The Company's core retail business, Canadian Tire Retail, posted adjusted earnings results that were effectively unchanged from the same quarter in 2008 while demonstrating year-to-date adjusted earnings before income taxes growth of 1.9%. This resiliency in the core retail business has been achieved despite challenging market conditions and unseasonable cold, wet weather.
"Our core business is resilient in the face of challenging seasonal and economic realities delivering modest shipment growth and a positive EBITDA uplift- although offset by the overall challenges in financial services," said
------------------------------------------
Consolidated 2009 2008(1)
Highlights: 3rd Quarter 3rd Quarter Change
-------------------------------------------------------------------------
Retail sales(2) $ 2.45 billion $ 2.61 billion (6.0)%
Gross operating revenue $ 2.17 billion $ 2.26 billion (4.1)%
EBITDA(3) $218.8 million $223.9 million (2.4)%
Adjusted earnings before income
taxes (excludes non-operating
gains and losses)(3) $127.2 million $159.2 million (20.1)%
Net earnings $ 85.4 million $109.1 million (21.8)%
Adjusted net earnings (excludes
non-operating gains and
losses)(3) $ 91.0 million $116.0 million (21.6)%
Basic earnings per share $ 1.04 $ 1.34 (21.9)%
Adjusted basic earnings per
share (excludes non-operating
gains and losses)(3) $ 1.11 $ 1.42 (21.8)%
(1) 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.
(2) Represents retail sales at CTR (which includes PartSource), Mark's
corporate and franchise stores and Petroleum's sites
(3) Non-GAAP measure. Please refer to section 15.0 of Management's
Discussion and Analysis.
Business Overview
CANADIAN TIRE RETAIL
($ in millions) Q3 2009 Q3 2008(1) Change 2009 YTD 2008 YTD(1) Change
-------------------------------------------------------------------------
Retail sales(2) $1,818.3 $1,860.3 (2.3)% $5,239.4 $5,253.6 (0.3)%
Same store
sales(3) (year
-over-year %
change) (3.8)% 2.0% (1.9)% (0.5)%
Gross operating
revenue 1,408.5 1,399.3 0.7% 4,057.8 4,032.7 0.6%
Net shipments
(year-over-year
% change) 0.3% 7.6% 0.1% 3.8%
-------------------------------------------------------------------------
Earnings before
income taxes 95.6 94.0 1.6% 223.6 222.7 0.4%
Less adjustment
for:
Amortization
of interest
rate swap
unwind 1.6 - 1.6 -
Gain (loss) on
disposals of
property and
equipment(4) 0.3 (0.3) (0.4) 3.7
Former CEO
retirement
obligation 0.0 0.2 0.5 1.1
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(5) $ 93.7 $ 94.1 (0.4)% $ 221.9 $ 217.9 1.9%
-------------------------------------------------------------------------
(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 2.3% from the same quarter in 2008 with unseasonable cool, wet weather impacting some seasonal businesses such as backyard living, cycling, gardening and camping and continuing challenging economic conditions impacting discretionary categories such as home décor, electronics and storage and organization. Despite overall softer sales, Canadian Tire Retail did see a healthy increase in sales in growth categories such as exercise equipment, automotive parts, kitchen and pet food.
Canadian Tire Retail's third quarter adjusted earnings before income taxes were
During the quarter, Canadian Tire Retail expanded one traditional store into a Smart store and opened one incremental Small Market store with a full size Mark's offering, bringing the total number of stores in the network to 476.
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 sales increases driven by both the continued expansion of the network and improved product assortment. During the quarter, PartSource opened one new corporate store in Welland, Ontario which was a new store format, expanded one store into a hub store and closed two stores bringing the network total to 87 locations.
CANADIAN TIRE PETROLEUM (Petroleum)
($ in millions) Q3 2009 Q3 2008 Change 2009 YTD 2008 YTD Change
-------------------------------------------------------------------------
Sales volume
(millions of
litres) 433.5 414.5 4.6% 1,277.5 1,257.9 1.6%
Retail sales $ 441.1 $ 550.2 (19.8)% $1,220.2 $1,541.1 (20.8)%
Gross operating
revenue 403.6 519.3 (22.3)% 1,116.3 1,456.9 (23.4)%
-------------------------------------------------------------------------
Earnings before
income taxes 8.5 7.5 13.9% 22.3 20.5 9.0%
Less adjustment for:
Loss on disposals
of property
and equipment(1) (0.1) (0.1) (0.4) (0.3)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(2) $ 8.6 $ 7.6 13.4% $ 22.7 $ 20.8 9.1%
-------------------------------------------------------------------------
(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 4.6% increase in gasoline sales volume over the comparable period in 2008 due to lower prices at the pumps, Petroleum experienced declines of 22.3% in gross operating revenues and 19.8% in retail sales due to these significantly lower retail gasoline prices.
Despite the decrease in pump prices, Petroleum had a record quarter with pre-tax adjusted earnings up 13.4% due to strong convenience sales, relatively stable gasoline margins and well managed operating expenses which were held relatively flat in spite of the growth in the Petroleum network.
Petroleum opened one new gas bar, refurbished five existing sites 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) Q3 2009 Q3 2008(1) Change 2009 YTD 2008 YTD(1) Change
-------------------------------------------------------------------------
Total retail
sales(2) $ 189.6 $ 194.5 (2.5)% $ 568.3 $ 600.1 (5.3)%
Same store
sales(3) (year-
over-year
% change) (3.7)% (1.0)% (6.7)% (2.0)%
Gross operating
revenue(4) 164.2 168.7 (2.6)% 493.5 516.8 (4.5)%
-------------------------------------------------------------------------
Earnings (loss)
before income
taxes (3.8) (0.1) N/A (1.6) 3.8 (142.7)%
Less adjustment for:
Loss on disposals
of property and
equipment (0.5) (0.3) (0.8) (0.4)
-------------------------------------------------------------------------
Adjusted earnings
(loss) before
income taxes(5) $ (3.3) $ 0.2 N/A $ (0.8) $ 4.2 (120.1)%
-------------------------------------------------------------------------
(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 third quarter total retail sales were
Mark's pre-tax earnings decreased in the third quarter of 2009 primarily as a result of the decrease in gross operating revenue and higher expenses due to network expansion and infrastructure investments in recent years. The gross margin rate on merchandise sold improved this quarter, up 50 basis points due to lower markdowns versus the third quarter of 2008 offset to some degree by lower purchase markup primarily as a result of the foreign exchange hedging activities.
During the quarter, Mark's opened one new combination store, relocated four stores, expanded one franchise store and closed two stores, bringing the total number of stores in the network to 374.
CANADIAN TIRE FINANCIAL SERVICES (Financial Services)
($ in millions) Q3 2009 Q3 2008(1) Change 2009 YTD 2008 YTD(1) Change
-------------------------------------------------------------------------
Total managed
portfolio end
of period $4,174.4 $4,002.3 4.3%
Gross operating
revenue $ 222.0 $ 197.8 12.2% $ 672.2 $ 608.0 10.6%
-------------------------------------------------------------------------
Earnings before
income taxes 18.7 47.6 (60.8)% 93.5 146.2 (36.1)%
Less adjustment for:
Gain (loss) on
disposal of
property and
equipment (0.5) (0.6) (0.7) (0.6)
Net effect of
securitization
activities(2) (9.0) (9.1) (6.8) 7.7
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(3) $ 28.2 $ 57.3 (50.9)% $ 101.0 $ 139.1 (27.4)%
-------------------------------------------------------------------------
(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
Financial Services' gross operating revenue was
Earnings before income taxes for the third quarter decreased significantly compared to the same quarter last year due to the increase in loan loss provisioning resulting from increased bankruptcy and write off rates noted below and an increase in interest expense caused by carrying excess liquidity.
The net write-off rate for the total managed portfolio on a rolling 12- month basis was 7.30%, compared to 6.04% in the comparable 2008 period. While bankruptcy costs increased, analysis of Financial Services' performance versus national statistics indicate that Financial Services continues to experience a lower growth in bankruptcies than the Canadian average due to its effective credit risk strategies. Overall aging of past due accounts deteriorated by 47 basis points from
As previously announced, Financial Services' sold its mortgage portfolio, approximately
Looking forward, the government has announced new credit card legislative changes which come into effect at varying times during 2010 and will impact items such as interest charges, payment allocation methodology and credit limit increase approvals. The preliminary estimates on the negative impact to Financial Services coming in 2010 as a result of these changes are in the range of
FUNDING AND LIQUIDITY
Financial Services continues to have access to multiple sources of funding including:
- Operating cash flow
- Broker deposits
- Retail deposits in the form of high interest savings accounts and
GIC's
In addition,
By the end of the third quarter, Financial Services had pre-funded the majority of the approximately
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
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.
In a simultaneous news release, Canadian Tire also announced organizational changes to focus on business performance and customer-centred growth.
CONFERENCE CALL
Canadian Tire will conduct a conference call to discuss information included in this news release and related matters at
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, one of Canada's most shopped general merchandise retailers, with 476 stores operated by Dealers across
Management's discussion and analysis (MD&A)
-------------------------------------------------------------------------
Introduction
This Management's Discussion and Analysis (MD&A) provides management's perspective on our Company, our performance and our strategy for the future.
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 the Glossary of Terms (pages 93 to 95) in our 2008 Financial Report, which can be found online on the SEDAR website at www.sedar.com and on our Canadian Tire website in the 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
Quarterly and annual comparisons in this MD&A
Unless otherwise indicated, all comparisons of results for the third quarter (13 weeks ended
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 sections 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 19.0 in this MD&A 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 business
Canadian Tire has been in business for over 85 years, offering everyday products and services to Canadians through its growing network of interrelated businesses. Canadian Tire, our Dealers, store operators, franchisees and Petroleum agents operate more than 1,200 general merchandise and apparel retail stores and gas bars. Canadian Tire Financial Services Limited and Canadian Tire Bank also offer a variety of financial services to Canadians, including the Canadian Tire Options® MasterCard®, personal loans, lines of credit, insurance and warranty products, guaranteed investment certificates (GICs) offered through third-party brokers and directly to the public, and high-interest and tax-free savings accounts.
Canadian Tire's four main businesses are described below.
Canadian Tire Retail (CTR) is one of Canada's most shopped general merchandise retailer with a network of 476 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 includes PartSource. PartSource is a chain of 87 specialty automotive hard parts stores that cater to serious "do-it-yourselfers" and professional installers of automotive parts. The PartSource network consists of 29 franchise stores and 58 corporate stores.
Mark's Work Wearhouse (Mark's) is one of Canada's leading clothing and footwear retailers, operating 374 stores nationwide, including 331 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
Canadian Tire Petroleum (Petroleum) is one of Canada's largest independent retailers of gasoline with a network of 273 gas bars, including 268 convenience stores and kiosks, 73 car washes, 12 Pit Stops and 88 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 Limited (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 and tax-free savings accounts and retail GICs in all provinces except
1.2 Store network at a glance
October 3, September 27,
Number of stores and retail square footage 2009 2008
-------------------------------------------------------------------------
Consolidated store count
CTR retail stores(1) 476 473
PartSource stores 87 82
Mark's retail stores(1) 374 364
Petroleum gas bar locations 273 269
-------------------------------------------------------------------------
Total stores 1,210 1,188
Consolidated retail square footage (in millions)
CTR 18.9 18.4
PartSource 0.3 0.3
Mark's 3.3 3.1
-------------------------------------------------------------------------
Total retail square footage(2) (in millions) 22.5 21.8
-------------------------------------------------------------------------
(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 453 square feet per store in Q3 2009. It has not been included
in the total above.
1.3 Business unit performance at a glance
(year-over-year percentage change) Q3 2009 Q3 2008
-------------------------------------------------------------------------
CTR retail sales(1) (2.3)% 4.1%
CTR gross operating revenue 0.7% 7.3%
CTR net shipments 0.3% 7.6%
Mark's retail sales(2) (2.5)% 2.6%
Petroleum retail sales (19.8)% 21.9%
Petroleum gasoline volume (litres) 4.6% (4.6)%
Financial Services' credit card sales 0.8% 14.0%
Financial Services' gross average receivables 4.6% 6.5%
-------------------------------------------------------------------------
(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 2013 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 includes financial aspirations for the Company for the five-year period ending in
3.0 Our performance in 2009
3.1 Consolidated financial results
($ in millions)
except per share
amounts) Q3 2009 Q3 2008(1) Change 2009 YTD 2008 YTD(1) Change
-------------------------------------------------------------------------
Retail sales(2) $2,449.0 $2,605.0 (6.0)% $7,027.9 $7,394.8 (5.0)%
Gross operating
revenue 2,165.9 2,257.5 (4.1)% 6,248.8 6,533.5 (4.4)%
EBITDA(3) 218.8 223.9 (2.4)% 625.0 615.0 1.6%
Earnings before
income taxes 119.0 149.0 (20.2)% 337.8 393.2 (14.1)%
Effective tax rate 28.2% 26.8% 29.3% 30.3%
Net earnings $ 85.4 $ 109.1 (21.8)% $ 238.8 $ 273.9 (12.8)%
Basic earnings
per share $ 1.04 $ 1.34 (21.9)% $ 2.92 $ 3.36 (13.0)%
Adjusted basic
earnings per
share(3 $ 1.11 $ 1.42 (21.8)% $ 2.98 $ 3.27 (8.7)%
-------------------------------------------------------------------------
(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) 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 4.1 percent from the prior year primarily as a result of a 22.3% decline in Petroleum's revenue, due to significantly lower gasoline pump prices compared with the third quarter of 2008. Mark's gross operating revenue declined by 2.6% 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 and unseasonably cold and wet weather, grew a modest 0.7 percent. Financial Services' revenue remained strong in the third quarter with gross operating revenue up 12.2% due to a higher yield and the growth in account balances.
Consolidated net earnings
Consolidated net earnings for the quarter decreased from the prior year by 21.8%. The majority of the decrease was caused by 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 that are being used to prefund the increase of credit card receivables arising from the maturation of the GCCT (Glacier Credit Card Trust) notes and maturing GICs in late 2009. Partially offsetting the decrease in Financial Services' earnings were modest growth in earnings in our CTR and Petroleum businesses.
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) Q3 2009 Q3 2008(2) Change 2009 YTD 2008 YTD(2) Change
-------------------------------------------------------------------------
Earnings before
income taxes $ 119.0 $ 149.0 (20.2)% $ 337.8 $ 393.2 (14.1)%
Less pre-tax
adjustment for:
Former CEO
retirement
obligation(3) 0.0 0.2 0.5 1.1
Amortization of
interest rate
swap unwind(3) 1.6 - 1.6 -
Net effect of
securitization
activities(4) (9.0) (9.1) (6.8) 7.7
Gain (loss) on
disposals of
property and
equipment (0.8) (1.3) (2.3) 2.4
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(1) $ 127.2 $ 159.2 (20.1)% $ 344.8 $ 382.0 (9.7)%
Income taxes 36.2 43.2 101.2 115.7
-------------------------------------------------------------------------
Adjusted earnings
after income
taxes(1) $ 91.0 $ 116.0 (21.6)% $ 243.6 $ 266.3 (8.5)%
-------------------------------------------------------------------------
Basic earnings
per share $ 1.04 $ 1.34 (21.9)% $ 2.92 $ 3.36 (13.0)%
Adjusted basic
earnings per
share(1) $ 1.11 $ 1.42 (21.8)% $ 2.98 $ 3.27 (8.7)%
-------------------------------------------------------------------------
(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 sections 14.1 and 14.2 for additional information.
(3) The former CEO retirement obligation and the amortization of the
interest rate swap unwind 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 third quarter were positively affected by
Seasonal trend analysis
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) Q3 2009 Q2 2009 Q1 2009 Q4 2008
-------------------------------------------------------------------------
Gross operating revenue $2,165.9 $2,324.8 $1,758.1 $2,587.8
Net earnings 85.4 103.7 49.7 101.5
Basic and diluted earnings
per share 1.04 1.27 0.61 1.24
-------------------------------------------------------------------------
($ in millions except
per share amounts) Q3 2008 Q2 2008 Q1 2008 Q4 2007
-------------------------------------------------------------------------
Gross operating revenue $2,257.5 $2,450.7 $1,825.3 $2,503.1
Net earnings 109.1 97.7 67.1 131.3
Basic and diluted earnings
per share 1.34 1.20 0.82 1.61
-------------------------------------------------------------------------
(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 sections 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;
- Q4 2008 was negatively impacted by a $28.7 million pre-tax expense
related to a delayed-start interest rate swap adjustment;
- Q1 2009 was positively impacted by a $4.6 million reduction in the
tax provision related to the retroactive change in the taxation of
gains realized from the disposition of shares during 2006 and 2007;
and
- Q3 2009 was positively impacted by a $4.5 million reduction in the
tax provision, primarily due to the revision of the prior year's
estimated tax expense.
3.2 Business unit Q3 2009 performance overview
-------------------------------------------------------------------------
Canadian Tire Retail Mark's Work Wearhouse
-------------------------------------------------------------------------
Q3 2009 Performance highlights Q3 2009 Performance highlights
- continued development of new store - opened one new corporate
formats and prepared to open 25 Combo store and closed one
Smart store retrofits in Q4 2009; Mark's corporate store and
and one Work World corporate
- expanded one traditional store store
into a Smart store and opened one - increased total retail
new incremental Small Market store. space by approximately 5.2
percent year-over-year;
PartSource Q3 2009 Performance store network totals 374
highlights locations; and
- improved gross margin by 50
- opened one new corporate store basis points primarily due
in Welland, Ontario which was a to improvements in markdown
new store format, expanded one management.
store into a hub store and closed
two stores; and
- increased the retail square
footage by approximately 7.5
percent year-over-year as a result
of ongoing network expansion.
-------------------------------------------------------------------------
Canadian Tire Financial Services Petroleum
-------------------------------------------------------------------------
Q3 2009 Performance highlights Q3 2009 Performance highlights
- increased gross average - grew store network by four
receivables by 4.6 percent for gas bars (since Q3 2008);
the total managed portfolio; and
- continued growth in the broker - grew convenience store
GIC portfolio; and business by 15.4 percent
- piloted the "Curve" and "GoPlay" over the prior year.
credit cards in test markets,
-------------------------------------------------------------------------
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 Q3 2009 Strategic Plan performance
The following outlines CTR's performance for the third 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 store retrofits
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 Third quarter
program in 2008, CTR's strategy is to
test/rollout the next versions of the During the third quarter CTR
CTR store. This includes the expanded one traditional store
building of, and conversion to, the into a Smart store and opened
new Smart stores and new Small Market one new incremental Small Market
stores which are an important aspect store with a full Mark's store
of the 2013 Plan. contained therein. At the end
of the third quarter, there were
ten Smart stores and six Small
Market stores.
The store network now totals 476
stores, 49 of which include a
Mark's component.
-------------------------------------------------------------------------
Customer Experience
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.
-------------------------------------------------------------------------
2009 Key initiatives 2009 Performance
-------------------------------------------------------------------------
Improve the customer service Third quarter
experience by implementing the
Customer Service Index to identify our CTR halted the "store intercept"
core strengths and opportunities in (one-on-one interviews) method
order to grow sales. of surveying customers during
the third quarter. Instead, the
Store Support and Dealer
Relations teams worked with the
Canadian Tire Dealers to
implement a new web-based
version of the Customer Service
Index program, which will be
introduced in the fourth
quarter.
-------------------------------------------------------------------------
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 resulted in high rates of customer retention after conversion.
-------------------------------------------------------------------------
2009 Key initiatives 2009 Performance
-------------------------------------------------------------------------
Key initiatives for PartSource include Third quarter
building CTR as a new commercial
account for emergency shipments, During the quarter, PartSource
updating the organizational structure, continued making progress on
testing new operating systems and building the CTR commercial
developing a new auto parts catalogue. account. The entire PartSource
network (which consists of hub
stores, corporate stores and
franchise stores) supplies
emergency auto parts to
approximately 210 Canadian Tire
stores.
PartSource opened one new
corporate store in Welland,
Ontario which was a new store
format, converted one franchise
store to a corporate store,
converted one unbranded
corporate store to the
PartSource banner, expanded one
store into a hub store and
closed two PartSource stores
during the quarter. This brings
the network total to 87 stores,
including ten 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 Third 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 implementation
in the areas of promotional planning - completion and
and vendor relationship management. implementation of software
upgrade;
- build of technology
solution for promotional
planning capability;
commencement of rollout of
processes and testing of
technology; and
- work on new processes and
technology to improve
returns desk practices at
store level and online.
-------------------------------------------------------------------------
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 Third quarter
eight PartSource hub stores.
Progress on the Automotive
There will be further investment in Infrastructure initiative
the physical retrofit of the included:
automotive distribution centres.
Emergency supply implementation:
Manhattan warehouse management - converted a PartSource
software will be implemented in the store to a hub store in
Calgary auto parts distribution Calgary. Now, ten hub
centre. stores serve 149 Canadian
Tire Retail stores.
The investment in distribution assets
will support an increase in the number Assortment deployment processes:
of auto parts in the assortment by an - now stocking approximately
additional 20%. 53,000 stock keeping units
(SKUs) in two auto parts
Work to implement an industry-leading distribution centres; and
automotive hard parts catalogue will - implementing the warehouse
begin in 2009. management system in the
Calgary auto parts
distribution centre.
Customer Experience processes:
- finalized Master Services
Agreement with our chosen
vendor and completed one
half of the functional
design specifications
needed to support the
customer experience
processes; and
- the detailed design of
parts data management is
underway.
-------------------------------------------------------------------------
3.3.1.2 Key performance indicators
The following are key measures of CTR's sales productivity:
- total same store sales growth;
- average retail sales per store; and
- average sales per square foot of retail space
CTR total retail and same store sales
(year-over-year percentage change) Q3 2009 Q3 2008 YTD 2009 YTD 2008
-------------------------------------------------------------------------
Total retail sales(1) (2.3)% 4.1% (0.3)% 1.6%
Same store sales(2) (3.8)% 2.0% (1.9)% (0.5)%
-------------------------------------------------------------------------
(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 the labour portion of CTR's auto service sales.
CTR retail sales
Third quarter
Our retail sales continue to be influenced by the challenging economic conditions that are currently affecting
The unseasonably cool summer weather impacted some seasonal businesses such as backyard living, cycling, gardening and camping, and challenging economic conditions impacted some of our high-ticket discretionary categories such as home décor, electronics and storage and organization. Despite overall softer sales, Canadian Tire Retail did see a healthy increase in sales in growth categories such as exercise equipment, automotive parts, kitchen and pet food.
PartSource experienced another quarter of year-over-year 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: 61,000 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 square
Stores range in size particular region, feet, most of which
from 41,000 to 83,000 easy-to navigate were opened or
square feet. There are signage and walkways, converted to these
currently ten Smart prominent heritage formats between 1994
stores in the network, departments (e.g.: and mid-2008. "Updated
the first of which hockey) and generously and expanded" format
opened in November sized outdoor areas stores make up
2008. that "expand" the store approximately 90.2
in peak periods. percent of the retail
There are currently six square footage in the
Small Market stores in CTR network (excluding
the network. PartSource).
-------------------------------------------------------------------------
----------------------------------------------------
Traditional store PartSource stores
format (1994 and prior) (2008 and prior)
Average retail square Average retail square
footage: 16,000 footage: 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 major
various sizes and purchasers of auto parts,
layouts ranging in size professional automotive
from 3,000 to 36,000 installers and serious
square feet. do-it-yourselfers.
Traditional stores make Stores carry a tailored
up approximately 6.0 product assortment based
percent of the retail on local vehicle needs
square footage in the and are easily recognizable
CTR network (excluding with the checkerboard
PartSource). 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
Q3 2009(1) 2008(2) 2007(2) 2006(2) 2005(2)
-------------------------------------------------------------------------
Updated and expanded
stores(3) 388 393 381 363 345
Traditional stores 72 76 92 105 117
Small Market stores 6 4 - - -
Smart stores 10 2 - - -
-------------------------------------------------------------------------
Total updated and expanded,
traditional, Small Market
and Smart stores 476 475 473 468 462
PartSource stores 87 86 71 63 57
-------------------------------------------------------------------------
(1) Store count at the end of Q3 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 traditional 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. These latest formats have been well received by customers to date. For example, the first nine new or replacement Smart stores experienced a sales uplift of over 25% with average transactions up 15%. There have been significant increases in sales in key categories such as pet food and accessories, exercise equipment, hockey equipment and kitchen. We are pleased with the results to date of our food test, and are extending it into 5 more stores this fall. We intend to draw conclusions from our tests and decide on future directions sometime in 2010.
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. During the Fall of 2009, we will open 25 retrofit Smart stores for which we expect an annualized sales uplift of 6% to 8%.
Average retail sales per CTR store(1),(2)
For the 12 For the 12
months ended months ended
October 3, September 27,
($ in millions) 2009 2008
-------------------------------------------------------------------------
Updated and expanded stores $ 15.9 $ 16.0
Traditional stores 7.7 7.8
-------------------------------------------------------------------------
(1) Retail sales are shown on a 52-week basis in each year and exclude
sales from PartSource stores 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, experienced a slight decline.
The decline in sales per store is partially attributable to a weaker economy as consumers focused on 'needs' versus 'wants'.
Average sales per square foot of CTR retail space(1),(2),(3)
For the 12 For the 12
months ended months ended
October 3, September 27,
2009 2008
-------------------------------------------------------------------------
Retail square footage(1),(3) (millions of
square feet) 18.9 18.4
Updated and expanded stores(2),(3)
($ sales per square foot) $ 377 $ 382
Traditional stores(2),(3) 492 497
-------------------------------------------------------------------------
(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 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.
3.3.1.3 CTR's financial results
($ in millions) Q3 2009 Q3 2008(1) Change 2009 YTD 2008 YTD(1) Change
-------------------------------------------------------------------------
Retail sales $1,818.3 $1,860.3 (2.3)% $5,239.4 $5,253.6 (0.3)%
Net shipments
(year-over-
year %
change) 0.3% 7.6% 0.1% 3.8%
Gross operating
revenue 1,408.5 1,399.3 0.7% 4,057.8 4,032.7 0.6%
EBITDA(2) 161.2 152.6 5.6% 421.1 397.9 5.8%
-------------------------------------------------------------------------
Earnings before
income taxes 95.6 94.0 1.6% 223.6 222.7 0.4%
Less adjustment
for:
Amortization of
interest rate
swap unwind 1.6 - 1.6 -
Gain (loss) on
disposals of
property and
equipment 0.3 (0.3) (0.4) 3.7
Former CEO
retirement
obligation 0.0 0.2 0.5 1.1
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(2) $ 93.7 $ 94.1 (0.4)% $ 221.9 $ 217.9 1.9%
-------------------------------------------------------------------------
(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 results
Third quarter
Shipments and gross operating revenue experienced modest increases in the third quarter, outpacing retail sales, as Dealers began their inventory build toward the end of the quarter in anticipation of the winter and holiday sales requirements and also adjusted upward their inventory levels that had been reduced in previous quarters due to the economic environment.
Earnings before taxes improved 1.6% over the prior year, partially due to the
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 Q3 2009 Strategic Plan performance
The following outlines Mark's performance for the third 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 goal of expanding
the network of Mark's stores.
-------------------------------------------------------------------------
2009 Key initiatives Q3 2009 Performance
-------------------------------------------------------------------------
Mark's will continue network Third quarter
development through opening new stores,
relocating or expanding existing - opened one new corporate
stores and renovating older stores to Combo store;
the newest Mark's format. For 2009, - relocated four corporate
we originally planned to: stores;
- expanded one franchise
- open 14 new stores; store; and
- relocate 10 stores; - closed one Mark's store and
- expand 3 stores; and one Work World corporate
- grow the retail square store.
footage by 5%.
Mark's total retail square
footage at the end of the
quarter was 3.3 million square
feet, an increase of 5.2% vs. Q3
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 2.9%.
-------------------------------------------------------------------------
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 Q3 2009 Performance
-------------------------------------------------------------------------
While participating in the Mark's Third quarter
portion of the newly-developed
concepts for CTR/Mark's Combo stores, The Combo store opened in the
such as Smart stores and Small Market third quarter was a new format
stores, Mark's is developing a new, Smart store. Mark's opened its
stand-alone "CLOTHES THAT WORK®" first "CLOTHES THAT WORK®"
store that will be tested in 2009. prototype store during the
quarter. Our new Edmonton store
includes a "product-testing
freezer" where customers can
plunge into a deep-freeze cold
to try out our latest winter
fashions. Customers have
responded positively to this
innovation.
-------------------------------------------------------------------------
Category expansion
Mark's growth goals for the 2013 Plan period will be supported by
category expansion in its three major product lines. Although growth in
women's wear was modest in 2007, 2008 and 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 Q3 2009 Performance
-------------------------------------------------------------------------
In 2009, Mark's will continue to Third quarter - corporate sales
expand its product assortment in the
three main categories of apparel and - sales of women's wear
footwear with a focus on the Clothes increased by 6.1 percent;
That Work campaign. - sales of industrial wear
decreased by 5.0 percent;
and
- sales of men's wear
decreased by 5.7 percent.
In the third quarter of 2009,
Mark's launched its fall 2009 TV
advertising campaign, with most
advertisements geared towards
advancing "Clothes That Work"
such as DH Soft women's
sweaters, DH U35™ underwear
and the Perfect Fit Panty. dri-
WEAR® is technology now used
in Mark's underwear, socks, T-
shirts polo shirts and the
lining of some outerwear.
CURVETECH™ shape-enhancing
technology is used in Mark's
women's wear category. QUAD
COMFORT® technology is found
in both men and women's footwear
at Mark's.
-------------------------------------------------------------------------
3.3.2.2 Key performance indicators
The following are key performance indicators for Mark's:
- retail and same store sales growth;
- average sales per corporate store; and
- average sales per square foot of retail space
Mark's retail and same store sales growth
(year-over-year percentage change) Q3 2009 Q3 2008 2009 YTD 2008 YTD
-------------------------------------------------------------------------
Total retail sales(1) (2.5)% 2.6% (5.3)% 1.9%
Same store sales(2) (3.7)% (1.0)% (6.7)% (2.0)%
-------------------------------------------------------------------------
(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.
Third quarter
Mark's retail sales during the third quarter of 2009 continued to be impacted by fragile economic conditions across
Mark's continues to focus on its "CLOTHES THAT WORK" strategy and has maintained its pricing to support the brand and to focus on optimizing margins rather than driving unprofitable sales volumes.
Average corporate store sales(1)
For the For the For the
12 months 12 months 12 months
ended, ended, ended,
October 3, September 27, September 29,
2009 2008 2007
-------------------------------------------------------------------------
Average retail sales per store
($ thousands)(2) $ 2,589 $ 2,712 $ 2,862
Average sales per square
foot ($)(3) 296 318 341
-------------------------------------------------------------------------
(1) Calculated on a rolling 12-month basis.
(2) Average retail sales per corporate store include corporate stores
that have been open for 12 months or more.
(3) Average sales per square foot is based on sales from corporate
stores. We have prorated square footage for corporate stores that
have been open for less than 12 months.
Mark's average retail sales per store and average sales per square foot have been declining since the end of the second quarter of 2007, primarily due to the economic slowdown which began then, combined with the fact that Mark's has, through new stores, store relocations, store expansions and franchise repatriations, increased its corporate store retail square footage by 21.4% over that time frame.
According to a market research company that tracks the clothing industry retail trends, Mark's continued to increase its market share of the total Canadian apparel market in 2008 and maintained or slightly increased its market share through the first half of 2009, the latest data available. Mark's believes that with its continued network expansion, it will be well positioned to increase its market share and resume improving its average retail sales per store and average sales per square foot when the Canadian apparel market recovers from the current recession.
3.3.2.3 Mark's financial results
($ in millions) Q3 2009 Q3 2008(1) Change 2009 YTD 2008 YTD(1) Change
-------------------------------------------------------------------------
Retail sales(2) $ 189.6 $ 194.5 (2.5)% $ 568.3 $ 600.1 (5.3)%
Gross operating
revenue(3) 164.2 168.7 (2.6)% 493.5 516.8 (4.5)%
EBITDA(4) 3.8 6.9 (47.1)% 20.0 24.1 (17.1)%
-------------------------------------------------------------------------
Earnings (loss)
before income
taxes (3.8) (0.1) N/A (1.6) 3.8 (142.7)%
Less adjustment
for:
Loss on
disposals of
property and
equipment (0.5) (0.3) (0.8) (0.4)
-------------------------------------------------------------------------
Adjusted earnings
(loss) before
income taxes(4) $ (3.3) $ 0.2 N/A $ (0.8) $ 4.2 (120.1)%
-------------------------------------------------------------------------
(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
Third quarter
Gross operating revenue declined 2.6% in the third quarter compared to the prior year, in line with the decline in retail sales as referenced above.
Mark's pre-tax earnings decreased in the third quarter of 2009 primarily as a result of the decrease in gross operating revenue and higher expenses due to network expansion and infrastructure investments in recent years.
The gross margin rate on merchandise sold improved this quarter, up 50 basis points due to lower markdowns versus the third quarter of 2008, offset to some degree by the effect of foreign exchange hedging activities. The year- to-date gross margin rate was up 280 basis points as it was favourably impacted by reduced inventory shrinkage during Mark's annual inventory count in the second quarter and lower markdowns through the application of a new advanced integrated merchandising planning system, again offset to some degree by lower purchase markup primarily as a result of the foreign exchange hedging activities.
Total expenses increased by
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 Q3 2009 Strategic Plan performance
Petroleum plays a strategic role in increasing customer loyalty and driving traffic and transactions for CTR and Financial Services. Petroleum increases Canadian Tire's total value proposition by offering Canadian Tire 'Money' loyalty rewards on gas purchases paid for in cash or by Canadian Tire's Options MasterCard. Petroleum also supports other cross-marketing promotions and joint product launches, such as Canadian Tire's Gas Advantage MasterCard, which has gained wide popularity since its introduction in Ontario in mid-2006. Customers who have a Canadian Tire MasterCard and purchase gas at Petroleum are Canadian Tire's most loyal and profitable customers.
The following outlines Petroleum's performance for the third quarter of 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 site concepts into its existing network of locations, while
continuing to focus on renewing its current sites to enhance the customer
experience.
-------------------------------------------------------------------------
2009 Key initiatives Q3 2009 Performance
-------------------------------------------------------------------------
In 2009, Petroleum will continue to Third quarter
strengthen the existing network by
opening new sites and refurbishing or - opened one new convenience
rebuilding existing sites. store;
- opened one gas bar and
refurbished five existing
sites; and
- closed one gas bar.
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 Q3 2009 Performance
-------------------------------------------------------------------------
In 2009, Petroleum will aggressively Third quarter
seek out additional cross-marketing
opportunities to further leverage its - executed cross-marketing
interrelatedness strategy to drive national contest at gas
customer traffic, transactions, bars driving traffic to CTR
customer loyalty and earnings across and Mark's stores and
the enterprise. Financial Services'
Canadian Tire Options®
MasterCard®; and
- issued multiplier coupons
that increase the Canadian
Tire 'Money' offered on gas
purchases paid for in cash
or by Canadian Tire Options
MasterCard.
-------------------------------------------------------------------------
3.3.3.2 Key performance indicators
Gasoline sales volume is a top-line performance indicator for Petroleum, as measured by the number of gasoline litres sold. Fluctuations in the wholesale and retail price of gasoline may result in fluctuations in Petroleum's margin and profitability.
Gasoline sales volume
Q3 2009 Q3 2008 Change 2009 YTD 2008 YTD Change
-------------------------------------------------------------------------
Sales volume
(millions of
litres) 433.5 414.5 4.6% 1,277.5 1,257.9 1.6%
-------------------------------------------------------------------------
Gasoline sales volumes in the third quarter were up 4.6% due to consumers benefiting from lower and more stable pump prices in comparison to the third quarter of 2008.
Petroleum's convenience and car wash sales
(year-over-year percentage change) Q3 2009 Q3 2008 2009 YTD 2008 YTD
-------------------------------------------------------------------------
Total retail sales
Convenience store sales 15.4% 10.7% 17.0% 9.0%
Car wash sales 7.7% (14.3)% 8.3% (16.5)%
-------------------------------------------------------------------------
Same store sales
Convenience 13.3% 9.1% 14.5% 7.3%
Car wash 16.5% (14.1)% 8.5% (16.5)%
Convenience store sales were very strong in the third quarter of 2009 especially in the confectionary, tobacco and lottery categories, which are more resilient during economic downturns. Car wash sales were very strong compared to the third quarter of the prior year. With lower pump prices in the third quarter of 2009, consumers had more room for discretionary purchases, such as car washes.
3.3.3.3 Petroleum's financial results
($ in millions) Q3 2009 Q3 2008 Change 2009 YTD 2008 YTD Change
-------------------------------------------------------------------------
Retail sales $ 441.1 $ 550.2 (19.8)% $1,220.2 $1,541.1 (20.8)%
Gross operating
revenue 403.6 519.3 (22.3)% 1,116.3 1,456.9 (23.4)%
EBITDA(1) 13.1 11.7 12.7% 35.6 32.8 8.6%
-------------------------------------------------------------------------
Earnings before
income taxes 8.5 7.5 13.9% 22.3 20.5 9.0%
Less adjustment
for:
Loss on
disposals of
property and
equipment (0.1) (0.1) (0.4) (0.3)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(1) $ 8.6 $ 7.6 13.4% $ 22.7 $ 20.8 9.1%
-------------------------------------------------------------------------
(1) See section 15.0 on non-GAAP measures.
Explanation of Petroleum's financial results
Third quarter
Retail sales and gross operating revenue declined more than 19% in the third quarter of 2009, due to a 26.1 percent decrease in retail gasoline prices year-over-year. Despite the decrease in pump-prices, Petroleum's pre- tax earnings were up 13.9 percent due to strong convenience sales, relatively stable gasoline margins and well managed operating expenses which were held relatively 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 Q3 2009 Strategic Plan performance
The following outlines Financial Services' performance for the third 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 Q3 2009 Performance
-------------------------------------------------------------------------
For 2009, Financial Services has Third quarter
targeted the increase of gross average
receivables mainly through increases Gross average loans receivable
in the average account balances. were $4.1 billion in the third
quarter. The growth reflects an
8.7 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 Q3 2009 Performance
-------------------------------------------------------------------------
Financial Services' retail banking Third quarter
plans include increasing the ending
mortgage portfolio balance and retail Financial Services had
deposit balances. accumulated over $590 million in
retail deposits and over $164
Financial Services will incur million in mortgages as at the
approximately $17 million in net end of the third quarter of
expenses associated with the marketing 2009. Financial Services
and operations of the retail banking subsequently sold its mortgage
initiative in 2009. portfolio to National Bank of
Canada (see section 16.2 of this
MD&A for more details). Retail
deposits is a cost effective
funding source for credit card
receivables.
Financial Services incurred $4.2
million in net expenses
associated with the marketing
and operation of the retail
banking initiative during the
third quarter of 2009.
-------------------------------------------------------------------------
Insurance and other ancillary products
Financial Services plans to enhance its insurance and warranty product
offering to credit card customers. Revenues from insurance and warranty
products have increased significantly in the last five years through
direct marketing to Canadian Tire's growing base of customers.
-------------------------------------------------------------------------
2009 Key initiatives Q3 2009 Performance
-------------------------------------------------------------------------
Financial Services plans to increase Revenues from insurance and
revenues from insurance and warranty warranty products decreased 4.8
products during 2009. percent in the third quarter
versus the same period last
year, however revenues increased
2.6 percent on a year-to-date
basis versus the same period
last year.
-------------------------------------------------------------------------
3.3.4.2 Key performance indicators
The following are key indicators of Financial Services' performance:
- size of the total managed portfolio
- profitability of the portfolio
- quality of the portfolio
Financial Services' total managed portfolio of loans receivable
($ in millions,
except where
noted) Q3 2009 Q3 2008 Change 2009 YTD 2008 YTD Change
-------------------------------------------------------------------------
Average number
of accounts
with a balance
(thousands) 1,791 1,862 (3.8)% 1,798 1,857 (3.2)%
Average account
balance ($) $ 2,308 $ 2,123 8.7% $ 2,260 $ 2,087 8.3%
Gross average
receivables (GAR) 4,132.6 3,951.8 4.6% 4,063.2 3,876.1 4.8%
Total managed
portfolio (end
of period) 4,174.4 4,002.3 4.3%
Net managed
portfolio (end
of period) 4,052.2 3,903.2 3.8%
-------------------------------------------------------------------------
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 4.6% in the third quarter, due primarily to select limit increases, balance transfer offers and a lower customer payment rate.
Financial Services believes that its 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 deposit products as a cost effective source of financing credit card receivables.
Financial Services' portfolio of credit card loans receivable
($ in millions,
except where
noted) Q3 2009 Q3 2008 Change 2009 YTD 2008 YTD Change
-------------------------------------------------------------------------
Average number
of accounts
with a balance
(thousands) 1,767 1,826 (3.2)% 1,771 1,820 (2.7)%
Average account
balance ($) $ 2,204 $ 2,041 8.0% $ 2,156 $ 2,013 7.1%
Gross average
receivables 3,896.0 3,727.9 4.5% 3,818.1 3,663.1 4.2%
Total managed
portfolio (end
of period) 3,945.8 3,772.5 4.6%
-------------------------------------------------------------------------
Gross average credit card loans receivable grew 4.5 percent to
Financial Services' profitability
Financial Services' profitability measures are tracked as a percentage of GAR, shown in the table below.
Profitability of total managed portfolio(1)
Q3 2009 Q3 2008 Q3 2007 Q3 2006 Q3 2005
-------------------------------------------------------------------------
Total revenue as a %
of GAR(2) 25.05% 24.30% 24.88% 25.01% 25.81%
Gross margin as a %
of GAR(2) 10.86% 12.40% 13.19% 13.06% 13.30%
Operating expenses as
a % of GAR(3) 6.98% 7.65% 7.75% 8.12% 8.68%
Return on average
total managed
portfolio(2,3,4) 3.88% 4.75% 5.45% 4.93% 4.61%
-------------------------------------------------------------------------
(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
sections 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 has decreased in comparison to the third quarter of 2008. The Canadian economy continues to be challenged with rising consumer bankruptcies and a deterioration of the aging of receivables, resulting in increased write-offs. Other variable costs were also up, such as an increase in interest expense caused by an increase in broker deposits to prefund GCCT term notes and GIC maturities in the fourth quarter.
Financial Services' credit card accounts (MasterCard and proprietary store cards) 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 gross margin as a percentage of gross average receivables will be offset by continued growth in loans receivable, higher sales of insurance and warranty products and ongoing improvements in the operating expense ratio.
As part of the strategic planning process, management set a long-term goal of managing Financial Services' pre-tax return on the average total managed portfolio in the target range of 4.5 to 5.0 percent. As shown in the table above, Financial Services has met or exceeded this target in the third quarters over four of the last five years, but missed the target in 2009 for the reasons noted above. Management believes the pre-tax return on the average total managed portfolio will fall within the target range in the longer term, once unemployment levels and consumer spending behaviour return to historical norms.
Portfolio quality
Q3 2009 Q3 2008 Q3 2007 Q3 2006 Q3 2005
-------------------------------------------------------------------------
Net write-off rate
(rolling 12-month basis) 7.30% 6.04% 5.87% 5.94% 5.95%
Account balances less
than 30 days overdue
at end of period 95.85% 96.32% 96.26% 96.14% 96.31%
Allowance rate 2.93% 2.48% 2.44% 2.60% 2.56%
-------------------------------------------------------------------------
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 selecting credit-worthy customers. The 2009 rolling 12-month net write-off rate on the total loans portfolio has been negatively impacted by an increase in write-offs and consumer bankruptcies as a result of a significantly more challenging economic environment and rising unemployment rates.
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 by a number of its peers 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 third quarter of 2008 is due to an increase in the credit card portfolio aging. 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) Q3 2009 Q3 2008(1) Change 2009 YTD 2008 YTD(1) Change
-------------------------------------------------------------------------
Gross operating
revenue $ 222.0 $ 197.8 12.2% $ 672.2 $ 608.0 10.6%
EBITDA(2) 40.7 52.7 (23.0)% 148.3 160.2 (7.5)%
-------------------------------------------------------------------------
Earnings before
income taxes 18.7 47.6 (60.8)% 93.5 146.2 (36.1)%
Less adjustment
for:
Loss on disposals
of property and
equipment (0.5) (0.6) (0.7) (0.6)
Net effect of
securitization
activities(3) (9.0) (9.1) (6.8) 7.7
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(2) $ 28.2 $ 57.3 (50.9)% $ 101.0 $ 139.1 (27.4)%
-------------------------------------------------------------------------
(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.
(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
Third quarter
Financial Services' gross operating revenue increased by 12.2% over the third quarter of 2008 largely as a result of an increase in credit interest earned due to an increase in yield and an overall growth in the gross average receivable balance. This was partially offset by a modest decrease in revenue from insurance services.
Earnings before income taxes for the third quarter decreased significantly in comparison to the same quarter last 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 GCCT notes and GICs in late 2009. The cost of this conservative approach was approximately
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 2013 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 third 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
- 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 third 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" (
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
Credit markets have shown marked improvement in recent months and Canadian Tire's financing capabilities remain strong as evidenced by a
Summary of Canadian Tire's financing sources
-------------------------------------------------------------------------
Amount
Financing Source Available Description
-------------------------------------------------------------------------
Committed bank lines $1.17 billion Provided by 10 domestic and
of 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
October 3, 2009 and the full
amount was available.
Commercial paper program $800 million Canadian Tire had no commercial
paper outstanding as at
October 3, 2009.
Medium Term Notes $750 million A new Shelf Prospectus was
(MTN) 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 2009.
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 funding source ramped up
limit in the second half of 2008 and
funds continue to be readily
available through broker
networks. As at the end of Q3
2009, Financial Services held
$1.7 billion in broker GIC
deposits.
High Interest Savings No specified This funding source increased
Accounts and Tax-Free limit in the third quarter of 2009.
Savings Accounts At the end of Q3 2009,
Financial Services held
$541 million in High Interest
Savings and Tax-Free Savings
deposits.
Sale/leaseback Transaction Additional sources of funding
transactions 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
As of
Debt market conditions
Credit markets have shown signs of marked improvement over the course of 2009 to date as evidenced by reduced credit spreads and higher investor demand for bond transactions. Although few public asset-backed securities transactions have been completed in 2009, credit spreads in this market have also tightened and investor demand is improving. 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 its maturing commercial paper and had
Should the Company not seek to complete a credit card securitization transaction in the near-to-medium term, the Company has access to other sufficient sources of financing as indicated in the table above.
In
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
Redemption of debentures
Subsequent to quarter-end, the Company redeemed all
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. CTB broker GICs are offered for varying terms ranging from 30 days to five years, and all issued broker 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
As at the end of the third quarter of 2009, CTB had approximately
High Interest Savings and Tax-Free Savings deposits
More recently, CTB has been successful in generating deposits from High Interest Savings (HIS) and Tax-Free Savings (TFSA) accounts and at the end of the third quarter, CTB had
Sale of mortgage portfolio
Subsequent to quarter-end, CTB sold its portfolio of mortgages to the National Bank of
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 third quarter of 2009, the primary sources of funding were:
- $159 million of cash arising from an increase in net deposits; and
- $9 million of cash arising from proceeds on disposition of property
and equipment.
5.1.2 Cash and cash equivalents
At
- $75 million for the investment in loans receivable;
- $49 million for additions to property and equipment;
- $17 million in dividends paid; and
- $11 million for additions to intangible assets, primarily computer
software.
5.1.3 Working capital
Optimizing our working capital continues to be a long-term priority in order to maximize cash flow for use in the operations of the Company. The table below shows the change in the value of our working capital components at the end of the third quarter of 2009 from the third quarter of 2008.
Comparable working capital components
Increase/
(decrease)
October 3, September 27, in working
($ in millions) 2009 2008(1) capital
-------------------------------------------------------------------------
Short-term investments $ 190.9 $ - $ 190.9
Accounts receivable 682.5 584.1 98.4
Merchandise inventories 1,216.9 1,301.2 (84.3)
Income taxes recoverable 116.1 83.7 32.4
Prepaid expenses and deposits 70.1 56.3 13.8
Accounts payable and other (1,396.8) (1,417.5) 20.7
-------------------------------------------------------------------------
$ 271.9
-------------------------------------------------------------------------
(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.
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
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 which had previously been drawn down in light of a softer economy.
The decrease in merchandise inventories was primarily at CTR and reflected aggressive downward management of inventory levels in line with working capital management objectives.
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:
October 3, September 27,
($ in millions) 2009 2008
-------------------------------------------------------------------------
Securitized $ 1,798.6 $ 2,471.3
Non-securitized 2,253.6 1,431.9
-------------------------------------------------------------------------
Net managed loans receivable $ 4,052.2 $ 3,903.2
-------------------------------------------------------------------------
Net managed loans receivable continued to increase over the last 12 months as customers' use of the Canadian Tire Options® MasterCard® and Gas Advantage® MasterCard® grew and mortgage volumes increased. At the end of the third quarter of 2009, net managed loans receivable were 3.8 percent higher than at the end of the third 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- branded credit card accounts to lead to an increase in total loans receivable in 2009. Financial Services expects to continue to fund this increase over the long term 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
6.0 Equity
The book value of Common and Class A Non-Voting Shares at the end of the third quarter of 2009 was
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
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
October 3, September 27,
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) 622,612 495,043
Shares purchased under NCIB (480,800) (494,800)
-------------------------------------------------------------------------
Shares outstanding at end of quarter 78,319,878 78,048,305
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
The following chart summarizes our quarterly dividend distribution in 2009, payable to the shareholders as of the record date:
Amount
Quarterly Date of Payable
Dividend Declaration Record Date Date Payable Per Share
-------------------------------------------------------------------------
First
Quarter February 12, 2009 April 30, 2009 June 1, 2009 $ 0.21
Second
Quarter May 14, 2009 July 31, 2009 September 1, 2009 $ 0.21
Third
Quarter August 13, 2009 October 30, 2009 December 1, 2009 $ 0.21
-------------------------------------------------------------------------
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 Q3 2009 Capital expenditures program
Canadian Tire's capital expenditures, on an accrual basis, totaled
- $35 million for real estate projects, including projects associated
with the rollout of CTR's new store formats;
- $14 million for information technology;
- $4 million for CTR distribution centres;
- $3 million for Automotive Infrastructure; and
- $8 million for other purposes.
Overall, capital investment has slowed since the third quarter of 2008, as construction of the Eastern
7.2 2009 Capital expenditures plan
In light of current market conditions, the 2009 capital expenditure plan has been reduced. Originally set at
- $155 million for real estate projects, including $122 million
associated with the rollout of CTR's new store formats;
- $59 million for information technology;
- $25 million for CTR distribution centres;
- $15 million for Automotive Infrastructure;
- $14 million for energy management and lighting; and
- $32 million for other purposes.
8.0 Foreign operations
The Company has established operations outside of
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
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
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
10.0 Off-balance sheet arrangements
10.1 Glacier Credit Card Trust
As noted earlier, GCCT was formed to buy our credit card loans and it issues debt to third-party investors to fund its credit card loans purchases. Refer to section 5.1.4 of this MD&A for additional information on GCCT.
10.2 Trust financing for Dealers
A financing program is in place to provide an efficient and cost- effective way for Dealers to access the majority of the financing they require for their store operations. The agreement with the Trust and the participating banks for the Trust financing program for Dealers has been amended and extended until
Refer to MD&A section 13.2 of our 2008 Financial Report for additional information on this program.
10.3 Bank financing for Dealers
We have guaranteed the bank debt of some Dealers. The total is approximately
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 third quarter of 2009. In 2009 there has been an outbreak of the H1N1 flu virus with confirmed cases in
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 uses derivative financial instruments to manage its financial risk exposures to foreign currency risk and to a lesser extent interest rate risk. The Company may also use equity derivative contracts to hedge certain future stock-based compensation expenses. The Company does not use derivative financial instruments for trading or speculative purposes, 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.
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)
-------------------------------------------
October September October September
($ in millions) 3, 2009 27, 2008 3, 2009 27, 2008
-------------------------------------------
Balance, beginning of year $ 51.8 $ 51.5 $ 3.5 $ 2.7
Provision for credit losses 124.5 47.1 4.3 8.2
Recoveries 13.7 10.7 0.6 0.4
Write-offs (110.9) (59.3) (5.8) (7.5)
-------------------------------------------
Balance, end of period $ 79.1 $ 50.0 $ 2.6 $ 3.8
-------------------------------------------
Accounts receivable Total
-------------------------------------------
October September October September
($ in millions) 3, 2009 27, 2008 3, 2009 27, 2008
-------------------------------------------
Balance, beginning of year $ 3.3 $ 5.0 $ 58.6 $ 59.2
Provision for credit losses 0.9 0.8 129.7 56.1
Recoveries 0.2 0.3 14.5 11.4
Write-offs (2.2) (2.5) (118.9) (69.3)
-------------------------------------------
Balance, end of period $ 2.2 $ 3.6 $ 83.9 $ 57.4
-------------------------------------------
(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 U.S. dollar purchases that must be hedged for various time periods. Consequently, when dramatic swings in foreign currency rates occur the Company has already hedged a significant portion of its near term U.S. dollar-denominated forecast purchases. The foreign currency hedge portfolio has allowed the Company to achieve some margin stability for 2009 year to date as a significant amount of the U.S. dollars required for U.S. dollar-denominated purchases 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 and the directional move of the Canadian dollar. It is likely that the hedge rate achieved will be less favourable than the spot reference rate for the remainder of the year. The Company may 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 $ 1,015.1 $ 219.9 $ 280.8 $ 296.1
Accounts payable and other 1,373.6 - - -
Long-term debt 453.9 9.0 21.0 8.2
Interest payment(1) 143.7 102.2 99.6 98.2
Other - 0.8 - -
--------------------------------------------
Total $ 2,986.3 $ 331.9 $ 401.4 $ 402.5
--------------------------------------------
--------------------------------------------
There-
($ in millions) 5 years after Total
---------------------------------
Deposits $ 521.9 $ - $ 2,333.8
Accounts payable and other - - 1,373.6
Long-term debt 6.9 1,063.1 1,562.1
Interest payment(1) 110.7 651.5 1,205.9
Other 5.2 - 6.0
---------------------------------
Total $ 644.7 $ 1,714.6 $ 6,481.4
---------------------------------
---------------------------------
(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
In
11.3 Regulatory risk
On
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 that 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
In view of the recent turmoil in credit markets and economic recession being experienced in
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 period
In the
remaining
three In years In years
months 2010 - 2012 - After
($ in millions) Total of 2009 2011 2013 2013
-------------------------------------------------------------------------
Long-term debt(1) $ 1,517.2 $ 150.1 $ 316.0 $ 1.1 $ 1,050.0
Capital lease
obligations 44.9 1.9 15.0 15.1 12.9
Operating leases 2,120.8 59.5 438.6 374.6 1,248.1
Purchase obligations 848.8 428.1 346.8 59.1 14.8
Financial Services'
deposits 2,333.8 865.5 453.9 701.5 312.9
Other obligations 30.8 2.7 12.4 6.4 9.3
-------------------------------------------------------------------------
Total contractual
obligations $ 6,896.3 $ 1,507.8 $ 1,582.7 $ 1,157.8 $ 2,648.0
-------------------------------------------------------------------------
(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
14.1 Financial Statement Concepts
Effective,
14.2 Goodwill and Intangible Assets
Effective,
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, September 27, December 29,
($ in millions) 2009 2008 2007
-------------------------------------------------------------------------
Retained earnings $ (3.1) $ (3.4) $ (4.3)
Long-term receivables and other
assets (3.3) (4.0) (4.6)
Intangible assets 189.5 180.2 174.0
Property and equipment (190.9) (181.3) (175.8)
Income taxes recoverable 0.4 0.0 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 39 weeks ended
14.3 Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities
Effective,
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
14.4 Business Combinations
In
14.5 Financial Instruments - Recognition and Measurement
In
14.6 Financial Instruments - Disclosures
In
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
14.7 Financial Instruments - Impairment on Debt Instruments
In
14.8 International Financial Reporting Standards
In
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 deliverables for 10 accounting specific work streams were completed by the end of Q3 2009. The deliverables for the remaining 3 accounting specific work streams will be completed in Q4 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 is being 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 is also being finalized during this stage. This stage also involves 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 October 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 IFRS of Q1 2011 individual policy
policies selection
- selection of IFRS 1 recommendations in
accounting policy progress
choices
- financial statement
format, including
alternative
performance measures
- changes in note
disclosure
- 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 sales
EBITDA
With the exception of Financial Services, we consider EBITDA to be an effective measure of the contribution of each of our businesses to our profitability on an operational basis, before allocating the cost of income taxes and capital investments. EBITDA is also commonly regarded as an indirect measure of operating cash flow, a significant indicator of success for many businesses.
A reconciliation of EBITDA to the most comparable GAAP measure (earnings before income taxes) is provided as follows:
Reconciliation of EBITDA to GAAP measures(1)
($ in millions) Q3 2009 Q3 2008(2) 2009 YTD 2008 YTD(2)
-------------------------------------------------------------------------
EBITDA(3)
CTR $ 161.2 $ 152.6 $ 421.1 $ 397.9
Financial Services 40.7 52.7 148.3 160.2
Petroleum 13.1 11.7 35.6 32.8
Mark's 3.8 6.9 20.0 24.1
-------------------------------------------------------------------------
Total EBITDA $ 218.8 $ 223.9 $ 625.0 $ 615.0
-------------------------------------------------------------------------
Less:
Depreciation and
amortization expense
CTR $ 47.8 $ 43.0 $ 140.8 $ 127.5
Financial Services 3.0 2.8 8.6 8.2
Petroleum 4.6 4.2 13.3 12.3
Mark's 7.1 5.9 20.2 17.1
-------------------------------------------------------------------------
Total depreciation and
amortization expense $ 62.5 $ 55.9 $ 182.9 $ 165.1
-------------------------------------------------------------------------
Interest expense(3)
CTR $ 17.8 $ 15.6 $ 56.7 $ 47.7
Financial Services 19.0 2.3 46.2 5.8
Mark's 0.5 1.1 1.4 3.2
-------------------------------------------------------------------------
Total interest expense $ 37.3 $ 19.0 $ 104.3 $ 56.7
-------------------------------------------------------------------------
Earnings (loss) before income
taxes
CTR $ 95.6 $ 94.0 $ 223.6 $ 222.7
Financial Services 18.7 47.6 93.5 146.2
Petroleum 8.5 7.5 22.3 20.5
Mark's (3.8) (0.1) (1.6) 3.8
-------------------------------------------------------------------------
Total earnings before income
taxes $ 119.0 $ 149.0 $ 337.8 $ 393.2
-------------------------------------------------------------------------
(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 sections 14.1 and 14.2 for additional information.
(3) Eliminations of inter-company transactions (eg. a loan of funds from
one business unit to another), previously disclosed as a separate
line item, are now presented net of these transactions.
References to adjusted earnings
In several places in this MD&A, we refer to adjusted pre-tax and after- tax earnings before the impact of non-operating items. Historically, non- operating items have included the net effect of securitization activities and dispositions of surplus property and equipment. The timing and amount of gains and losses from these items are not consistent from quarter to quarter. We believe the adjusted figures allow for a clearer assessment of earnings for each of our businesses and provide a more meaningful measure of our consolidated and segmented operating results.
From time to time adjusted earnings may also contain additional unusual and/or non-recurring items which are explained in detail at that time.
Same store sales
Same store sales is the metric used by management, and most commonly used in the retail industry, to compare retail sales growth in a more consistent manner across the industry. CTR's same store sales includes sales from all CTR and PartSource 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
16.0 Subsequent events
16.1 Redemption of debentures
On
As a result of this redemption, the Company paid a redemption premium of
The debentures were hedged by interest rate swaps that were to mature on
16.2 Sale of mortgage portfolio
Effective
17.0 Controls and procedures
Changes in internal control over financial reporting
During the third 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.
18.0 Jumpstart
Canadian Tire's charitable efforts are reflected in the work of Canadian Tire Jumpstart charities. The Jumpstart organization, formerly the Canadian Tire Foundation for Families, underwent a name change this year to reflect the success of the Jumpstart program, which is a community-based organization that helps financially disadvantaged children participate in organized sports and recreation so they can develop important life skills, including self-esteem and self-confidence. National in scope but local in focus, Canadian Tire Jumpstart has delivered support since 2005 to children through a Canada-wide network of local chapters. To date, 279 Jumpstart chapters have been created in communities across the country and have contributed to help over 184,000 children.
During the first nine months of 2009, Jumpstart has raised over
19.0 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 a reflection 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, Petroleum agents and PartSource and 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) of this MD&A. 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 http://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
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
2009 THIRD QUARTER
INTERIM REPORT FINANCIALS
Consolidated Statements of Earnings (Unaudited)
-------------------------------------------------------------------------
(Dollars in millions 13 weeks ended, 39 weeks ended,
except per October 3, September October 3, September
share amounts) 2009 27, 2008 2009 27, 2008
-------------------------------------------------------------------------
(Restated - (Restated -
Note 2) Note 2)
Gross operating
revenue $ 2,165.9 $ 2,257.5 $ 6,248.8 $ 6,533.5
-------------------------------------------------------------------------
Operating expenses
Cost of merchandise
sold and all other
operating expenses
except for the
undernoted items
(Note 14) 1,939.8 2,024.3 5,603.5 5,895.4
Net interest
expense (Note 8) 37.3 19.0 104.3 56.7
Depreciation and
amortization 62.5 55.9 182.9 165.1
Employee profit
sharing plan 7.3 9.3 20.3 23.1
-------------------------------------------------------------------------
Total operating
expenses 2,046.9 2,108.5 5,911.0 6,140.3
Earnings before income
taxes 119.0 149.0 337.8 393.2
Income taxes
Current 29.3 61.9 85.4 141.3
Future 4.3 (22.0) 13.6 (22.0)
-------------------------------------------------------------------------
Income taxes 33.6 39.9 99.0 119.3
-------------------------------------------------------------------------
Net earnings $ 85.4 $ 109.1 $ 238.8 $ 273.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted
earnings per share $ 1.04 $ 1.34 $ 2.92 $ 3.36
-------------------------------------------------------------------------
Weighted average number
of Common and Class A
Non-Voting Shares
outstanding 81,706,279 81,512,981 81,674,281 81,510,371
-------------------------------------------------------------------------
Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------------------------------------------
13 weeks ended, 39 weeks ended,
October 3, September October 3, September
(Dollars in millions) 2009 27, 2008 2009 27, 2008
-------------------------------------------------------------------------
(Restated - (Restated -
Note 2) Note 2)
Cash generated from (used for):
Operating activities
Net earnings $ 85.4 $ 109.1 $ 238.8 $ 273.9
Items not affecting
cash
Depreciation 48.5 41.6 143.0 123.4
Net provision for
loans receivable
(Note 3) 55.5 25.1 128.9 55.3
Amortization of
intangible assets 14.0 14.3 39.9 41.8
Future income taxes 4.3 (22.0) 13.6 (22.0)
Employee future
benefits expense
(Note 5) 1.5 1.6 4.5 4.8
Impairments on
property and equipment 0.7 1.4 1.5 1.7
Loss (Gain) on
disposals of property
and equipment - (0.1) 0.6 (4.1)
Impairment of other
long-term investments
(Note 13) - - 0.5 1.0
Other (4.7) (1.8) (3.7) (1.5)
Changes in fair
value of derivative
instruments (18.7) 1.7 (23.1) 16.5
Securitization
loans receivable (10.2) (13.8) (31.3) (40.3)
Gain on sales of
loans receivable
(Note 3) (8.7) (17.4) (31.8) (63.5)
-------------------------------------------------------------------------
167.6 139.7 481.4 387.0
-------------------------------------------------------------------------
Changes in other
working capital
components (227.6) (287.2) (420.9) (659.6)
-------------------------------------------------------------------------
Cash (used for)
generated from
operating activities (60.0) (147.5) 60.5 (272.6)
-------------------------------------------------------------------------
Investing activities
Net securitization
of loans receivable (422.2) (382.1) (420.7) 240.3
Short-term investments 3.6 - (168.0) -
Additions to property
and equipment (49.4) (99.7) (168.0) (325.1)
Investment in loans
receivable, net (75.1) (56.3) (82.8) (35.4)
Other long-term
investments (0.2) - (50.6) -
Additions to
intangible assets (11.2) (21.8) (48.8) (50.2)
Other (4.2) (1.6) (5.9) (3.5)
Purchases of stores (1.1) (10.4) (3.8) (28.5)
Long-term receivables
and other assets 1.1 9.6 (1.6) 1.5
Proceeds on disposition
of property and equipment 9.1 215.0 12.3 231.1
Proceeds on disposition
of intangible assets - (0.5) - (0.5)
-------------------------------------------------------------------------
Cash (used for) generated
from investing activities (549.6) (347.8) (937.9) 29.7
-------------------------------------------------------------------------
Financing activities
Net change in deposits 158.6 120.9 1,182.3 185.7
Issuance of long-term
debt (Note 4) - - 200.1 0.2
Class A Non-Voting Share
transactions 4.4 (0.5) 6.9 1.0
Repayment of
long-term debt (6.4) (1.6) (13.5) (154.3)
Dividends (17.2) (17.1) (51.6) (49.3)
Commercial paper - 367.2 - 367.2
-------------------------------------------------------------------------
Cash generated from
financing activities 139.4 468.9 1,324.2 350.5
-------------------------------------------------------------------------
Cash (used) generated
in the period (470.2) (26.4) 446.8 107.6
Cash and cash equivalents,
beginning of period 1,346.0 28.5 429.0 (105.5)
-------------------------------------------------------------------------
Cash and cash
equivalents, end of
period (Note 9) $ 875.8 $ 2.1 $ 875.8 $ 2.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income (Unaudited)
-------------------------------------------------------------------------
13 weeks ended, 39 weeks ended,
October 3, September October 3, September
(Dollars in millions) 2009 27, 2008 2009 27, 2008
-------------------------------------------------------------------------
(Restated - (Restated -
Note 2) Note 2)
Net earnings $ 85.4 $ 109.1 $ 238.8 $ 273.9
Other comprehensive
income (loss), net of
taxes
Gain (loss) on
derivatives
designated as cash
flow hedges, net of
tax of $18.3 and
$23.5 (2008 - $8.1
and $12.2),
respectively (39.1) 14.3 (57.1) 22.3
Reclassification to
non-financial asset
of loss (gain) on
derivatives designated
as cash flow hedges,
net of tax of $2.0 and
$39.0 (2008 - $3.3 and
$8.4), respectively 4.1 (6.1) (75.0) 17.9
Reclassification to
earnings of loss (gain)
on derivatives
designated as cash
flow hedges, net of
tax of $0.3 and $1.0
(2008 - $0.6 and $2.8),
respectively (0.7) 1.3 (2.0) 6.0
-------------------------------------------------------------------------
Other comprehensive
(loss) income (35.7) 9.5 (134.1) 46.2
-------------------------------------------------------------------------
Comprehensive income $ 49.7 $ 118.6 $ 104.7 $ 320.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
-------------------------------------------------------------------------
39 weeks ended,
October 3, September
(Dollars in millions) 2009 27, 2008
-------------------------------------------------------------------------
(Restated -
Note 2)
Share capital
Balance, beginning of period $ 715.4 $ 700.7
Transactions, net (Note 6) 12.9 5.8
-------------------------------------------------------------------------
Balance, end of period $ 728.3 $ 706.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contributed surplus
Balance, beginning of period $ - $ 2.3
Transactions, net 0.1 (2.3)
-------------------------------------------------------------------------
Balance, end of period $ 0.1 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 238.8 273.9
Dividends (51.6) (51.3)
Repurchase of Class A Non-Voting Shares (6.1) (2.5)
-------------------------------------------------------------------------
Balance, end of period $ 2,934.6 $ 2,670.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 (134.1) 46.2
-------------------------------------------------------------------------
Balance, end of period $ (39.4) $ (3.8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings and accumulated other
comprehensive income (loss) $ 2,895.2 $ 2,667.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Balance Sheets (Unaudited)
-------------------------------------------------------------------------
(Dollars in millions) October 3, September January 3,
As at 2009 27, 2008 2009
-------------------------------------------------------------------------
(Restated - (Restated -
Note 2) Note 2)
ASSETS
Current assets
Cash and cash equivalents
(Note 9) $ 875.8 $ 2.1 $ 429.0
Short-term investments (Note 9) 190.9 - -
Accounts receivable 682.5 584.1 824.1
Loans receivable (Note 3) 2,164.1 1,314.6 1,683.4
Merchandise inventories 1,216.9 1,301.2 917.5
Income taxes recoverable 116.1 83.7 64.6
Prepaid expenses and deposits 70.1 56.3 40.2
Future income taxes 75.6 53.6 20.2
-------------------------------------------------------------------------
Total current assets 5,392.0 3,395.6 3,979.0
-------------------------------------------------------------------------
Long-term receivables and other
assets (Note 3) 184.6 231.5 262.1
Other long-term investments, net
(Note 13) 52.4 6.6 25.2
Goodwill 71.6 72.2 70.7
Intangible assets 262.2 232.7 247.9
Property and equipment, net 3,184.0 3,138.7 3,198.9
-------------------------------------------------------------------------
Total assets $ 9,146.8 $ 7,077.3 $ 7,783.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Commercial paper $ - $ 367.2 $ -
Deposits (Note 10) 1,005.7 186.5 540.7
Accounts payable and other 1,396.8 1,417.5 1,444.2
Current portion of long-term debt 453.9 10.5 14.8
-------------------------------------------------------------------------
Total current liabilities 2,856.4 1,981.7 1,999.7
-------------------------------------------------------------------------
Long-term debt 1,116.1 1,370.3 1,373.5
Future income taxes 49.5 49.6 44.7
Long-term deposits (Note 10) 1,318.7 114.5 598.7
Other long-term liabilities 182.5 187.6 202.2
-------------------------------------------------------------------------
Total liabilities 5,523.2 3,703.7 4,218.8
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 6) 728.3 706.5 715.4
Contributed surplus 0.1 - -
Accumulated other comprehensive
income (loss) (39.4) (3.8) 97.2
Retained earnings 2,934.6 2,670.9 2,752.4
-------------------------------------------------------------------------
Total shareholders' equity 3,623.6 3,373.6 3,565.0
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 9,146.8 $ 7,077.3 $ 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, September December 29,
2009 27, 2008 2007
--------------------------------------
Retained earnings $ (3.1) $ (3.4) $ (4.3)
Long-term receivables and other
assets (3.3) (4.0) (4.6)
Intangible assets 189.5 180.2 174.0
Property and equipment (190.9) (181.3) (175.8)
Income taxes recoverable 0.4 0.0 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 39 weeks ended September 27, 2008
was a decrease of $0.8 million and $1.9 million, respectively. The
retrospective impact of the write-off of deferred development costs
on cost of merchandise sold and all other operating expenses for the
13 weeks and 39 weeks ended September 27, 2008 was an increase of
$nil and $0.4 million, respectively. The retrospective impact on net
earnings for the 13 weeks ended September 27, 2008 was an increase of
$0.5 million, or $0.01 per share, and for the 39 weeks ended
September 27, 2008 was an increase of $0.9 million, or $0.01 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 other
comprehensive income (AOCI).
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
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. The amendment included a paragraph
relating to embedded prepayment options. 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
International Accounting Standards Boards (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.
Financial Instruments - Impairment of Debt Instruments
In August 2009, the CICA amended CICA HB 3855 - Financial Instruments
- Recognition and Measurement and concurrently CICA HB 3025 -
Impaired Loans. These amendments affect the classifications that are
required or allowed for debt instruments, as well as the impairment
model for held-to-maturity financial assets. The amendments are
effective for annual financial statements relating to fiscal years
beginning on or after November 1, 2008. 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)
--------------------------------------
October 3, September January 3,
2009 27, 2008 2009
------------ ------------ ------------
Total net managed credit card
loans $ 3,826.8 $ 3,677.6 $ 3,780.4
Credit card loans sold (1,798.6) (2,471.2) (2,216.0)
------------ ------------ ------------
Credit card loans held 2,028.2 1,206.4 1,564.4
Total net managed personal
loans(2) 43.8 101.1 83.8
Personal loans sold - - -
------------ ------------ ------------
Personal loans held 43.8 101.1 83.8
Total net managed mortgage
loans(3) 164.7 102.3 138.8
------------ ------------ ------------
Total net managed line of
credit loans 16.9 22.1 20.6
------------ ------------ ------------
Total loans receivable 2,253.6 1,431.9 1,807.6
Less: long-term portion(4) (89.5) (117.3) (124.2)
------------ ------------ ------------
Current portion of loans
receivable $ 2,164.1 $ 1,314.6 $ 1,683.4
------------ ------------ ------------
------------ ------------ ------------
Average balances
($ in millions) for the 39 weeks ended
-------------------------
October 3, September
2009 27, 2008
------------ ------------
Total net managed credit card
loans $ 3,711.4 $ 3,571.1
Credit card loans sold (2,166.0) (2,704.6)
------------ ------------
Credit card loans held 1,545.4 866.5
Total net managed personal
loans(2) 62.0 121.5
Personal loans sold - (23.7)
------------ ------------
Personal loans held 62.0 97.8
Total net managed mortgage
loans(3) 160.7 61.4
------------ ------------
Total net managed line of
credit loans 18.7 24.5
------------ ------------
Total loans receivable $ 1,786.8 $ 1,050.2
Less: long-term portion(4) ------------ ------------
------------ ------------
(1) Amounts shown are net of allowance for credit losses.
(2) Personal loans are unsecured loans that are provided to qualified
existing credit card holders 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 39
weeks ended October 3, 2009 were $55.5 million (2008 - $25.1 million)
and $128.9 million (2008 - $55.3 million), respectively. Net credit
losses for the total managed portfolio for the 13 weeks and 39 weeks
ended October 3, 2009 were $89.9 million (2008 - $60.6 million) and
$251.5 million (2008 - $181.6 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 39 weeks
ended October 3, 2009 was $1.5 million (2008 - $1.6 million) and
$4.5 million (2008 - $4.8 million), respectively.
6. Share Capital
($ in millions) October 3, September January 3,
2009 27, 2008 2009
------------ ------------ ------------
Authorized
3,423,366 Common Shares
100,000,000 Class A Non-Voting
Shares
Issued
3,423,366 Common Shares
(September 27, 2008 -
3,423,366) $ 0.2 $ 0.2 $ 0.2
78,319,878 Class A Non-Voting
Shares (September 27, 2008 -
78,048,305) 728.1 706.3 715.2
------------ ------------ ------------
$ 728.3 $ 706.5 $ 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:
39 weeks ended 39 weeks ended
($ in millions) October 3, 2009 September 27, 2008
------------------------- -------------------------
Number $ Number $
------------ ------------ ------------ ------------
Shares outstanding
at the beginning
of the period 78,178,066 715.2 78,048,062 700.5
Issued 622,612 29.8 495,043 29.8
Repurchased (480,800) (22.9) (494,800) (28.8)
Excess of repurchase
price over issue
price - 6.0 - 4.8
------------ ------------ ------------ ------------
Shares outstanding
at the end of the
period 78,319,878 728.1 78,048,305 706.3
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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 39 weeks ended October
3, 2009, $1.7 million and $3.7 million of compensation expense was
recorded for the 2009 PSUs, respectively.
8. Segmented Information - Statement of Earnings
---------------------------------------------------------------------
13 weeks 39 weeks
ended ended
13 weeks September 39 weeks September
ended 27, 2008 ended 27, 2008
October 3, (Restated - October 3, (Restated -
($ in millions) 2009 Note 2) 2009 Note 2)
---------------------------------------------------------------------
Gross operating
revenue
CTR $ 1,408.5 $ 1,399.3 $ 4,057.8 $ 4,032.7
Financial Services 222.0 197.8 672.2 608.0
Petroleum 403.6 519.3 1,116.3 1,456.9
Mark's 164.2 168.7 493.5 516.8
Eliminations (32.4) (27.6) (91.0) (80.9)
---------------------------------------------------
Total gross
operating
revenue $ 2,165.9 $ 2,257.5 $ 6,248.8 $ 6,533.5
---------------------------------------------------------------------
---------------------------------------------------------------------
Earnings (loss)
before income
taxes
CTR $ 95.6 $ 94.0 $ 223.6 $ 222.7
Financial
Services 18.7 47.6 93.5 146.2
Petroleum 8.5 7.5 22.3 20.5
Mark's (3.8) (0.1) (1.6) 3.8
---------------------------------------------------
Total earnings
before income
taxes 119.0 149.0 337.8 393.2
Income taxes 33.6 39.9 99.0 119.3
---------------------------------------------------
Net earnings $ 85.4 $ 109.1 $ 238.8 $ 273.9
---------------------------------------------------------------------
---------------------------------------------------------------------
Net Interest
expense(1)
CTR $ 17.8 $ 15.6 $ 56.7 $ 47.7
Financial
Services 19.0 2.3 46.2 5.8
Mark's 0.5 1.1 1.4 3.2
---------------------------------------------------
Total interest
expense $ 37.3 $ 19.0 $ 104.3 $ 56.7
---------------------------------------------------------------------
---------------------------------------------------------------------
Depreciation and
amortization
expense
CTR $ 47.8 $ 43.0 $ 140.8 $ 127.5
Financial
Services 3.0 2.8 8.6 8.2
Petroleum 4.6 4.2 13.3 12.3
Mark's 7.1 5.9 20.2 17.1
---------------------------------------------------
Total depreciation
and amortization
expense $ 62.5 $ 55.9 $ 182.9 $ 165.1
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Net interest expense includes interest on short-term and long-
term debts, 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 39 weeks ended October 3, 2009 was $32.0 million
(2008 - $18.6 million) and $90.5 million (2008 - $57.6 million),
respectively.
Segmented Information - Total Assets
---------------------------------------------------------------------
September January 3,
27, 2008 2009
October 3, (Restated - (Restated -
($ in millions) 2009 Note 2) Note 2)
---------------------------------------------------------------------
CTR $ 6,248.7 $ 6,208.1 $ 5,801.8
Financial Services 3,804.5 2,143.8 2,550.6
Petroleum 274.5 281.5 352.9
Mark's 613.5 567.7 509.0
Eliminations (1,794.4) (2,123.8) (1,430.5)
---------------------------------------------------------------------
Total $ 9,146.8 $ 7,077.3 $ 7,783.8
---------------------------------------------------------------------
---------------------------------------------------------------------
9. Cash and Cash Equivalents
The components of cash and cash equivalents are:
October 3, September January 3,
($ in millions) 2009 27, 2008 2009
------------ ------------ ------------
Cash (bank overdraft) $ (59.7) $ (58.0) $ 59.2
Line of credit borrowings - (49.8) -
Cash equivalents 935.5 109.9 369.8
------------ ------------ ------------
Cash and cash equivalents $ 875.8 $ 2.1 $ 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.
Cash from broker deposits is raised 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 October 3, 2009 were $1,733.5 million (2008 -
$142.5 million).
Retail deposits consist of high interest savings deposits, retail
GICs and tax-free savings deposits. Total retail deposits outstanding
at October 3, 2009 were $590.9 million (2008 - $158.5 million).
11. Capital Management Disclosures
The Company's objectives when managing capital are:
- minimizing the after-tax cost of capital;
- maintaining healthy liquidity reserves and access to capital; and
- maintaining flexibility in capital structure to ensure the ongoing
ability to execute the Strategic Plan.
The current economic environment has not changed the Company's
objectives in managing capital.
Management includes the following items in its definition of capital:
October 3, % of September % of January 3, % of
($ in millions) 2009 total 27, 2008 total 2009 total
------------------ ----------------- -----------------
Current portion
of long-term
debt $ 453.9 6.9% $ 10.5 0.2% $ 14.8 0.3%
Long-term debt 1,116.1 17.0% 1,370.3 28.2% 1,373.5 25.2%
Long-term
deposits 1,318.7 20.1% 114.5 2.4% 598.7 11.0%
Other long-term
liabilities(1) - - % 0.3 0.0% 3.2 0.1%
Share capital 728.3 11.1% 706.5 14.5% 715.4 13.1%
Contributed
surplus 0.1 - % - - % - - %
Components of
accumulated
other
comprehensive
loss(2) - - % (12.1) (0.3)% - - %
Retained
earnings 2,934.6 44.9% 2,670.9 55.0% 2,752.4 50.3%
------------------ ----------------- -----------------
Net capital
under
management $6,551.7 100.0% $4,860.9 100.0% $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
historically monitored 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,
which is 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
whereby 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 key 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; and
- achieving the lowest overall cost of capital consistent with
preserving the appropriate mix of capital elements to meet target
capitalization levels.
The Bank's total capital consists of two tiers of capital approved
under OSFI's current regulatory capital guidelines. As at September
30, 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 percent
for Tier 1 and Total capital ratios. The Bank is within its internal
maximum target for the assets to capital multiple. OSFI's minimum
Tier 1 and Total capital ratios for Canadian banks are 7 percent and
10 percent, respectively. During the 3 months ended September 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)
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October 3, September October 3, September
($ in millions) 2009 27, 2008 2009 27, 2008
---------------------------------------------------
Balance, beginning
of year $ 51.8 $ 51.5 $ 3.5 $ 2.7
Provision for
credit losses 124.5 47.1 4.3 8.2
Recoveries 13.7 10.7 0.6 0.4
Write-offs (110.9) (59.3) (5.8) (7.5)
---------------------------------------------------
Balance, end of
period $ 79.1 $ 50.0 $ 2.6 $ 3.8
---------------------------------------------------
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Accounts receivable Total
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October 3, September October 3, September
($ in millions) 2009 27, 2008 2009 27, 2008
---------------------------------------------------
Balance, beginning
of year $ 3.3 $ 5.0 $ 58.6 $ 59.2
Provision for
credit losses 0.9 0.8 129.7 56.1
Recoveries 0.2 0.3 14.5 11.4
Write-offs (2.2) (2.5) (118.9) (69.3)
---------------------------------------------------
Balance, end of
period $ 2.2 $ 3.6 $ 83.9 $ 57.4
---------------------------------------------------
---------------------------------------------------
(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 $ 1,015.1 $ 219.9 $ 280.8 $ 296.1
Accounts payable
and other 1,373.6 - - -
Long-term debt 453.9 9.0 21.0 8.2
Interest
payment(1) 143.7 102.2 99.6 98.2
Other - 0.8 - -
---------------------------------------------------
Total $ 2,986.3 $ 331.9 $ 401.4 $ 402.5
---------------------------------------------------
---------------------------------------------------
($ in millions) 5 years Thereafter Total
--------------------------------------
Deposits $ 521.9 $ - $ 2,333.8
Accounts payable
and other - - 1,373.6
Long-term debt 6.9 1,063.1 1,562.1
Interest
payment(1) 110.7 651.5 1,205.9
Other 5.2 - 6.0
--------------------------------------
Total $ 644.7 $ 1,714.6 $ 6,481.4
--------------------------------------
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(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.
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 were two transactions of the notes to date in the open
market in Canada in 2009 which Management did not consider to be
representative of market value. As a result, a valuation model is
used to determine fair value. The discount rate used in the valuation
model was updated with more current information in the quarter.
14. Merchandise Inventory
Included in "cost of merchandise sold and all other operating
expenses except for the undernoted items" for the 13 weeks and 39
weeks ended October 3, 2009 is $1,473.6 million (2008 -
$1,604.6 million) and $4,185.1 million (2008 - $4,610.1 million),
respectively, of inventory recognized as an expense, which included
$16.0 million (2008 - $16.0 million) and $41.4 million (2008 -
$48.9 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 October 3,
2009 of $32.4 million (2008 - $57.1 million) and made interest
payments of $28.4 million (2008 - $14.8 million). For the 39 weeks
ended October 3, 2009, the Company paid income taxes of
$136.6 million (2008 - $170.6 million) and made interest payments of
$110.8 million (2008 - $73.2 million), including $31.8 million
related to the settlement of delayed start swaps.
During the 13 weeks and 39 weeks ended October 3, 2009, property and
equipment were acquired at an aggregate cost of $50.5 million (2008 -
$109.5 million) and $140.2 million (2008 - $286.7 million),
respectively. The amount of property and equipment acquired that is
included in accounts payable and other at October 3, 2009 was
$11.8 million (2008 - $27.1 million).
During the 13 weeks and 39 weeks ended October 3, 2009, intangible
software was acquired at an aggregate cost of $13.7 million (2008 -
$21.7 million) and $51.7 million (2008 - $50.3 million),
respectively. The amount of intangible software acquired that is
included in accounts payable and other at October 3, 2009 was
$3.0 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. If adversely
decided, the present total aggregate exposure to CTB is expected to
be approximately $15.0 million.
In June 2009, 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, although 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.
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 $192.8 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 $9.1 million due
to the retroactive change in legislation relating to the taxation of
gains realized from the disposition of shares during 2006 and 2007
and revision to the prior year's estimated tax expense.
18. Subsequent Events
On September 21, 2009, the Company announced that it exercised its
right to redeem all $150 million of outstanding 12.10% debentures
(the debentures), which were to mature on May 10, 2010. The
debentures were redeemed on October 22, 2009 (the redemption date).
As a result of this redemption, the Company paid a redemption premium
of $9.4 million on the redemption date. This will be included in
long-term interest expense in the quarter ending January 2, 2010.
The debentures were hedged by interest rate swaps that were to mature
on May 10, 2010. Hedge accounting for these swaps ceased upon the
redemption announcement. As a result, $3.3 million of cumulative
hedge accounting adjustment that was previously included in the
carrying value of the debentures was amortized to earnings over the
debentures' remaining term to maturity. As a result, a $1.6 million
benefit is included in long-term interest expense in the quarter
ended October 3, 2009 and a $1.7 million benefit will be recorded in
the quarter ending January 2, 2010.
Effective November 6, 2009, the Company sold its mortgage portfolio,
totaling approximately $162 million, to the National Bank of Canada.
The transition of customer accounts will be completed by early 2010.
The Company estimates it will incur a pre-tax loss of approximately
$6 million in the quarter ending January 2, 2010 in relation to wind
down and other costs, which will be included in cost of merchandise
sold and other operating expenses.
Interest Coverage Exhibit to the Consolidated Financial Statements
(unaudited)
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The Company's long-term interest requirements for the 53 weeks ended