital:
July 4, % of June 28, % of January 3, % of
($ in millions) 2009 total 2008 total 2009 total
----------------- ----------------- -----------------
Current portion
of long-term
debt $ 159.5 2.5% $ 6.1 0.1% $ 14.8 0.3%
Long-term debt 1,422.9 22.4% 1,361.9 29.2% 1,373.5 25.2%
Long-term
deposits 1,185.3 18.6% 24.3 0.5% 598.7 11.0%
Other long-term
liabilities(1) - - % 0.1 0.0% 3.2 0.1%
Share capital 723.9 11.4% 704.9 15.1% 715.4 13.1%
Contributed
surplus - - % - - % - - %
Components of
accumulated
other
comprehensive
loss(2) - - % (10.8) -0.2% - - %
Retained
earnings 2,866.5 45.1% 2,581.0 55.3% 2,752.4 50.3%
----------------- ----------------- -----------------
Net capital
under
management $6,358.1 100.0% $4,667.5 100.0% $5,458.0 100.0%
----------------- ----------------- -----------------
----------------- ----------------- -----------------
(1) Long-term liabilities that are derivative or hedge instruments
relating 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 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. As a
result of growth in our Financial Services business, changes in how
Financial Services is funded and the pending impact of IFRS, these
previously disclosed ratios are no longer considered relevant by
Management. Management is currently undertaking a review to identify
the most relevant key ratios.
Under the existing debt agreements, key financial covenants are
monitored on an on-going basis by Management to ensure compliance
with the agreements. The key covenants are as follows:
- maintaining a specified minimum 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 June 30,
2009 (the Bank's fiscal quarter end), 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 per cent
for Tier 1 and Total capital ratios. The Bank is within its internal
maximum target of 11 times for the assets to capital multiple. OSFI's
minimum Tier 1 and Total capital ratios for Canadian banks are 7 per
cent and 10 per cent, respectively. During the 3 months ended June
30, 2009 and the comparative period, 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).
12. 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)
---------------------------------------------------
July 4, June 28, July 4, June 28,
($ in millions) 2009 2008 2009 2008
---------------------------------------------------
Balance, beginning
of year $ 51.8 $ 51.5 $ 3.5 $ 2.7
Provision for
credit losses 70.4 24.0 3.0 6.2
Recoveries 8.8 6.3 0.4 0.3
Write-offs (68.0) (40.5) (4.0) (4.5)
---------------------------------------------------
Balance, end of
period $ 63.0 $ 41.3 $ 2.9 $ 4.7
---------------------------------------------------
---------------------------------------------------
Accounts receivable Total
---------------------------------------------------
July 4, June 28, July 4, June 28,
($ in millions) 2009 2008 2009 2008
---------------------------------------------------
Balance, beginning
of year $ 3.3 $ 5.0 $ 58.6 $ 59.2
Provision for
credit losses 1.1 0.8 74.5 31.0
Recoveries 0.1 0.1 9.3 6.7
Write-offs (2.1) (2.5) (74.1) (47.5)
---------------------------------------------------
Balance, end of
period $ 2.4 $ 3.4 $ 68.3 $ 49.4
---------------------------------------------------
---------------------------------------------------
(1) Other Loans include personal loans, mortgages loans and lines of
credit loans.
Foreign currency risk
The Company has significant demand for foreign currencies, primarily
United States dollars, due to global sourcing. However, it manages
its exposure to foreign exchange rate risk through a comprehensive
Foreign Exchange Risk Management Policy that sets forth specific
guidelines and parameters, including monthly hedge percentage
guidelines, for entering into foreign exchange hedge transactions for
anticipated U.S. dollar-denominated purchases. The Company's
exposure, however, to a sustained movement in the currency markets,
is impacted by competitive forces and future prevailing market
conditions.
Liquidity risk
The following table summarizes the Company's contractual maturity for
its financial liabilities. The table includes both interest and
principal cash flows.
($ in millions) 1 year 2 years 3 years 4 years
---------------------------------------------------
Deposits $ 988.7 $ 211.9 $ 252.6 $ 175.3
Accounts payable
and other 1,140.1 - - -
Long-term debt 159.5 309.3 21.3 8.2
Interest
payment(1) 113.6 87.0 88.1 86.9
Other - 0.3 - -
---------------------------------------------------
Total $ 2,401.9 $ 608.5 $ 362.0 $ 270.4
---------------------------------------------------
---------------------------------------------------
($ in millions) 5 years Thereafter Total
--------------------------------------
Deposits $ 545.5 $ - $ 2,174.0
Accounts payable
and other - - 1,140.1
Long-term debt 6.9 1,062.9 1,568.1
Interest
payment(1) 176.0 663.4 1,215.0
Other 5.4 - 5.7
--------------------------------------
Total $ 733.8 $ 1,726.3 $ 6,102.9
--------------------------------------
--------------------------------------
(1) Includes interest payments on deposits and long-term debt.
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 this policy.
13. Other Long-Term Investments
Included in other long-term investments is the Company's investment
of $5.1 million (2008 - $6.6 million) in Canadian third-party asset-
backed commercial paper (ABCP) issued by a number of trusts with an
original cost of $8.9 million.
The market for Canadian third-party ABCP was addressed in a formal
restructuring proposal, and on January 21, 2009, the Bank's custodian
received restructured ABCP as designed in the Montreal Accord. The
Company received Class A notes with a face value of $7.7 million
which have floating interest rates estimated at BA less 50bps. The
Class A notes received an "A" credit rating from the rating agency
DBRS. The Company also received $1.2 million in various lower grade
notes as a part of the restructuring. On January 21, 2009, the
Company received the first of two payments of accrued interest earned
from the original notes of $0.3 million. The second accrued interest
payment of $0.1 million was received May 14, 2009.
The value of these notes is adjusted to fair market value on a
quarterly basis, as the notes are financial instruments held for
trading. There was only one transaction of the notes to date in the
open market in Canada in 2009 and therefore a valuation model is used
to determine fair value. No changes to the valuation methodology were
made during the second quarter in 2009.
14. Merchandise Inventory
Included in "cost of merchandise sold and all other operating
expenses except for the undernoted items" for the 13 weeks and 26
weeks ended July 4, 2009 is $1,573.8 million (2008 -
$1,768.7 million) and $2,711.5 million (2008 - $3,005.5 million),
respectively, of inventory recognized as an expense, which included
$11.8 million (2008 - $16.1 million) and $25.4 million (2008 -
$32.9 million), respectively, of write-downs of inventory as a result
of net realizable value being lower than cost. Inventory write-downs
recognized in previous years and reversed in the current quarter and
the comparative quarter were insignificant.
15. Supplementary Cash Flow Information
The Company paid income taxes during the 13 weeks ended July 4, 2009
of $52.1 million (2008 - $57.7 million) and made interest payments of
$26.2 million (2008 - $38.1 million). For the 26 weeks ended July 4,
2009, the Company paid income taxes of $104.2 million (2008 -
$113.5 million) and made interest payments of $82.4 million (2008 -
$58.4 million), including $31.8 million related to the settlement of
delayed start swaps.
During the 13 weeks and 26 weeks ended July 4, 2009, property and
equipment were acquired at an aggregate cost of $30.2 million (2008 -
$77.7 million) and $89.7 million (2008 - $177.2 million),
respectively. The amount of property and equipment acquired that is
included in accounts payable and other at July 4, 2009 was
$9.9 million (2008 - $16.0 million).
During the 13 weeks and 26 weeks ended July 4, 2009, intangible
software was acquired at an aggregate cost of $18.1 million (2008 -
$15.4 million) and $38.0 million (2008 - $28.6 million),
respectively. The amount of intangible software acquired that is
included in accounts payable and other at July 4, 2009 was
$0.5 million (2008 - $0.6 million).
16. 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 routine legal matters incidental to the business
conducted by the Company and that the ultimate disposition of the
proceedings will not have a material effect on its consolidated
earnings, cash flows, or financial position.
In October 2004, a motion for authorization to proceed with a class
action against the Company's wholly-owned subsidiary, Canadian Tire
Bank (the Bank), and a number of other banks was filed by a Quebec-
based consumers' group. The class action alleges that the cash
advance transaction fees charged by the Bank are not permitted under
the Consumer Protection Act (Quebec). The claim seeks a return of all
fees assessed against cardholders for cash advances, plus interest
and punitive damages per class member. The class action was certified
against the Bank on November 1, 2006. The class is comprised of all
persons in Quebec who have a credit card agreement with the Bank and
who have paid fees for cash advances in Canada or abroad since
October 1, 2001. The Company believes it has a solid defense to the
claim on the basis that banks are not required to comply with
provincial legislation because banking and cost of borrowing
disclosure is a matter of exclusive federal jurisdiction.
Accordingly, no provision has been made for amounts, if any, that
would be payable in the event of an adverse outcome.
In June 2009, however, a similar lawsuit against another financial
institution was heard by the Quebec Supreme Court questioning the
legality of foreign exchange fees on credit cards transactions. The
court ruled in favour of the plaintiff, however the decision is being
appealed to the Quebec Court of Appeal. One consequence of this
decision is that it may affect other outstanding lawsuits, including
the action filed against the Bank noted in the preceding paragraph.
If adversely decided, the present total aggregate exposure to CTB is
expected to be approximately $15.0 million.
17. 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 $192.5 million. Although the Company has appealed these
reassessments, current tax legislation requires the Company to remit
to the CRA and its provincial counterparts approximately
$119.7 million related to this matter, all of which 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.
The year to date tax provision has been reduced by $4.6 million due
to the retroactive change in legislation relating to the taxation of
gains realized from the disposition of shares during 2006 and 2007.
Interest Coverage Exhibit to the Consolidated Financial Statements
(unaudited)
-------------------------------------------------------------------------
The Company's long-term interest requirements for the 53 weeks ended July
4, 2009, after annualizing interest on long-term debt issued and retired
during this period, amounted to $154.1 million. The Company's earnings
before interest on long-term debt and income taxes for the 53 weeks ended
July 4, 2009 were $654.0 million, which is 4.2 times the Company's long-
term interest requirements for this period.%SEDAR: 00000534EF
For further information:
For further information: Media: Lisa Gibson, (416) 544-7655, lisa.gibson@cantire.com; Investors: Karen Meagher, (416) 480-8058, karen.meagher@cantire.com