Canadian Tire releases third quarter earnings - Retail sales up 7.3%; adjusted net earnings up 12.7%
Consolidated 2008 2007(2)
Highlights(1): 3rd Quarter 3rd Quarter Change
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Retail sales $2.61 billion $2.43 billion 7.3%
Gross operating revenue $2.26 billion $2.05 billion 10.2%
Adjusted earnings before
income taxes (excludes
non-operating gains and
losses)(3) $158.4 million $153.2 million 3.4%
Net earnings $108.6 million $102.2 million 6.3%
Adjusted net earnings
(excludes non-operating
gains and losses)(3) $115.5 million $102.5 million 12.7%
Basic earnings per share $1.33 $1.25 6.3%
Adjusted basic earnings
per share (excludes
non-operating gains and
losses)(3) $1.42 $1.26 12.7%
(1) All dollar figures in this table are rounded.
(2) The 2007 earnings figures have been restated for implementation, on a
retrospective basis, of the CICA HB 3031-Inventories. Please refer to
Note 2 in the Consolidated Financial Statements.
(3) Non-GAAP measure. Please refer to section 14.0 of Management's
Discussion and Analysis.TORONTO, Nov. 6 /CNW/ - Canadian Tire Corporation, Limited (CTC, CTC.a)
released its third quarter results today. In a simultaneous news release, the
Company announced the appointment of Stephen Wetmore as its next president and
CEO effective the beginning of 2009. Tom Gauld will retire from the role at
the end of this year and will continue as a member of the Board of Directors.
Despite challenging economic conditions, the company reported a 7.3%
increase in retail sales and a 6.3% increase in net earnings compared to the
same period in 2007. Adjusted net earnings were $115.5 million, a 12.7%
increase over the previous year. The growth in adjusted earnings during the
quarter reflects strong quarterly performance in Canadian Tire Retail and
Financial Services, as well as benefits from lower effective tax rates.
"Given the challenging market conditions, we are pleased with third
quarter sales and the continuing strong sales momentum during the month of
October," said Tom Gauld, president and CEO, Canadian Tire Corporation. "The
positive sales trends in Canadian Tire Retail stores reflect improvements in
our pricing and promotional strategies which will continue through the fourth
quarter. Financial Services' earnings growth is also expected to remain strong
throughout the remainder of 2008 reflecting the impact of our recent card
relaunch and stable aging trends in past due accounts."Business Overview
CANADIAN TIRE RETAIL (CTR)
Q3 Q3 YTD YTD
($ in millions) 2008 2007(1) Change 2008 2007(1) Change
-------------------------------------------------------------------------
Retail
sales(2) $1,860.3 $1,787.4 4.1% $5,253.6 $5,171.9 1.6%
Same store
sales(3)
(year-over-
year % change) 2.0% (2.7)% (0.5)% 0.0%
Gross
operating
revenue $1,399.3 $1,304.0 7.3% $4,032.7 $3,889.8 3.7%
Net shipments
(year-over-
year % change) 7.6% 1.4% 3.8% 3.1%
Earnings
before income
taxes and
minority
interest $94.0 $94.9 (1.0)% $222.6 $221.4 0.6%
-------------------------------------------------------------------------
Less adjustment
for:
Gain/loss on
disposals of
property and
equipment(4) (0.3) 6.6 3.7 10.3
Former CEO
retirement
obligations 0.2 0.2 1.1 (6.5)
-------------------------------------------------------------------------
Adjusted
earnings
before income
taxes and
minority
interest(5) $94.1 $88.1 6.9% $217.8 $217.6 0.1%
-------------------------------------------------------------------------
(1) 2007 figures have been restated for implementation, on a
retrospective basis, of the CICA HB 3031-Inventories. Please refer to
Note 2 in the Consolidated Financial Statements.
(2) Includes sales from Canadian Tire stores, PartSource stores, sales
from CTR's online web store and the labour portion of CTR's auto
service sales.
(3) Same store sales include sales from all stores that have been open
for more than 53 weeks.
(4) Includes fair market value adjustments and impairments on property
and equipment.
(5) Non-GAAP measure. Please refer to section 14.0 in Management's
Discussion and Analysis.CTR's retail sales increased 4.1% over the same quarter in 2007
reflecting an increase in sales across all three lines of business. CTR
experienced a 20% increase in fall/winter seasonal categories driven by strong
early sales in winter tires and snow throwers and an increase across kitchen
and storage and organization. Overall same store sales were up 2.0% compared
to the third quarter in 2007.
CTR's third quarter adjusted earnings before taxes were $94.1 million, up
6.9% compared to a year ago due to strong shipment growth.
CTR opened three new stores in the quarter, all of which were replacement
stores. Two of the stores were CTR's new small store format with a fully
integrated Mark's Work Wearhouse.
During the fourth quarter, CTR will open the first two Smart stores in
Welland and Orleans, Ontario, which are expected to significantly enhance the
customer shopping experience and showcase core CTR growth categories in a new
and exciting way.
PartSource experienced another quarter of sales growth driven primarily
by strong commercial sales. PartSource acquired six new corporate stores, two
of which were converted to the PartSource brand at the end of the quarter.
PartSource also converted one franchise store to a corporate store and opened
one new hub store during the quarter, bringing the network total to 82
locations.CANADIAN TIRE PETROLEUM (Petroleum)
Q3 Q3 YTD YTD
($ in millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Sales volume
(millions of
litres) 414.5 434.3 (4.6)% 1,257.9 1,287.0 (2.3)%
Retail sales $550.2 $451.3 21.9% $1,541.1 $1,308.6 17.8%
Gross operating
revenue $519.3 $424.0 22.5% $1,456.9 $1,232.4 18.2%
Earnings before
income taxes $7.5 $7.9 (5.5)% $20.5 $16.8 22.3%
-------------------------------------------------------------------------
Less adjustment
for:
Loss on
disposals of
property and
equipment(1) (0.1) (0.7) (0.3) (2.0)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(2) $7.6 $8.6 (12.2)% $20.8 $18.8 11.0%
-------------------------------------------------------------------------
(1) Includes asset impairment losses.
(2) Non-GAAP measure. Please refer to section 14.0 in Management's
Discussion and Analysis.Higher fuel prices drove a 4.6% decrease in gasoline sales volumes.
Petroleum's gross operating revenue totaled $519.3 million during the
quarter, a 22.5% increase over the $424.0 million in the comparable 2007
period, reflecting a significant increase in pump prices during the quarter
and a 10.7% increase in convenience store sales.
Petroleum recorded pre-tax earnings of $7.5 million compared to $7.9
million a year ago, based on continued stable margins and good expense
management. While adjusted earnings were down 12.2% from $8.6 million this
time last year, compared to historical norms, this represents a strong
quarterly performance.
Petroleum opened two new gas stations and rebranded two gas stations
during the quarter. The business also refurbished seven gas stations and
rebuilt one existing location during the period.MARK'S WORK WEARHOUSE (Mark's)
Q3 Q3 YTD YTD
($ in millions) 2008 2007(1) Change 2008 2007(1) Change
-------------------------------------------------------------------------
Total retail
sales $194.5 $189.5 2.6% $600.1 $589.1 1.9%
Same store
sales(2)
(year-over-
year % change) (1.0)% 0.6% (2.0)% 7.2%
Gross operating
revenue(3) $168.7 $159.8 5.5% $516.8 $499.1 3.5%
-------------------------------------------------------------------------
Earnings (loss)
before income
taxes $(0.3) $6.2 (104.1)% $4.2 $31.0 (86.3)%
-------------------------------------------------------------------------
Less adjustment
for:
Loss on
disposal of
property and
equipment (0.3) (0.2) (0.4) (0.8)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(4) $0.0 $6.4 (99.2)% $4.6 $31.8 (85.4)%
-------------------------------------------------------------------------
(1) 2007 figures have been restated for implementation, on a
retrospective basis, of the CICA HB 3031-Inventories. Please refer to
Note 2 in the Consolidated Financial Statements.
(2) Mark's same store sales exclude new stores, stores not open for the
full period in each year and store closures.
(3) Gross operating revenue includes retail sales at corporate stores
only.
(4) Non-GAAP measure. Please refer to section 14.0 in Management's
Discussion and Analysis.Mark's third quarter total retail sales grew to $194.5 million, a modest
increase of 2.6% from the $189.5 million recorded a year ago. While sales
overall were challenging during the quarter, Mark's mature industrial wear
business led corporate store sales growth, with a 10.1% increase over last
year driven principally by men's industrial footwear and accessories.
Adjusted pre-tax earnings were $6.4 million lower than the same 2007
period due to lower margins related to promotional activity to clear seasonal
merchandise and continued investments in network expansion and longer term
growth and productivity initiatives.
During the quarter, Mark's opened three new stores, bought back four
franchise stores, expanded one store and relocated seven stores.CANADIAN TIRE FINANCIAL SERVICES (Financial Services)
Q3 Q3 YTD YTD
($ in millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Total managed
portfolio
end of
period $4,002.3 $3,717.4 7.7%
Gross
operating
revenue $197.8 $187.2 5.6% $608.0 $555.6 9.4%
Earnings
before
income taxes $47.0 $43.7 7.4% $144.4 $157.7 (8.5)%
-------------------------------------------------------------------------
Less adjustment
for:
Gain on
disposal/
redemption
of shares - - - 18.4
Net effect
of
securitization
activities(1) (9.1) (6.3) 7.7 (3.8)
Loss on
disposals of
property and
equipment (0.6) (0.1) (0.6) (0.3)
-------------------------------------------------------------------------
Adjusted
earnings
before income
taxes(2) $56.7 $50.1 13.0% $137.3 $143.4 (4.3)%
-------------------------------------------------------------------------
(1) Includes initial gain/loss on the sale of loans receivable,
amortization of servicing liability, change in securitization reserve
and gain/loss on reinvestment.
(2) Non-GAAP measure. Please refer to section 14.0 in Management's
Discussion and Analysis in our 2007 Financial Report.Financial Services' total managed portfolio of loans receivable was $4.0
billion at the end of the third quarter, a 7.7% increase over the $3.7 billion
portfolio at the end of the comparable 2007 period.
Financial Services' gross operating revenue was $197.8 million in the
quarter, a 5.6% increase over the $187.2 recorded in the prior year.
Adjusted pre-tax earnings for the quarter were $56.7 million or 13.0%
higher than the third quarter of 2007. The increase in earnings in the third
quarter was due to higher receivable balances in the quarter and tight
controls on operating expenses.
The net write-off rate for the total managed portfolio on a rolling
12-month basis was 6.04%, compared to 5.87% in the comparable 2007 period.
Overall aging of past due accounts is comparable to the same period in 2007
and 2006.
For Financial Services, a number of new actions have been taken to
mitigate future credit risk exposure which may arise due to current economic
conditions including: reducing credit limits for cardholders; enhancing
predictive scorecards to identify high risk customer behaviour; and further
enhancing collection strategies.
Financial Services continued its investment in the retail banking pilot
and at quarter-end had more than $128 million in high rate savings,
approximately $90 million in broker deposits, (net of liquidity reserves)
which on average, have a maturity of three years and $102 million in
mortgages.
2008 EARNINGS AND CAPITAL FORECAST
The Company confirms its expectation that earnings per share for 2008
will be in the range of $4.75 to $5.05, excluding non-operating items.
The fourth quarter of the year is the most significant for CTR and Mark's
due to the concentration of sales and shipment activity for the Christmas
season. While it is reasonable to expect that the current economic environment
could affect consumer behaviour, the quarter has started strongly for CTR,
with strong sales and same store sales performance in October resulting from
continued improvements in pricing and promotional activity.
As a result of the Corporation's long-standing currency hedging programs,
CTR's product purchasing in US funds will be largely sheltered from the recent
significant weakening of the Canadian dollar for the balance of 2008 and well
into 2009.
Ongoing effective management of credit risk points to strong fourth
quarter earnings for Financial Services based on the anticipated level of
provisions necessary for doubtful accounts. Expected growth from the card
relaunch earlier this year and very effective expense management will also
contribute to earnings growth.
Should economic conditions continue to deteriorate, rolling write off
rates may be outside the normal range of 5.0% to 6.0%. However, because of
ongoing productivity initiatives it is anticipated that returns on receivables
will remain at the upper end of the targeted range of 4.5% to 5.0% for 2008.
Total capital commitments for 2008 have been reduced to approximately
$543 million on a gross basis. As previously announced, two sale/leaseback
transactions, including a total of 13 CTR properties in locations across the
country, were completed for proceeds of $214 million in the third quarter.
FUNDING UPDATE
While overall credit market conditions in Canada remain challenging, the
Corporation has substantial sources of liquidity to support its retail and
financial services growth plans, including committed bank lines totaling
approximately $1.22 billion from major Canadian and other banks. These credit
facilities are committed until close to the end of fiscal 2009 and are
currently renewed on a quarterly basis.
In addition to the above bank lines, the following additional sources of
funding contribute to a strong liquidity position:- Continued growth in high rate savings and broker deposits as part of
Financial Services banking activities;
- An authorized medium term note program of up to $750 million of which
$300 million has been utilized; and
- An authorized commercial paper program of $800 million, which is
backed dollar for dollar by the above noted bank lines, in support of
both Glacier Credit Card Trust ("Glacier") and the Corporation of
which $367 million was outstanding at the end of the quarterThe broker deposit channel makes Canadian Tire Bank non-cashable GIC's,
with 1 to 5 year terms, available to customers of established deposit brokers.
Broker deposits, which have grown, as of November 4th to $382 million
(net of liquidity reserves), have reduced the Corporation's dependency on the
securitization market for longer term funding.
In addition to all of these sources of funding the Corporation continues
to look at creating additional financial flexibility through:- The addition of further committed bank lines for which it is in
active discussion with its current bankers and other lenders.
- Select real estate transactions at cost effective rates.For Glacier, the 2003 five year term notes totaling $570 million mature
in November 2008 and will be repaid in late November from funds already on
deposit. In terms of refinancing, the asset-backed term securitization market
in Canada is currently inactive due to market conditions, Glacier does,
however anticipate being able to access this market when conditions improve,
based on the quality of the assets held by the Trust and the past performance
of the program.
As a result of current market conditions, the cost of funding for all
Canadian corporations has increased. However, as at the end of the quarter,
approximately 93% of the Corporation's and Glacier's funding rates were fixed,
thus sheltering it to a substantial degree from the impact of this cost
increase. Because of this significant fixed component of funding needs,
management estimates that the total impact on an annualized basis of expected
current or future funding cost increases, due to higher rates and fees, is not
material to the Corporation's consolidated earnings.
FORWARD-LOOKING STATEMENTS
This disclosure contains statements that are forward-looking. Actual
results or events may differ materially from those forecasted in this
disclosure because of the risks and uncertainties associated with Canadian
Tire's business and the general economic environment. Risks and uncertainties
are disclosed in other public filings by the Company, such as Management's
Discussion and Analysis ("the MD&A") and the 2007 Financial Report and
include, but are not limited to: changes in interest, currency exchange and
tax rates; the ability of Canadian Tire to attract and retain quality
employees, Associate Dealers, Petroleum agents and PartSource and Mark's Work
Wearhouse store operators and franchisees; and the willingness of customers to
purchase the Company's merchandise, financial products and services.
Risk factors associated with the assumptions that underlie Canadian
Tire's forecasted performance in 2008 that have the potential to affect the
operating performance and results of the Company's divisions are outlined in
Section 11.2 of the MD&A.
The Company has developed its 2008 forecast on the assumption that there
will not be a material deviation in the risks described in the MD&A compared
to the current operating environment. The Company cannot provide any assurance
that forecasted financial or operational performance will actually be
achieved, or if it is, that it will result in an increase in the price of
Canadian Tire shares.
REVIEW BY BOARD OF DIRECTORS
The Canadian Tire Board of Directors, on the recommendation of its Audit
Committee, has approved the contents of this disclosure.
CONFERENCE CALL
Canadian Tire will conduct a conference call to discuss information
included in this news release and related matters at 4:30 p.m. EDT on
Thursday, November 6th, 2008. The conference call will be available
simultaneously and in its entirety to all interested investors and the news
media through a webcast at http://investor.relations.canadiantire.ca, and will
be available through replay at this website for 12 months.
Canadian Tire Corporation, Limited (TSX: CTC.a, CTC), operates more than
1,180 general merchandise and apparel retail stores and gas stations in an
inter-related network of businesses engaged in retail, financial services and
petroleum. Canadian Tire Retail, Canada's most shopped general merchandise
retailer, with 473 stores operated by dealers across Canada offers a unique
mix of products and services through three specialty categories in which the
organization is the market leader - Automotive, Sports and Leisure, and Home
Products. www.canadiantire.ca offers Canadians the opportunity to shop online.
PartSource is an automotive parts specialty chain with 82 stores designed to
meet the needs of purchasers of automotive parts - professional automotive
installers and serious do-it-yourselfers. Canadian Tire Petroleum is one of
the country's largest and most productive independent retailers of gasoline,
operating 269 gas bars, 262 convenience stores and kiosks, and 74 car washes.
Mark's Work Wearhouse is one of the country's leading apparel retailers
operating 364 stores in Canada. Under the Clothes that Work™ marketing
strategy, Mark's sells apparel and footwear in work, work-related, casual and
active-wear categories, as well as health-care and business-to-business
apparel. www.marks.com offers Canadians the opportunity to shop for Mark's
products online. Canadian Tire Financial Services has issued over five million
Canadian Tire MasterCard credit cards and also markets related financial
products and services for retail and petroleum customers. Canadians can also
access Financial Services online at www.ctfs.com. More than 57,000 Canadians
work across Canadian Tire's organization from coast-to-coast in the
enterprise's retail, financial services, and petroleum businesses.
Management's discussion and analysis (MD&A)
-------------------------------------------------------------------------
Introduction
This Management's Discussion and Analysis (MD&A) provides management's
perspective on our Company, our performance and our strategy for the future.
We, us, our, Company and Canadian Tire
In this document, the terms "we", "us", "our", "Company" and "Canadian
Tire" refer to Canadian Tire Corporation, Limited and its business units and
subsidiaries.
Review and approval by the Board of Directors
The Board of Directors, on the recommendation of its Audit Committee,
approved the contents of this MD&A on November 6, 2008.
Quarterly and annual comparisons in this MD&A
Unless otherwise indicated, all comparisons of results for the third
quarter (13 weeks ended September 27, 2008) are against results for the third
quarter of 2007 (13 weeks ended September 29, 2007).
Restated figures
Certain of the prior period's figures have been reclassified or restated
to conform to the current year's presentation or to be in accordance with the
adoption of the Canadian Institute of Chartered Accountants (CICA) new
accounting standards. Please refer to notes 2 and 16 in the Notes to the
Consolidated Financial Statements for further information.
Accounting estimates and assumptions
The preparation of consolidated financial statements that conform with
Canadian generally accepted accounting principles (GAAP) requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent liabilities at the date of the
Consolidated Financial Statements and the reported amounts of revenue and
expenses during the reporting period. We calculate our estimates using
detailed financial models that are based on historical experience, current
trends and other assumptions that are believed to be reasonable under the
circumstances. Actual results could differ from those estimates. In our
judgment, none of the estimates highlighted in note 1 in the Notes to the
Consolidated Financial Statements for the quarter ended September 27, 2008
requires us to make assumptions about matters that are highly uncertain. For
these reasons, none of the estimates is considered a "critical accounting
estimate" as defined in Form 51-102F1 published by the Ontario Securities
Commission.
Forward-looking statements
This MD&A contains statements that are forward-looking. Actual results or
events may differ materially from those forecasted in this disclosure because
of the risks and uncertainties associated with Canadian Tire's business and
the general economic environment. In addition to the principal risks
identified and discussed in detail in MD&A sections 9.0 to 9.3 of the 2007
Financial Report, there are other external factors that could affect our
results. These include, but are not limited to: changes in interest rates,
currency exchange rates and tax rates; the ability of Canadian Tire to attract
and retain quality employees, Dealers, Canadian Tire Petroleum™ (Petroleum)
agents and PartSource® and Mark's Work Wearhouse® (Mark's) store operators
and franchisees; and the willingness of customers to shop at our stores or
acquire our financial products and services. Please also refer to section 11.2
of this MD&A which identifies some of the operational risks that can affect
our businesses.
We cannot provide any assurance that forecasted financial or operational
performance will actually be achieved, or if it is, that it will result in an
increase in the price of Canadian Tire shares.
1.0 Our Company
1.1 Overview of the business
Canadian Tire has been in business for over 85 years, offering everyday
products and services to Canadians through its growing network of interrelated
businesses. Canadian Tire, our Dealers, store operators, franchisees and
Petroleum agents operate more than 1,180 general merchandise and apparel
retail stores and gas bars. The Canadian Tire Financial Services® (Financial
Services) division of the Company also markets a variety of financial services
to Canadians, primarily its proprietary Options® MasterCard®, personal
loans, lines of credit, insurance and warranty products, and a retail banking
pilot offering products to customers in certain test markets.
Canadian Tire's model of interrelated businesses provides market
differentiation and competitive advantage. Canadian Tire's businesses benefit
from the Company's key capabilities in merchandising, marketing and
advertising, supply chain and real estate, which enable us to achieve a
greater level of efficiency. Canadian Tire's primary loyalty program,
Canadian Tire 'Money'® - shared by Canadian Tire Retail (CTR), Financial
Services and Petroleum - is an example of how interrelationships between the
businesses create a strong competitive advantage for the Company.
The success of the loyalty program has proven - through high customer
acceptance and redemption - to be a key element of Canadian Tire's total
customer value proposition and is designed to drive higher total sales across
CTR, Financial Services and Petroleum. For example, a customer who fills up
with gas at Petroleum's gas bars and uses Canadian Tire credit cards spends
considerably more at Canadian Tire stores, on average, than a customer who
only shops at Canadian Tire stores.
Mark's has derived meaningful cost and operating synergies from Canadian
Tire's strengths in real estate and supply chain since its acquisition by the
Company in 2002. The Company co-locates Mark's and Canadian Tire stores in
certain locations and, where appropriate, has been extending its national
marketing and advertising channels to boost customer traffic and loyalty to
Mark's and increase its brand penetration.
1.2 Operational synergies
All of our businesses benefit from strategic and operational synergies
including real estate management, supply chain, merchandising, marketing and
advertising. Meaningful cost savings are also derived through Canadian Tire's
collective buying power and economies of scale, and we are continually
enhancing our customer value proposition by creating promotions and reward
programs to increase customer loyalty.
Canadian Tire's four main businesses are described below.
CTR is Canada's most shopped general merchandise retailer with a network
of 473 Canadian Tire stores that are operated by Dealers, who are independent
business owners. Dealers buy merchandise from the Company and sell it to
consumers in Canadian Tire stores. CTR also includes our online shopping
channel and PartSource. PartSource is a chain of 82 specialty automotive hard
parts stores that cater to serious "do-it-yourselfers" and professional
installers of automotive parts. The PartSource network consists of 34
franchise stores and 48 corporate stores.
Mark's is one of Canada's leading clothing and footwear retailers,
operating 364 stores nationwide, including 321 corporate and 43 franchise
stores that offer men's wear, women's wear and industrial wear. Mark's
operates under the banner "Mark's", and in Quebec, "L'Equipeur®". Mark's
also conducts a business-to-business operation under the "Imagewear by Mark's
Work Wearhouse®" brand.
Petroleum is Canada's largest independent retailer of gasoline with a
network of 269 gas bars, 262 convenience stores and kiosks, 74 car washes, 13
Pit Stops and 85 propane stations. The majority of Petroleum's sites are
co-located with Canadian Tire stores as a strategy to attract customers to
Canadian Tire stores. Substantially all of Petroleum's sites are operated by
agents.
Financial Services markets a range of Canadian Tire branded credit cards,
including the Canadian Tire Options MasterCard, Commercial Link®
MasterCard® and Gas Advantage® MasterCard®. Financial Services also
markets personal loans, lines of credit, insurance and warranty products as
well as guaranteed investment certificates (GICs) offered through third-party
brokers and an emergency roadside assistance service called Canadian Tire
Roadside Assistance®. Canadian Tire Bank® (CTB), a wholly-owned
subsidiary, is a federally regulated bank that manages and finances Canadian
Tire's consumer MasterCard and retail credit card portfolios, as well as the
personal loan and line of credit portfolios. CTB also offers high interest
savings accounts, GICs and residential mortgages in three pilot markets as
well as the Canadian Tire One-and-Only™ account which offers customers the
opportunity to pay down their loan balances faster by consolidating their
chequing, savings, loans and mortgage loan balances into one account.1.3 Store network at a glance
September 27, September 29,
Number of stores and retail square footage 2008 2007
-------------------------------------------------------------------------
Consolidated store count
CTR retail stores(1) 473 468
PartSource stores 82 68
Mark's retail stores(1) 364 348
Petroleum gas bar locations 269 265
-------------------------------------------------------------------------
Total stores 1,188 1,149
Consolidated retail square footage (in millions)
CTR retail square footage 18.4 17.1
PartSource retail square footage 0.3 0.2
Mark's retail square footage 3.1 2.9
-------------------------------------------------------------------------
Total retail square footage(2) 21.8 20.2
-------------------------------------------------------------------------
(1) Store count numbers reflect individual selling locations; therefore,
CTR and Mark's store count numbers each include stores that are co-
located on the same property.
(2) The average retail square footage for Petroleum's convenience stores
was 400 square feet per store in 2007 and has not been included in
the total above.2.0 Our Strategic Plan
2.1 Rolling Five-Year Strategic Plan to 2012 (2012 Plan)
The 2012 Plan outlines our strategy to build a Bigger and Better Canadian
Tire through a continued focus on growth and productivity from a consolidated
perspective. The key initiatives of the 2012 Plan include network expansion
across all of our retail businesses (CTR, PartSource and Mark's), store
concept renewals and the continued testing of our retail banking products.
Other initiatives to improve productivity include upgrading our automotive
supply chain, renewing our technology infrastructure and streamlining our
organizational design.
Specific objectives related to these programs are included in section 3.3
of this MD&A and section 3.0 of the MD&A contained in the 2007 Financial
Report.
2.2 Financial aspirations
The 2012 Plan includes financial aspirations for the Company for the
five-year period ending in 2012. These aspirations are not to be construed as
guidance or forecasts for any individual year within the 2012 Plan, but rather
as long-term, rolling targets that we aspire to achieve over the life of the
2012 Plan, based on the successful execution of our various initiatives.Financial aspirations 2012 Plan
-------------------------------------------------------------------------
Same store sales
(simple average of annual percentage growth,
CTR stores only) 3% to 4%
Gross operating revenue
(compound annual growth rate) 6% to 8%
Retail sales
(compound annual growth rate) 6%+
Adjusted earnings per share(1)
(compound annual growth rate) 10%+
After-tax return on invested capital
(annual simple average) 10%+
-------------------------------------------------------------------------
(1) Excludes gains and losses on real estate and the net effect of
securitization activities, gain on disposal/ redemption of investment
and former CEO retirement obligation.
3.0 Our performance in 2008
3.1 Consolidated financial results
($ in
millions
except
per share Q3 Q3 YTD YTD
amounts) 2008 2007(1) Change 2008 2007(1) Change
-------------------------------------------------------------------------
Retail
sales(2) $2,605.0 $2,428.2 7.3% $7,394.8 $7,069.6 4.6%
Gross
operating
revenue 2,257.5 2,049.2 10.2% 6,533.5 6,101.0 7.1%
EBITDA(3) 223.9 218.0 2.7% 615.4 614.9 0.1%
Earnings
before
income taxes 148.2 152.7 (2.9)% 391.7 426.9 (8.2)%
Effective
tax rate 26.7% 33.1% 30.3% 34.3%
Net earnings $ 108.6 $ 102.2 6.3% $ 273.0 $ 280.4 (2.6)%
Basic
earnings
per share $ 1.33 $ 1.25 6.3% $ 3.35 $ 3.44 (2.7)%
Adjusted
basic
earnings per
share(3) $ 1.42 $ 1.26 12.7% $ 3.26 $ 3.32 (1.9)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) 2007 figures have been restated for the implementation, on a
retrospective basis, of CICA HB 3031 - Inventories. See section 13.1
for additional information.
(2) Represents retail sales at CTR (which includes PartSource), Mark's
corporate and franchise stores and Petroleum's sites.
(3) See section 14.0 for non-GAAP measures.
Highlights of top-line performance by business
(year-over-year percentage change) Q3 2008 Q3 2007
-------------------------------------------------------------------------
CTR retail sales(1) 4.1% (0.7)%
CTR gross operating revenue 7.3% 1.3%
CTR net shipments 7.6% 1.4%
Mark's retail sales 2.6% 3.9%
Petroleum retail sales 21.9% 0.0%
Petroleum gasoline volume (litres) (4.6)% (1.5)%
Financial Services' credit card sales 14.0% 10.9%
Financial Services' gross average receivables 6.5% 7.2%
-------------------------------------------------------------------------
(1) Includes sales from Canadian Tire stores, PartSource stores and CTR's
online web store and the labour portion of CTR's auto service sales.Gross operating revenue
During the third quarter of 2008, all of our businesses contributed to
the 10.2 percent increase in consolidated gross operating revenue, including
higher CTR shipment volume to Dealers, increased sales at Petroleum and Mark's
and receivables growth at Financial Services. Financial Services growth was
driven by both increased transaction volume and higher loan account balances.
Increased Petroleum revenues were a function of sustained higher retail
gasoline prices as well as strong convenience store sales. Revenue growth at
Mark's was attributable to the ongoing expansion of the store network.
Net earnings
Third quarter consolidated net earnings increased by 6.3 percent, despite
challenging economic conditions, reflecting strong adjusted earnings
performance at both CTR and Financial Services, as well as benefits
attributable to a lower effective tax rate. These were partially offset by
decreased earnings at Mark's which experienced a lower gross margin rate and
higher costs associated with the ongoing network expansion and increased
infrastructure.
Earnings before income taxes were negatively impacted by non-operating
items, as noted below.
Impact of non-operating items
The following tables show our adjusted consolidated earnings on a pre-tax
and after-tax basis.Adjusted consolidated earnings before income taxes(1)
Q3 Q3 YTD YTD
($ in millions) 2008 2007(2) Change 2008 2007(2) Change
-------------------------------------------------------------------------
Earnings
before
income taxes $ 148.2 $ 152.7 (2.9)% $ 391.7 $ 426.9 (8.2)%
Less pre-tax
adjustment
for:
Gain on
disposal of
shares - - - 18.4
Former CEO
retirement
obligation(3) 0.2 0.2 1.1 (6.5)
Net effect of
securitization
activities(4) (9.1) (6.3) 7.7 (3.8)
Gain (loss) on
disposals of
property and
equipment (1.3) 5.6 2.4 7.2
-------------------------------------------------------------------------
Adjusted
earnings
before
income
taxes(1) $ 158.4 $ 153.2 3.4% $ 380.5 $ 411.6 (7.5)%
-------------------------------------------------------------------------
(1) See section 14.0 on non-GAAP measures.
(2) 2007 figures have been restated for the implementation, on a
retrospective basis, of CICA HB 3031 - Inventories. See section 13.1
for additional information.
(3) See section 3.3.1 on CTR's performance.
(4) Includes initial gain/loss on the sale of loans receivable,
amortization of servicing liability, change in securitization reserve
and gain/loss on reinvestment.
Adjusted consolidated net earnings after tax(1)
($ in
millions
except
per share Q3 Q3 YTD 2007
amounts) 2008 2007(2) Change 2008 YTD(2) Change
-------------------------------------------------------------------------
Net earnings $ 108.6 $ 102.2 6.3% $ 273.0 $ 280.4 (2.6)%
Less after-tax
adjustment
for:
Gain on
disposal of
shares - - - 12.0
Former CEO
retirement
obligation 0.2 0.2 0.8 (4.2)
Net effect
of
securitization
activities(3) (6.2) (4.1) 5.2 (2.5)
Gain (loss)
on disposals
of property
and equipment (0.9) 3.6 1.6 4.7
-------------------------------------------------------------------------
Adjusted net
earnings
after
tax(1) $ 115.5 $ 102.5 12.7% $ 265.4 $ 270.4 (1.8)%
-------------------------------------------------------------------------
Basic earnings
per share $ 1.33 $ 1.25 6.3% $ 3.35 $ 3.44 (2.7)%
Adjusted
basic
earnings per
share(1) $ 1.42 $ 1.26 12.7% $ 3.26 $ 3.32 (1.9)%
-------------------------------------------------------------------------
(1) See section 14.0 on non-GAAP measures.
(2) 2007 figures have been restated for the implementation, on a
retrospective basis, of CICA HB 3031 - Inventories. See section 13.1
for additional information.
(3) Includes initial gain/loss on the sale of loans receivable,
amortization of servicing liability, change in securitization reserve
and gain/loss on reinvestment.Included in the adjusted earnings table above, the tax provision was
impacted favourably by the net effect of adjustments to taxes on the sale and
leaseback of various properties and revisions to the estimate of tax
provisions. See section 9.0 for further details.
Seasonal impact
The second quarter and fourth quarters of each year are typically when we
experience stronger revenues and earnings in our retail businesses because of
the seasonal nature of some merchandise at CTR and Mark's and the timing of
marketing programs. The following table shows our financial performance by
quarter for the last two years.Consolidated quarterly results(1)
($ in millions except per
share amounts) Q3 2008 Q2 2008 Q1 2008 Q4 2007
-------------------------------------------------------------------------
Gross operating revenue $2,257.5 $2,450.7 $1,825.3 $2,503.1
Net earnings 108.6 97.7 66.7 131.3
Basic earnings per share 1.33 1.20 0.82 1.61
Diluted earnings per share 1.33 1.20 0.82 1.61
-------------------------------------------------------------------------
($ in millions except per
share amounts) Q3 2007 Q2 2007 Q1 2007 Q4 2006
-------------------------------------------------------------------------
Gross operating revenue $2,049.2 $2,314.1 $1,737.7 $2,426.1
Net earnings 102.2 122.5 55.7 108.3
Basic earnings per share 1.25 1.50 0.68 1.33
Diluted earnings per share 1.25 1.50 0.68 1.32
-------------------------------------------------------------------------
(1) 2007 quarterly results have been restated for the implementation, on
a retrospective basis, of CICA HB 3031 - Inventories. See section
13.1 for additional information. 2006 results have not been restated
as the information required to calculate the restatement on a
quarterly basis is not readily available.
3.2 Business unit Q3 2008 performance overview
-------------------------------------------------------------------------
Canadian Tire Retail Mark's Work Wearhouse
-------------------------------------------------------------------------
Q3 2008 Performance highlights Q3 2008 Performance highlights
- continued development of - opened three new corporate stores
store network, now with a (two of which are co-located with
total of 473 stores including a CTR store), relocated seven
223 20/20 stores and two stores, bought back four
small market stores that franchise stores which were
opened in the pilot phase; converted to corporate stores,
- continued development of new and closed three stores;
store formats; and - increased total retail space
- replaced two traditional by approximately eight percent
stores with two new small year-over-year; store network
market stores and replaced totals 364 locations; and
one new-format store with a - continued focus on Clothes That
CTR-Mark's 20/20 store, the Work campaign, with the
Mark's component of which introduction of three new Clothes
will open in October 2008. That Work items during the
quarter.
PartSource Q3 2008 performance
highlights
- acquired six corporate stores
(two of which were converted
to the PartSource banner);
- opened one new hub store, and
converted one franchise store
to a corporate store; and
- approximately 12 percent
year-over-year increase in
retail square footage.
-------------------------------------------------------------------------
Canadian Tire Financial Services Petroleum
-------------------------------------------------------------------------
Q3 2008 Performance highlights Q3 2008 Performance highlights
- continued testing of the - growth of network to 269 gas bars
retail banking initiative; and 262 convenience stores;
- completion of the Options - refurbished seven gas bars and
MasterCard relaunch; and replaced one gas bar as part of
- continued increases in gross the initiative to improve the
average receivables for the overall customer experience at
total managed portfolio. Petroleum's sites; and
- grew convenience store business
by 10.7 percent over the prior
year, despite record high
gasoline prices.
-------------------------------------------------------------------------The following sections outlining the Company's business segment
performance highlight the respective segments' achievements to date against
key initiatives identified in the 2012 Strategic Plan. The initiatives have
been divided into those contributing to building a "Bigger" Canadian Tire and
those designed to create a "Better" Canadian Tire.
In this context, "Bigger" is intended to convey the objective of
achieving increased sales and market share primarily through network growth,
new stores and new products. "Better" is intended to convey the objective of
improved productivity, service levels and rates of return.
3.3 Business segment performance
3.3.1 Canadian Tire Retail
3.3.1.1 Q3 2008 Strategic Plan performance
The following outlines CTR's performance for the third quarter of 2008 in
the context of our 2012 Strategic Plan.-------------------------------------------------------------------------
Initiatives to build a "BIGGER" Canadian Tire
-------------------------------------------------------------------------
New store program
20/20 has been the cornerstone of CTR's growth agenda since 2003. This
program is now largely complete and CTR is developing new store concepts
which are designed to build on the successes of the 20/20 store with a
greater focus on improving sales and productivity. Plans for 2008 include
opening two of the new "smart" stores that will have the same focus of
improving sales and productivity, as well as providing a more exciting
customer experience, and four small market stores with the further goal
of expanding our presence in smaller markets.
-------------------------------------------------------------------------
2008 Key initiatives 2008 Performance
-------------------------------------------------------------------------
Third quarter
With the substantial completion
of the 20/20 program in 2008, During the third quarter CTR replaced
CTR's strategy is to test the two existing traditional stores with
next versions of the CTR store. two new small market stores and
This includes completion of the replaced one existing new-format
new small market stores and new store with a CTR-Mark's 20/20
"smart" stores which will be an combination store, the Mark's
important aspect of the 2012 Plan. component of which will open in
October 2008. All of the stores
opened in the quarter incorporate a
full-size Mark's store inside.
The store network now totals 473
stores, 39 of which include a Mark's
component, with a 40th scheduled to
open in October 2008.
-------------------------------------------------------------------------
Customers for Life
Canadian Tire is committed to building customer loyalty through fostering
a positive, consistent and memorable customer experience. During 2007,
Canadian Tire began working on a new strategic model for the organization
that will lead to a stronger focus on customer service and improvements
in generating Customers for Life.
-------------------------------------------------------------------------
2008 Key initiatives 2008 Performance
-------------------------------------------------------------------------
CTR is committed to generating Third quarter
consistent and coherent customer
service measures, tracking and The Customer Satisfaction Index (CSI)
performance. was successfully developed, piloted
and rolled out in 2007. The
collecting of data for 2008
continued, as planned, completing
approximately two-thirds of the data
gathering for the year. The Dealer
relations team has also continued
working with the Canadian Tire
Dealers Association to address issues
that will improve the overall process
and survey results.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
PartSource network expansion
PartSource will continue its expansion into new markets through a
combination of new stores and small-scale acquisitions. PartSource's
strategy to buy small local businesses and convert them to the PartSource
banner has proven successful, with high rates of customer retention after
conversion.
-------------------------------------------------------------------------
2008 Key initiatives 2008 Performance
-------------------------------------------------------------------------
Key initiatives for PartSource Third quarter
include building CTR as a new
commercial account for emergency During the quarter, PartSource
shipments, updating the continued making significant progress
organizational structure, testing on building the CTR commercial
new operating systems and account and is now used by 170
launching a new auto parts Canadian Tire stores for emergency
catalogue. auto parts. Progress on this
initiative will continue building
throughout the year.
PartSource acquired six new corporate
stores (of which two had been
rebranded to the PartSource banner by
the end of the quarter), opened one
new hub store, relocated and/or
retrofitted two existing stores into
hub stores and converted one
franchise store to a corporate store
during the quarter. This brings the
network total to 82 stores, including
seven hub stores.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Initiatives to build a "BETTER" Canadian Tire
-------------------------------------------------------------------------
Automotive Infrastructure initiative
CTR has made revitalizing its cornerstone automotive business a key
priority over the 2012 Plan period and began to roll out Phase One of
this project in 2007 through opening two PartSource hub stores. Regional
hub stores are larger than traditional PartSource stores and are designed
to provide a broader assortment of automotive parts to service both
Canadian Tire and PartSource customers on an as needed basis. In
addition, the Company is investing in physical distribution
infrastructure and re-engineering customer facing processes and enabling
technologies.
-------------------------------------------------------------------------
2008 Key initiatives 2008 Performance
-------------------------------------------------------------------------
The Automotive Infrastructure Third quarter
initiative is an important factor
in CTR's future growth and Progress on the Automotive
involves a significant investment Infrastructure initiative included:
in fixed assets, working capital
and the redesign of core processes Emergency supply implementation:
and enabling technologies. - opened PartSource hub stores in
Pickering, Ontario; Sudbury,
Ontario and Edmonton, Alberta,
bringing the total number of hub
stores to seven.
Corporate assortment expansion:
- proceeded with the physical
retrofit of the Vaughan auto
parts distribution centre to
accommodate a significantly
larger auto parts assortment;
- increased auto parts SKU count by
10 percent;
- completed testing of a new, state
of the art warehouse management
system in the Vaughan auto parts
distribution centre.
Enabling technologies:
- signed agreement with core
software provider to secure
licenses and professional
services;
- completed level two process
designs and constructed a
software test environment for
in-depth training.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CTR Change program
During 2007, CTR began to implement its multi-year productivity effort
with projects designed to overhaul and upgrade internal processes and IT
systems. As the benefits of these projects begin to unfold, we will be
able to make faster and better decisions and improve our agility and
speed to market.
-------------------------------------------------------------------------
2008 Key initiatives 2008 Performance
-------------------------------------------------------------------------
CTR will implement Third quarter
productivity/control initiatives
in the areas of pricing and Progress made on the CTR change
product hierarchy to streamline program in the third quarter
and strengthen operations and included:
improve organizational structures - continued implementation of new
and efficiencies. pricing system across the
merchandising division;
- continued implementation of
Master Data Management
infrastructure for CTR's core
data;
- began design of new promotional
planning system;
- continued work on vendor
management capability; and
- began initiative to review
organizational design in
merchandising and marketing
areas.
-------------------------------------------------------------------------
3.3.1.2 Key performance indicators
The following are key measures of CTR's sales productivity:
- total same store sales growth;
- average retail sales per store; and
- average sales per square foot of retail space
CTR total retail and same store sales
(year-over-year percentage change) Q3 2008 Q3 2007 2008 YTD 2007 YTD
-------------------------------------------------------------------------
Total retail sales(1) 4.1% (0.7)% 1.6% 2.0%
Same store sales(2) 2.0% (2.7)% (0.5)% 0.0%
-------------------------------------------------------------------------
(1) Includes sales from Canadian Tire and PartSource stores, sales from
CTR's online web store and the labour portion of CTR's auto service
sales.
(2) Includes sales from Canadian Tire and PartSource stores, but excludes
sales from CTR's online web store and the labour portion of CTR's
auto service sales.
CTR's retail sales
Retail sales represent total merchandise sold at retail prices and the
labour portion of automotive sales to consumers across CTR's network of
stores, including CTR's online web store and PartSource.
CTR same store sales by store format
(year-over-year percentage change) Q3 2008 Q3 2007 2008 YTD 2007 YTD
-------------------------------------------------------------------------
Same store sales(1)
20/20 stores 2.9% 0.0% 0.4% 3.1%
New-format stores 0.6% (4.8)% (1.7)% (2.1)%
Traditional stores 2.4% (5.0)% (0.9)% (2.3)%
-------------------------------------------------------------------------
(1) Excludes sales from PartSource stores, CTR's online web store and the
labour portion of CTR's auto service sales.
-------------------------------------------------------------------------
CTR's same store sales
Same store sales include sales from all stores that have been open for
more than 53 weeks.
-------------------------------------------------------------------------
As our store network continues to evolve, we will be introducing new store
formats into our store class categories. In this 2008 third quarter MD&A, we
continue to report three separate classes of stores, defined as follows:
-------------------------------------------------------------------------
20/20 stores New-format stores Traditional stores
(mid 2003 to 2008) (1994 to mid 2003) (1994 and prior)
Average retail square Average retail square Average retail square
footage: 53,000 footage: 31,000 footage: 16,000
-------------------------------------------------------------------------
Larger format launched Large format, including Smaller than either the
in September 2003, "Class Of" and "Next new-format or 20/20
ranging in size from Generation" stores, stores on average.
approximately 18,000 to ranging in size from Traditional stores are
89,000 square feet 16,000 to 66,000 square characterized by varied
(excluding the Mark's feet, most of which were sizes and layouts.
component of Mark's- opened between 1994 and Traditional stores make
inside-a-CTR store). mid 2003. New-format up approximately seven
20/20 stores make up stores make up percent of the retail
approximately 65 percent approximately 28 percent square footage in the
of the retail square of the retail square network.
footage of the network. footage in the network.
See section 3.3.1.1, This format immediately
Q3 2008 Strategic Plan preceded the 20/20 format.
performance for more
information on the
20/20 rollout.
-------------------------------------------------------------------------
20/20 stores represented approximately 65 percent of CTR's retail square
footage and 58 percent of total retail sales in the third quarter of 2008.
CTR store count
Q3 2008 2007 2006 2005 2004
-------------------------------------------------------------------------
20/20 stores(1) 225 192 126 53 25
New-format stores(2) 167 189 237 292 302
Traditional stores 81 92 105 117 130
-------------------------------------------------------------------------
Total new-format,
traditional and 20/20
stores 473 473 468 462 457
PartSource stores 82 71 63 57 47
-------------------------------------------------------------------------
(1) The 20/20 store total in 2008 includes seven 20/20 Mark's-inside-a-
CTR stores (the Mark's component of one will open in October 2008),
two small market stores which have been opened in pilot phase and 28
CTR-Mark's combination 20/20 stores.
(2) New-format store total in 2008 includes three CTR-Mark's combination
stores.
CTR continues to expand and retrofit its store network with a focus on
converting older format stores to the new formats. The 20/20 store format will
be completed by the end of 2008 and new formats consistent with the goals of
the 2012 Plan will be piloted in 2008 and rolled out in subsequent years.
Average retail sales per Canadian Tire store(1),(2)
For the For the
12 months 12 months
ended ended
September September
($ in millions) 27, 2008 29, 2007
-------------------------------------------------------------------------
20/20 stores $ 19.2 $ 19.6
New-format stores 13.5 13.7
Traditional stores 7.9 8.1
-------------------------------------------------------------------------
(1) Retail sales are shown on a 52-week basis in each year and exclude
sales from PartSource stores, CTR's online web store and the labour
portion of CTR's auto service sales.
(2) Only includes stores that have been open for a minimum of two years
as at the end of the quarter.
The 20/20 stores experience higher customer traffic and increases in
average transaction value compared to previous store formats as customers
spend more time browsing in these stores.
Average sales per square foot of Canadian Tire retail space(1),(2),(3)
For the For the
12 months 12 months
ended, ended,
September September
27, 2008 29, 2007
-------------------------------------------------------------------------
Retail square footage(1),(3) (millions of
square feet) 18.4 17.1
20/20 stores(2),(3) $ 365 $ 374
New-format stores(2),(3) 437 444
Traditional stores(2),(3) 492 503
-------------------------------------------------------------------------
(1) Retail square footage is based on the total retail square footage
including stores that have not been open for a minimum of two years
as at the end of the quarter.
(2) Retail sales are shown on a 52-week basis in each year for those
stores that have been open for a minimum of two years as at the end
of the current quarter. Sales from PartSource stores, CTR's online
web store and the labour portion of CTR's auto service sales are
excluded.
(3) Retail space does not include warehouse, garden centre and auto
service areas.The two tables above show a year-over-year decrease in retail sales per
store and retail sales per square foot. The decrease is partially due to the
significant number of new-format and 20/20 stores that are excluded from the
calculation as they have not been open, in that format, for a period of two
years. Once the stores have been open for two years, they are included once
again in the average sales metrics.
Average sales per square foot of retail space in the larger store formats
are lower than in traditional stores because additional space is designed to
display more merchandise, accommodate wider aisles, include more appealing
product displays and provide a more compelling shopping experience overall.
The larger 20/20 stores and new-format stores do however, on average, generate
more total sales and have a lower operating cost for Dealers per retail square
foot.
CTR retail sales
Third quarter
CTR's third quarter same store sales increased by 2.0 percent and retail
sales increased 4.1 percent over the same quarter of 2007. The positive sales
performance reflected increases in our home, leisure and automotive businesses
and increases in both our regular and promotional sales when compared to the
third quarter of 2007. Retail sales were also positively affected by
improvements in non-seasonal categories and by strong early season results in
fall/winter categories, driven by winter tires and snowthrowers and an
increase across kitchen, storage and organization.
While our retail stores continue to be influenced by the challenging
economic conditions that are currently affecting Canada, CTR experienced
increased retail sales in all provincial markets during the third quarter with
stronger sales experienced in Quebec and Eastern Canada and weaker sales
results in Alberta and in BC than in past quarters. In particular, retail
sales were up 8.2 percent for the quarter in Quebec and are up 2.8 percent on
a year-to-date basis.
PartSource experienced another quarter of year-over-year sales increases
driven by both the continued expansion of the network and growth in the
commercial customer segment. In addition, PartSource shipments to Dealers
continue to increase as components of the Automotive Infrastructure initiative
project are rolled out.3.3.1.3 CTR's financial results
($ in millions) Q3 2008 Q3 2007(1) Change 2008 YTD 2007 YTD(1) Change
-------------------------------------------------------------------------
Retail sales $1,860.3 $1,787.4 4.1% $5,253.6 $5,171.9 1.6%
Net shipments
(year-over-year
% change) 7.6% 1.4% 3.8% 3.1%
Gross operating
revenue $1,399.3 $1,304.0 7.3% $4,032.7 $3,889.8 3.7%
EBITDA(2) 152.8 148.5 2.8% 398.0 376.7 5.6%
-------------------------------------------------------------------------
Earnings before
income taxes 94.0 94.9 (1.0)% 222.6 221.4 0.6%
Less adjustment
for:
Gain (loss) on
disposals of
property and
equipment (0.3) 6.6 3.7 10.3
Former CEO
retirement
obligation 0.2 0.2 1.1 (6.5)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(2) $ 94.1 $ 88.1 6.9% $ 217.8 $ 217.6 0.1%
-------------------------------------------------------------------------
(1) 2007 earnings figures have been restated for the implementation, on a
retrospective basis, of CICA HB 3031 - Inventories. Please refer to
section 13.1 for additional information.
(2) See section 14.0 on non-GAAP measures.
CTR's net shipments
-------------------------------------------------------------------------
CTR's net shipments are the total value of merchandise shipped to
Canadian Tire and PartSource stores, and through our online web store,
less discounts and net of returns. Shipments to stores are recorded at
the wholesale price that we charge to our Dealers and PartSource
franchisees.
-------------------------------------------------------------------------Explanation of CTR's financial results
Third quarter
Third quarter gross operating revenue increased 7.3 percent compared to
the third quarter of 2007, primarily as a result of higher net shipments to
Dealers, particularly in the automotive and home categories.
Adjusted pre-tax earnings in CTR increased 6.9 percent in the third
quarter principally due to an increase in product shipments. This was
partially offset by a slight decline in the margin rate primarily due to
aggressive promotional activity and product mix. Third quarter earnings also
included $2.7 million of incremental expenses to support long-term
productivity and growth initiatives, including the Automotive Infrastructure
initiative and Information Technology Renewal, which will provide long-term
benefits.
3.3.1.4 Business risks
CTR is exposed to a number of risks in the normal course of its business
that have the potential to affect its operating performance. The following are
some of the business risks specific to CTR's retail and other operations.
Please also refer to section 9.0 of our 2007 Financial Report for a discussion
of some other industry-wide and Company-wide risks affecting the business.
Supply chain disruption risk
An increasing portion of CTR's product assortment is being sourced from
foreign suppliers, lengthening the supply chain and extending the time between
order and delivery to CTR's warehouses. Accordingly, CTR is exposed to
potential supply chain disruptions due to foreign supplier failures,
geopolitical risk, labour disruption or insufficient capacity at ports, and
risks of delays or loss of inventory in transit. The Company mitigates this
risk through effective supplier selection and procurement practices, strong
relationships with transportation companies, port and other shipping
authorities, supplemented by marine insurance coverage.
Seasonality risk
CTR derives a significant amount of its revenues from the sale of
seasonal merchandise and, accordingly, bears a degree of risk from
unseasonable weather patterns. CTR mitigates this risk, to the extent
possible, through the breadth of our product mix as well as effective
procurement and inventory management practices.
Environmental risk
Environmental risk within CTR is primarily associated with the handling
and recycling of certain materials, such as tires, paint, oil and lawn
chemicals, sold in Canadian Tire and PartSource stores. The Company has
established and follows comprehensive environmental policies and practices to
avoid a negative impact on the environment, protect CTR's reputation and
comply with environmental laws.
3.3.2 Mark's Work Wearhouse
3.3.2.1 Q3 2008 Strategic Plan performance
The following outlines Mark's performance for the third quarter of 2008
in the context of our 2012 Strategic Plan.-------------------------------------------------------------------------
Initiatives to build a "BIGGER" Canadian Tire
-------------------------------------------------------------------------
Network expansion
A critical aspect of Mark's growth plan revolves around its objective of
capturing an increasingly significant share of overall apparel sales in
each geographic market in which Mark's competes. To increase Mark's
market presence, the Company plans to continue with its aggressive goal
of expanding the network of Mark's stores.
-------------------------------------------------------------------------
2008 Key initiatives Q3 2008 Performance
-------------------------------------------------------------------------
Mark's will continue network Third quarter
development through opening new
stores, relocating or expanding - opened three new corporate
existing stores and renovating stores, two of which are
older stores to the newest Mark's co-located inside a CTR
format. store;
- expanded one corporate store;
- relocated six corporate
stores and one franchise
store;
- bought back and converted
four franchise stores to
corporate stores; and
- closed three corporate stores.
Mark's total retail square
footage at the end of the
quarter was 3.1 million square
feet.
-------------------------------------------------------------------------
New store concepts
In addition to adding incremental stores to the total network, Mark's is
in the process of developing new store concepts that will be rolled out
over the Plan period.
-------------------------------------------------------------------------
2008 Key initiatives Q3 2008 Performance
-------------------------------------------------------------------------
Mark's will continue to expand the Third quarter
store network by developing new
and innovative ways to bring Mark's opened two new
Clothes That Work to consumers Mark's-inside-a-CTR stores as
across the country, resulting in part of CTR's small market store
an increased physical presence network expansion (included in
across the geographic regions of total above).
Canada.
-------------------------------------------------------------------------
Initiatives to build a "BETTER" Canadian Tire
-------------------------------------------------------------------------
Category expansion
Mark's has set aggressive growth goals for the 2012 Plan period which
will be supported by its plans for category expansion in its three major
product lines. Although growth was modest in 2007 and the first three
quarters of 2008, women's wear is still expected to be the fastest
growing segment of the business over the plan period as it is the least
developed of the Mark's main category lines. Improvements in the product
assortment in the women's wear category are expected to bring continued
growth during the Plan period.
-------------------------------------------------------------------------
2008 Key initiatives Q3 2008 Performance
-------------------------------------------------------------------------
In 2008, Mark's will continue to Third quarter - corporate sales
expand its product assortment in - sales of industrial wear
the three main categories of increased by 10.1 percent;
apparel and footwear with a focus - sales of women's wear
on the Clothes That Work campaign. increased by 5.2 percent; and
- sales of men's wear decreased
by 0.2 percent.
Mark's continued to focus on the
Clothes That Work campaign with
the introduction of three new
Clothes That Work items during the
quarter.
-------------------------------------------------------------------------
3.3.2.2 Key performance indicators
The following are key performance indicators for Mark's:
- retail and same store sales growth;
- average sales per corporate store; and
- average sales per square foot of retail space
Mark's retail and same store sales growth
(year-over-year
percentage change) Q3 2008 Q3 2007 2008 YTD 2007 YTD
-------------------------------------------------------------------------
Total retail sales 2.6% 3.9% 1.9% 9.9%
Same store sales(1) (1.0)% 0.6% (2.0)% 7.2%
-------------------------------------------------------------------------
(1) Mark's same store sales excludes new stores, stores not open for the
full period in each year and store closures.
-------------------------------------------------------------------------
Mark's retail sales
Mark's retail sales represent total merchandise sales to consumers and
business-to-business customers, net of returns, across Mark's entire
network of stores, fulfillment centres and Mark's online web store,
recorded at retail prices.
-------------------------------------------------------------------------Third quarter
Mark's retail sales during the third quarter of 2008 continued to be
impacted by further softening of retail and economic conditions across many
parts of Canada. Despite these factors, retail sales increased 2.6 percent due
to expansion in the store network. Same store sales growth decreased slightly
compared to the third quarter of 2007. Men's industrial footwear demonstrated
the largest dollar sales increase in corporate store sales in the third
quarter, along with positive sales performance in men's accessories, women's
sweaters, men's workwear and men's casual footwear categories.Average corporate store sales(1)
For the For the For the
12 months 12 months 12 months
ended, ended, ended,
September September September
27, 2008 29, 2007 30, 2006
-------------------------------------------------------------------------
Average retail sales per store
($ thousands)(2) $ 2,712 $ 2,862 $ 2,623
Average sales per square foot ($)(3) 318 341 331
-------------------------------------------------------------------------
(1) Calculated on a rolling 12-month basis.
(2) Average retail sales per corporate store include corporate stores
that have been open for 12 months or more.
(3) Average sales per square foot is based on sales from corporate
stores. We have prorated square footage for corporate stores that
have been open for less than 12 months.Mark's continues to focus on productivity at its stores. Due to the
softening retail environment in Canada during 2008, there was a decrease in
the current rolling 12 months average sales per store and average sales per
square foot. This followed strong nine percent and three percent year-over-
year increases in those respective measures for the two previous periods due
to the factors noted above in the retail sales discussion.3.3.2.3 Mark's financial results
($ in millions) Q3 2008 Q3 2007(1) Change 2008 YTD 2007 YTD(1) Change
-------------------------------------------------------------------------
Retail sales(2) $ 194.5 $ 189.5 2.6% $ 600.1 $ 589.1 1.9%
Gross operating
revenue(3) 168.7 159.8 5.5% 516.8 499.1 3.5%
EBITDA(4) 6.7 11.7 (41.6)% 24.4 46.4 (47.4)%
-------------------------------------------------------------------------
Earnings (loss)
before income
taxes (0.3) 6.2 (104.1)% 4.2 31.0 (86.3)%
Less adjustment for:
Loss on
disposals of
property and
equipment (0.3) (0.2) (0.4) (0.8)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(4) $ 0.0 $ 6.4 (99.2)% $ 4.6 $ 31.8 (85.4)%
-------------------------------------------------------------------------
(1) Mark's 2007 results have been restated for the implementation, on a
retrospective basis, of CICA HB 3031 - inventories. Please refer to
section 13.1 for additional information.
(2) Includes retail sales from corporate and franchise stores.
(3) Gross operating revenue includes retail sales at corporate stores
only.
(4) See section 14.0 on non-GAAP measures.Explanation of Mark's financial results
Third quarter
Mark's pre-tax earnings decreased in the third quarter of 2008 primarily
as a result of the decrease in gross margin rate attributable to higher
markdowns, mainly related to inventory clearance, and a higher inventory
shrinkage accrual provision made in the third quarter of 2008 compared to the
same period of the previous year. Operating expenses, including depreciation
but excluding interest, increased by 9.6 percent over the third quarter of
2007, largely attributable to higher personnel, occupancy and depreciation
expenses to support the growth in the store network and backline
infrastructure, that has occurred over the last several years.
3.3.2.4 Business risks
Mark's is exposed to a number of risks in the normal course of its
business that have the potential to affect its operating performance. The
following are some of the business risks specific to Mark's. Please also refer
to section 9.0 of our 2007 Financial Report for a discussion of some other
industry and Company-wide risks affecting the business.
Seasonality risk
Mark's business remains very seasonal, with the fourth quarter typically
producing the largest share of annual sales and earnings due to the general
increase in consumer spending for winter clothing and Christmas related
purchases. In 2007, for example, the fourth quarter produced about 40 percent
of total annual retail sales and prior to the adoption of CICA HB 3031 -
Inventories, approximately 54 percent of annual pre-tax earnings. With the
adoption of CICA HB 3031 - Inventories, an even higher percentage of Mark's
annual pre-tax earnings are expected to occur in the fourth quarter. Detailed
sales reporting and merchandise planning modules assist Mark's in mitigating
the risks and uncertainties associated with unseasonable weather and consumer
behaviour during the important Christmas selling season, but cannot remove
risks completely because inventory orders, especially for a significant
portion of merchandise purchased off-shore, must be placed well ahead of the
season.
Market obsolescence risk
All clothing retailers are exposed, to varying degrees, to the vagaries
of consumers' fashion preferences. Mark's mitigates this risk through its
brand positioning, consumer preference monitoring, demand forecasting and
merchandise selection efforts. Mark's specifically targets consumers of
durable everyday wear and is less exposed to changing fashions than apparel
retailers offering high-fashion apparel and accessories.
3.3.3 Canadian Tire Petroleum
3.3.3.1 Q3 2008 Strategic Plan performance
Petroleum plays a strategic role in increasing customer loyalty and
driving traffic and transactions for CTR and Financial Services. Petroleum
increases Canadian Tire's total value proposition by offering Canadian Tire
'Money' loyalty rewards on gas purchases paid for in cash or by Canadian
Tire's Options MasterCard. Petroleum also supports other cross-marketing
promotions and joint product launches, such as Canadian Tire's Gas Advantage
MasterCard, which has gained wide popularity since its introduction in Ontario
in mid-2006. Customers who have a Canadian Tire MasterCard and purchase gas at
Petroleum are Canadian Tire's most loyal and profitable customers.
The following outlines Petroleum's performance for the third quarter of
2008 in the context of our 2012 Strategic Plan.-------------------------------------------------------------------------
Initiatives to build a "BIGGER" Canadian Tire
-------------------------------------------------------------------------
Network renewal and new store concept
Petroleum's business is an integral part of the Canadian Tire
organization as customers that use Petroleum's gas bars drive sales and
traffic to our other business units. Over the 2012 Plan period, Petroleum
will continue to develop its real estate plan, focusing on introducing
new store concepts into its existing network of locations, while
continuing to focus on renewing its current sites.
-------------------------------------------------------------------------
2008 Key initiatives Q3 2008 Performance
-------------------------------------------------------------------------
In 2008, Petroleum will continue Third quarter
to strengthen the existing network
by opening new sites and - opened two new gas bars;
refurbishing or rebuilding existing - rebranded two gas bars;
sites. - refurbished seven gas bars
and replaced one gas bar; and
- closed two existing locations.
At the end of the quarter, Petroleum
had 269 gas bars, including 44
re-branded sites.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Initiatives to build a "BETTER" Canadian Tire
-------------------------------------------------------------------------
Enhancing interrelatedness
Petroleum's business is integrated with CTR and Financial Services
through Canadian Tire 'Money' and various cross-marketing programs
designed to build customer loyalty. Petroleum is in the process of
enhancing its interrelatedness strategy to further extend its marketing
leverage across the Company.
-------------------------------------------------------------------------
2008 Key initiatives Q3 2008 Performance
-------------------------------------------------------------------------
In 2008, Petroleum will Third quarter
aggressively seek out additional
cross-marketing opportunities to - issued multiplier coupons
further leverage its that increase the Canadian
interrelatedness strategy to drive Tire 'Money' offered on gas
customer traffic, transactions, purchases paid for in cash
customer loyalty and earnings or by Canadian Tire Options
across the enterprise. MasterCard;
- offered discount coupons on
Canadian Tire merchandise
with the purchase of gas;
and
- launched Gas Advantage
MasterCard in Quebec and
Atlantic Canada.
-------------------------------------------------------------------------3.3.3.2 Key performance indicators
Gasoline sales volume is a top-line performance indicator for Petroleum,
as measured by the number of gasoline litres sold. Fluctuations in the
wholesale and retail price of gasoline may result in fluctuations in
Petroleum's margin and profitability.Gasoline sales volume
Q3 2008 Q3 2007 Change 2008 YTD 2007 YTD Change
-------------------------------------------------------------------------
Sales volume
(millions of
litres) 414.5 434.3 (4.6)% 1,257.9 1,287.0 (2.3)%
-------------------------------------------------------------------------
Gasoline sales volumes during the quarter were down slightly due to lower
same site sales, partially offset by increases in new site openings. On a same
site basis, our gasoline volumes decreased by 5.7 percent in the quarter,
which was principally due to a year-over-year increase in average retail gas
prices of approximately 29 percent and a softening economic environment.
Petroleum's convenience and car wash sales
(year-over-year
percentage change) Q3 2008 Q3 2007 2008 YTD 2007 YTD
-------------------------------------------------------------------------
Total retail sales
Convenience store sales 10.7% 12.2% 9.0% 15.5%
Car wash sales (14.3)% 29.2% (16.5)% 22.9%
-------------------------------------------------------------------------
Same store sales
Convenience 9.1% 7.9% 7.3% 11.1%
Car wash (14.1)% 26.9% (16.5)% 19.8%Convenience store sales in the third quarter of 2008 increased as a
result of new site openings and increases in confectionary, lottery and
tobacco sales. The decline in car wash sales is largely attributable to
decreased consumer disposable income which was impacted by higher gasoline
prices and softening economic conditions experienced in the third quarter of
2008 compared to the previous year.3.3.3.3 Petroleum's financial results
($ in millions) Q3 2008 Q3 2007 Change 2008 YTD 2007 YTD Change
-------------------------------------------------------------------------
Retail sales $ 550.2 $ 451.3 21.9% $1,541.1 $1,308.6 17.8%
Gross operating
revenue 519.3 424.0 22.5% 1,456.9 1,232.4 18.2%
EBITDA(1) 11.7 12.1 (3.4)% 32.8 29.1 13.0%
-------------------------------------------------------------------------
Earnings before
income taxes 7.5 7.9 (5.5)% 20.5 16.8 22.3%
Less adjustment
for:
Loss on
disposals of
property
and equipment (0.1) (0.7) (0.3) (2.0)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(1) $ 7.6 $ 8.6 (12.2)% $ 20.8 $ 18.8 11.0%
-------------------------------------------------------------------------
(1) See section 14.0 on non-GAAP measures.
-------------------------------------------------------------------------
Petroleum's retail sales
Retail sales include the sales of gasoline at Petroleum's entire network
of petroleum sites recorded at retail pump prices, including re-branded
sites, and excluding goods and services taxes and provincial sales taxes,
where applicable. Retail sales also include sales of products sold at our
convenience stores, car wash sites, propane and Pit Stop sites, all of
which we record at retail selling prices.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gasoline pricing
Petroleum maintains long-term wholesale agreements with major refiners to
source competitively priced gasoline across Canada. This fuel is then
sold through Petroleum retail locations at market prices.
-------------------------------------------------------------------------Explanation of Petroleum's financial results
Third quarter
Record high gasoline prices and an increase in convenience store sales,
partially offset by lower gasoline volumes, contributed to Petroleum's revenue
growth in the third quarter. Average retail gasoline prices during the third
quarter of 2008 increased by approximately 29 percent over the third quarter
of 2007, driving the increased revenue.
Lower gasoline sales volume and higher credit card fees, partially offset
by increased gasoline margins, were the major factors that contributed to
Petroleum's reduced earnings during the quarter. While adjusted earnings were
down 12.2 percent from $8.6 million this time last year, compared to
historical norms, this represents a strong quarterly performance. Petroleum
incurred $1.0 million in environmental expenses in the third quarter related
to clean-up costs associated with certain site closures compared to
$0.8 million incurred in the third quarter of 2007.
3.3.3.4 Business risks
Petroleum is exposed to a number of risks in the normal course of its
business that have the potential to affect its operating performance. The
following are some of the business risks specific to Petroleum's operations.
Please also refer to section 9.0 of our 2007 Financial Report for a discussion
of some other industry-wide and Company-wide risks.
Commodity price and disruption risk
The operating performance of petroleum retailers can be affected by
fluctuations in the commodity cost of oil. The wholesale price of gasoline is
subject to global oil price supply and demand conditions, which are
increasingly a function of rising demand from fast-developing countries such
as India and China, political instability in the Middle East, potential supply
chain disruptions from natural and human-caused disasters, as well as
commodity speculation. To mitigate this risk to profitability, Petroleum
tightly controls its operating costs and enters into long-term gasoline
purchase arrangements with integrated gasoline wholesalers.
Environmental risk
Environmental risk within Petroleum is primarily associated with the
handling of gasoline, oil and propane. Environmental contamination, if not
prevented or remediated, could result in fines and sanctions and damage our
reputation. Petroleum mitigates its environmental risks through a
comprehensive regulatory compliance program, which involves environmental
investigations, as required, and the remediation of any contaminated sites in
a timely manner. Petroleum also carries environmental insurance coverage.
3.3.4 Canadian Tire Financial Services
3.3.4.1 Q3 2008 Strategic Plan performance
The following outlines Financial Services' performance for the third
quarter of 2008 in the context of our 2012 Strategic Plan.-------------------------------------------------------------------------
Initiatives to build a "BIGGER" Canadian Tire
-------------------------------------------------------------------------
Total managed portfolio of loans receivable (credit card, personal and
line of credit loans)
Financial Services plans to grow its portfolio through increases in
average balances, new account acquisition, the introduction of new credit
cards and continued testing of the personal loan portfolio.
-------------------------------------------------------------------------
2008 Key initiatives Q3 2008 Performance
-------------------------------------------------------------------------
For 2008, Financial Services has Third quarter
targeted increasing gross average
credit card receivables and the Gross average loans receivable
number of accounts carrying a were $4.0 billion in the third
balance and growing its total quarter. The growth reflects a
managed portfolio as key 6.1 percent increase in the
initiatives. average account balance and a
0.4 percent increase in the
In addition, Financial Services number of accounts carrying a
is planning a major relaunch of balance.
the Canadian Tire Options
MasterCard in 2008. During the quarter Financial
Services completed the relaunch
of the Canadian Tire Options
MasterCard.
-------------------------------------------------------------------------
Retail banking
Financial Services began offering retail banking products in two pilot
markets in October 2006, including high interest savings accounts, GICs
and residential mortgages. In 2007, the pilot was expanded to include a
third market in Ontario along with the launch of the Canadian Tire
One-and-Only account. The retail banking business leverages the trust and
credibility Canadian Tire has earned over the last 40 years providing
financial services to millions of customers.
-------------------------------------------------------------------------
2008 Key initiatives Q3 2008 Performance
-------------------------------------------------------------------------
Financial Services' retail Third quarter
banking plans include increasing Financial Services had accumulated
the ending mortgage portfolio over $300 million in deposits and
balance and deposit balances. approximately $100 million in
mortgages as at the end of the third
quarter of 2008.
Financial Services will incur
approximately $28 million in net Financial Services incurred
expenses associated with the $6.0 million in net expenses
marketing and operations of the associated with the marketing and
retail banking initiative in 2008. operation of the retail banking
initiative during the third
quarter of 2008.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Initiatives to build a "BETTER" Canadian Tire
-------------------------------------------------------------------------
Insurance and other ancillary products
Financial Services plans to enhance its insurance and warranty product
offering to credit card customers. Revenues from insurance and warranty
products have increased significantly in the last five years through
direct marketing to Canadian Tire's growing base of customers.
-------------------------------------------------------------------------
2008 Key initiatives Q3 2008 Performance
-------------------------------------------------------------------------
Financial Services plans to Revenues from insurance and
increase revenues from insurance warranty products increased 7.2
and warranty products during 2008. percent in the third quarter on a
comparable basis year-over-year.
-------------------------------------------------------------------------
3.3.4.2 Key performance indicators
The following are key indicators of Financial Services' performance:
- size of the total managed portfolio
- profitability of the portfolio
- quality of the portfolio
Financial Services' total managed portfolio of loans receivable
($ in millions,
except where
noted) Q3 2008 Q3 2007 Change 2008 YTD 2007 YTD Change
-------------------------------------------------------------------------
Average number of
accounts with a
balance
(thousands) 1,862 1,854 0.4% 1,857 1,851 0.3%
Average account
balance ($) $ 2,123 $ 2,001 6.1% $ 2,087 $ 1,950 7.0%
Gross average
receivables (GAR) 3,951.8 3,709.8 6.5% 3,876.1 3,609.1 7.4%
Total managed
portfolio (end of
period) 4,002.3 3,717.4 7.7%
Net managed
portfolio (end of
period) 3,903.2 3,626.9 7.6%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total and net managed portfolio
Financial Services' total managed portfolio is the total value of loans
receivable including credit card, personal, line of credit and mortgage
loans. The total managed portfolio includes both loans that have been
securitized and those that remain a receivable of the Company, as
reflected in the Consolidated Balance Sheet. Financial Services' net
managed portfolio represents the total managed portfolio, less
allowances.
-------------------------------------------------------------------------Financial Services' gross average receivables were up in the third
quarter, due primarily to an increase in credit sales and increased mortgage
volumes. The continued success of the Gas Advantage MasterCard and an increase
in balance transfers contributed to the total portfolio growth, offset by a
decline in personal loan accounts and personal loan account balances. During
the quarter, Financial Services ramped up the offering of GICs through third-
party brokers. Please refer to section 5.0 for additional information
regarding the broker GICs.
Financial Services' future growth will be driven by increases in average
account balances, modest increases in new accounts and the introduction of new
credit card and insurance products. Management regards new retail banking
products as another high-potential channel for growth in the longer term.
Approximately 2.6 million cards were issued as part of the Options
MasterCard relaunch which is now complete. By the end of the third quarter,
over 13 percent of the accounts with a PayPass™ card had been used for
PayPass transactions, which is higher than anticipated.Gross average receivables
-------------------------------------------------------------------------
GAR is the monthly average of Financial Services' loans receivable
averaged over a specified period of time.
-------------------------------------------------------------------------
Securitization of loans receivable
-------------------------------------------------------------------------
Securitization is the process by which interests in financial assets are
sold to a third party. Financial Services routinely securitizes credit
card loans receivable by selling an interest in those assets to trusts
involved in the business of handling receivables portfolios. In the case
of credit card loans, co-ownership interests are sold to Glacier Credit
Card Trust® (GCCT). Financial Services records these securitization
transactions as a sale, and as a result, these assets are not included on
the Company's Consolidated Balance Sheet, but are included in our total
managed portfolio of loans receivable. Financial Services has
traditionally securitized between 70 percent and 80 percent of loans
receivable on an ongoing basis.
-------------------------------------------------------------------------
Financial Services' portfolio of credit card loans receivable
($ in millions,
except where
noted) Q3 2008 Q3 2007 Change 2008 YTD 2007 YTD Change
-------------------------------------------------------------------------
Average number of
accounts with a
balance
(thousands) 1,826 1,817 0.5% 1,820 1,812 0.4%
Average account
balance ($) $ 2,041 $ 1,934 5.5% $ 2,013 $ 1,878 7.2%
Gross average
receivables 3,728 3,513 6.1% 3,663 3,404 7.6%
Total managed
portfolio (end
of period) 3,773 3,525 7.0%
-------------------------------------------------------------------------Gross average credit card loans receivable grew 6.1 percent to
$3.7 billion at the end of the quarter primarily due to a 5.5 percent increase
in the average account balance during the quarter compared to the previous
year. The increase in average account balances is largely a result of
marketing programs designed to increase average balances.
Financial Services' profitability
Financial Services' profitability measures are tracked as a percentage of
GAR, shown in the table below.Profitability of total managed portfolio(1)
Q3 2008 Q3 2007 Q3 2006
-------------------------------------------------------------------------
Total revenue as a % of GAR(2) 24.28% 24.88% 25.01%
Gross margin as a % of GAR(2) 12.40% 13.19% 13.06%
Operating expenses as a % of GAR(3) 7.73% 7.77% 7.98%
Return on average total managed
portfolio(2),(3),(4) 4.69% 5.43% 5.08%
-------------------------------------------------------------------------
(1) Figures are calculated on a rolling 12-month basis and comprise the
total managed portfolio of loans receivable.
(2) Excludes the net effect of securitization activities and gain on
disposal/redemption of investment.
(3) Excludes the impact of the modification to the stock option
agreements in the fourth quarter of 2006. 4 Return is calculated as
adjusted earnings before taxes as a percentage of GAR.
The decline in the return on the total managed portfolio is principally
due to an increase in the provision for credit losses and is also due to
expenses incurred for the Options MasterCard relaunch.
-------------------------------------------------------------------------
Gross margin
Gross margin is Financial Services' total revenue less direct expenses
associated with credit card, personal, line of credit and mortgage loans
and insurance and warranty products. The most significant direct expenses
are the provision for credit losses associated with the credit card,
personal loan and line of credit portfolios, loyalty program costs and
interest expense.
-------------------------------------------------------------------------Financial Services' MasterCard accounts provide increased earnings
potential through cross-selling of balance-based insurance products and other
financial services being offered by Financial Services. As Financial Services
introduces lower rate credit cards and other loans receivable, the reduction
in revenue and gross margin as a percentage of gross average receivables will
be offset by continued growth in loans receivable, higher sales of insurance
and warranty products and ongoing improvements in the operating expense ratio.
As part of the strategic planning process, management set a long-term
goal of managing Financial Services' pre-tax return on the average total
managed portfolio in the target range of 4.5 to 5.0 percent. As shown in the
table above, Financial Services has met or exceeded this target in the third
quarters of 2006, 2007 and 2008.Portfolio quality
Q3 2008 Q3 2007 Q3 2006
-------------------------------------------------------------------------
Net write-off rate (rolling 12-month basis) 6.04% 5.87% 5.94%
Account balances less than 30 days overdue
at end of period 96.32% 96.26% 96.14%
Allowance rate 2.48% 2.44% 2.60%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net write-offs
Net write-offs represent account balances that have been written off, net
of recoveries. Net write-off rate is the net write-offs expressed as a
percentage of gross average receivables in a given period. Financial
Services calculates the write-off rate for the loans portfolio on a
rolling 12-month basis to mitigate unusual quarterly fluctuations.
-------------------------------------------------------------------------Financial Services' rolling 12-month net write-off rate on the total
loans portfolio was 6.04 percent in the third quarter of 2008, an increase of
17 basis points over the same period of the previous year. As a result of more
challenging economic conditions, Financial Services expects that the write-off
rate may increase above the target range of 5.0 percent and 6.0 percent,
however a number of actions have already been taken to manage the quality of
the portfolio and expected write-off rates to acceptable levels.-------------------------------------------------------------------------
Allowance
The allowance is determined using a roll rate model that incorporates
historical loss experience of account balances based on the aging and
arrears status, with certain adjustments for other relevant circumstances
influencing the recoverability of the loans. The allowance rate is a
point-in-time calculation and represents the allowance as a percentage of
ending receivables.
-------------------------------------------------------------------------Periodic fluctuations in write-offs, aging and allowances occur as a
result of a variety of economic influences such as job growth or losses,
personal debt levels and personal bankruptcy rates, as well as changes caused
by adjustments to collection strategies. The increase in the allowance rate
compared to the third quarter of 2007 is due to a modest increase in the
credit card portfolio aging due to challenging economic conditions and the
impact of changes in collection practices in 2007. Aging of the credit card
portfolio is comparable to the same period in 2007 and 2006.3.3.4.3 Financial Services' financial results
($ in millions) Q3 2008 Q3 2007 Change 2008 YTD 2007 YTD Change
-------------------------------------------------------------------------
Gross operating
revenue $ 197.8 $ 187.2 5.6% $ 608.0 $ 555.6 9.4%
EBITDA(1) 52.7 45.7 15.3% 160.2 162.7 (1.5)%
Earnings before
income taxes 47.0 43.7 7.4% 144.4 157.7 (8.5)%
Less adjustment for:
Gain on sale
of investment - - - 18.4
Loss on disposals
of property and
equipment (0.6) (0.1) (0.6) (0.3)
Net effect of
securitization
activities(1) (9.1) (6.3) 7.7 (3.8)
Adjusted earnings
before income
taxes(2) $ 56.7 $ 50.1 13.0% $ 137.3 $ 143.4 (4.3)%
-------------------------------------------------------------------------
(1) Includes initial gain/loss on the sale of loans receivable,
amortization of servicing liability, change in securitization reserve
and gain/loss on re-investment.
(2) See section 14.0 on non-GAAP measures.Explanation of Financial Services' financial results
Third quarter
Financial Services' gross operating revenue increased over the third
quarter of 2007 largely as a result of higher credit sales and an increase in
interest bearing balances which resulted in an increase in credit interest
earned. In addition, ongoing expenses were well controlled as the third-
quarter operating ratio on a rolling 12-month basis, excluding the Options
MasterCard relaunch costs and costs of the retail banking initiative was 6.71
percent in 2008 compared to 7.07 percent in 2007 and 7.82 percent in 2006.
3.3.4.4 Business risks
Financial Services is exposed to a number of risks in the normal course
of its business that have the potential to affect its operating performance.
The following are some of the business risks specific to Financial Services'
operations. Please also refer to section 9.0 of our 2007 Financial Report for
a discussion of some other industry-wide and Company-wide risks affecting the
business.
Consumer credit risk
Financial Services grants credit to its customers through Canadian Tire
MasterCards, retail credit cards, personal loans, line of credit loans and
residential mortgages. With the granting of credit, Financial Services assumes
certain risks such as the failure to accurately predict the creditworthiness
of its customers or their ability to repay debt. Financial Services minimizes
credit risks to maintain and improve the quality of its consumer lending
portfolio by:- employing sophisticated credit-scoring models to constantly monitor
the creditworthiness of customers;
- using the latest technology to make informed credit decisions for
each customer account;
- adopting technology to improve the effectiveness of the collection
process; and
- monitoring the macro-economic environment, especially with respect to
consumer debt levels, interest rates, employment levels and income
levels.Securitization funding risk
Securitization is an important source of funding for Canadian Tire,
involving the sale of credit card loans to GCCT. Securitization enables
Financial Services to diversify funding sources, and manage risks and capital
requirements. Financial Services' securitization program relies on the
marketability of the asset-backed commercial paper (ABCP) and longer term
notes issued by GCCT as described in section 5.1.4. A decline in the
marketability of the commercial paper and notes would require the Company to
find new sources of funding. Developments since the last half of 2007 to date
in the international credit markets had an impact on some companies'
securitization programs. See sections 5.1.4 and 5.1.5 below.
Interest rate risk
The Company's sensitivity to movements in interest rates is substantially
limited to its cash and short-term investments. A one percent change in
interest rates would not materially affect its earnings, cash flow or
financial position.
Most of Financial Services' revenue is not interest rate sensitive as it
is generated primarily from Canadian Tire MasterCards, which carry a fixed
interest rate appropriate to customer segments with common credit ratings. The
securitization program as described in section 5.1.5 of this MD&A reduces
Financial Services' funding requirements. Canadian Tire constantly monitors
the potential impact of interest rate fluctuations on its fixed versus
floating rate exposure and manages its overall balance to reduce the magnitude
of this exposure.
As the success of Financial Services is dependent upon its ability to
access capital markets at favourable rates, and given the rapid growth of the
total managed portfolio, maintaining the quality of the total managed
portfolio and securitized loans receivable is a key priority of Financial
Services. For additional information on Canadian Tire's liquidity and capital
market activity, please refer to section 5.1 below.
Regulatory risk
Regulatory risk is the risk of negative impact to business activities,
earnings or capital, regulatory relationships or reputation as a result of
failure to comply with or a failure to adapt to current and changing
regulations or regulatory expectations.
Financial Services' regulatory compliance strategy is to manage
regulatory risk through the promotion of a strong compliance culture and the
integration of solid controls within the Company. Primary responsibility for
compliance with all applicable regulatory requirements rests with senior
management of the Company and extends to all employees.
Financial Services' Compliance Department is responsible for the
development and maintenance of a legislative compliance management system and
reports on a quarterly basis to CTB's Governance and Conduct Review Committee.
Specific activities that assist the Company in adhering to regulatory
standards include communication of regulatory requirements, advice, training,
testing, monitoring, reporting and escalation of control deficiencies and
regulatory risks.
4.0 Capital management
In order to support our growth agenda and meet the objectives enumerated
in our 2012 Strategic Plan, the Company actively manages its capital in the
manner indicated below.
4.1 Capital management objectivesThe Company's objectives when managing capital are:
- minimizing the after-tax cost of capital; and
- maintaining flexibility in capital structure to ensure the ongoing
ability to execute the Strategic Plan.
4.2 Definition and management of capital
In the process of managing the Company's capital, management includes the
following items in its definition of capital:
($ in September % of September % of December % of
millions) 27, 2008 total 29, 2007 total 29, 2007 total
-------------------------------------------------------------------------
Capital
components
Current portion
of long-term
debt $ 10.5 0.2% $ 153.1 3.6% $ 156.3 3.4%
Long-term debt 1,370.3 28.1% 1,013.8 24.0% 1,341.8 28.8%
Long-term
deposits 114.5 2.4% 1.1 0.0% 3.8 0.1%
Other long-term
liabilities(1) 0.3 0.0% 12.4 0.3% 10.6 0.2%
Share capital 706.5 14.5% 707.1 16.7% 700.7 15.0%
Contributed
surplus - - % 1.9 0.0% 2.3 0.0%
Components of
accumulated
other
comprehensive
loss(2) (12.1) (0.2)% (6.0) (0.1)% (8.5) (0.2)%
Retained
earnings 2,674.3 55.0% 2,339.0 55.5% 2,455.1 52.7%
-------------------------------------------------------------------------
Net capital
under
management $4,864.3 100.0% $4,222.4 100.0% $4,662.1 100.0%
-------------------------------------------------------------------------
(1) Long-term liabilities that are derivative or hedge instruments
related to capital items only.
(2) Components of other comprehensive loss relating to capital items
only.The Company has in place various policies which it uses to manage
capital, including a leverage and liquidity policy and a securities and
derivatives policy. As part of the overall management of capital, Management's
Financial Risk Management Committee and the Audit Committee of the Board of
Directors review the Company's compliance with, and performance against, these
policies.
In addition, Management's Financial Risk Management Committee and the
Audit Committee of the Board of Directors perform periodic reviews of the
policies to ensure they remain consistent with the risk tolerance acceptable
to the Company and the current market trends and conditions.
4.3 Constraints on managing capital
The Company manages its capital structure and makes modifications in
response to changes in economic conditions and the risks associated with the
underlying strategic initiatives. In addition, we are required to comply with
regulatory requirements associated with the operations of CTB, our federally
chartered bank, and other regulatory requirements that impact our business
operations. As part of existing debt agreements, two key financial covenants
are monitored on an on-going basis by Management to ensure compliance with the
agreements. The key covenants are as follows:- net tangible assets coverage - calculated as:
- total assets less intangible assets, current liabilities
(excluding current portion of long-term debt), and liability for
employee future benefits
- divided by long-term debt (including current portion of long-term
debt)
- limitations on surplus available for distribution to shareholders -
the Company is restricted from distributions (including dividends and
redemptions or purchases of shares) exceeding its accumulated net
income over a defined period.The Company was in compliance with these covenants during the third
quarter of 2008. Under these covenants, the Company currently has significant
flexibility to fund business growth and increase dividend rates within our
existing dividend policy.
In order to maintain or adjust the capital structure, the Company may
adjust the amount of dividends paid to shareholders, purchase shares for
cancellation pursuant to normal course issuer bids (NCIB), issue new shares,
issue new debt, issue new debt to replace existing debt with different
characteristics, engage in additional sale and leaseback transactions of real
estate properties and/or increase or decrease the amount of sales of loan
receivable to Glacier Credit Card Trust.
4.3.1 CTB's regulatory environment
The Company's wholly-owned subsidiary, CTB, manages its capital under
guidelines established by the Office of the Superintendent of Financial
Institutions Canada (OSFI). The regulatory capital guidelines measure capital
in relation to credit, market and operational risks. CTB has a capital
management policy, capital plan, and procedures and controls which it utilizes
to achieve its goals and objectives. CTB's objectives include:- providing sufficient capital to maintain the confidence of
depositors;
- being an appropriately capitalized institution, as measured
internally, defined by regulatory authorities and compared with CTB's
peers; and
- achieving the lowest overall cost of capital consistent with
preserving the appropriate mix of capital elements to meet target
capitalization levels.OSFI's current regulatory capital guidelines classify capital into two
tiers. At the end of the third quarter of 2008, Tier 1 capital included common
shares and retained earnings reduced by net securitization exposures. CTB
currently does not hold any instruments in Tier 2 capital. Risk-weighted
assets, referenced in the regulatory guidelines, include all on-balance sheet
assets weighted for the risk inherent in each type of asset as well as an
operational risk component based on a percentage of average risk-weighted
revenues.
CTB's ratios are above internal minimum targets of 12.0 percent for Tier
1 and total capital ratios and within internal maximum targets of 11.0 times
for the assets-to-capital multiple. OSFI's minimum Tier 1 and total capital
ratios for Canadian banks are 7 percent and 10 percent, respectively. OSFI
will consider applications for authorized assets-to-capital multiples in
excess of 20 times for institutions that meet certain requirements. OSFI has
currently authorized CTB to maintain a maximum assets-to-capital multiple of
12.5.
During the third quarter of 2008, CTB complied with the capital
guidelines issued by OSFI under the "International Convergence of Capital
Measurement and Capital Standards - A Revised Framework" (Basel II). For the
comparative period, CTB complied with the capital guidelines issued by OSFI
under the then current Basel I Capital Accord (Basel I).
4.4 Key performance measures
Management also monitors capital and measures our capital position
according to certain key performance measures identified in the table below.September September December
27, 2008 29, 2007(1) 29, 2007(1)
-------------------------------------------------------------------------
Debt ratio
Long-term debt to total
capitalization(2) 25.2% 26.0% 31.2%
Coverage ratio
Interest coverage(3) 8.1 times 11.5 times 10.7 times
-------------------------------------------------------------------------
(1) 2007 results have been restated for the implementation, on a
retrospective basis, of CICA HB 3031 - Inventories. Please refer to
section 13.1 for additional information.
(2) Long-term debt includes the current portion of long-term debt.
Capitalization is based on current and long-term debt, commercial
paper, long-term deposits, future income taxes, other long-term
liabilities and shareholders' equity.
(3) Interest coverage is calculated on a rolling 12-month basis after
annualizing short -term and long-term interest on long-term debt
issued and retired during the period. See section 14.0 for additional
information on non-GAAP measures.The interest coverage ratio has declined from the previous two years due
to the significant increase in interest expense which can be explained as
follows:- higher interest rate on Q4 2007 MTN issuance;
- additional utilization of commercial paper due to a delay in the GCCT
refinancing;
- an increase in retail banking interest of approximately $3.8 million;
and
- mark-to-market adjustments
As noted above in section 4.3, we are in compliance with our debt
covenants.
5.0 Financing
Canadian Tire has a number of alternative financing sources in order to
ensure that the appropriate level of liquidity is available to meet our
strategic objectives. These sources may be summarized as follows:
Summary of Canadian Tire's financing sources
-------------------------------------------------------------------------
Financing Source Amount Available Description
Committed bank lines of $1.22 billion Provided by 11 domestic and
credit international banks and
includes support for the
$800 million commercial
paper program noted below
which is covered by the bank
lines on a dollar for dollar
basis. There was
approximately $50 million
drawn on the bank lines as
at September 27, 2008.
Commercial paper program $800 million $367 million was outstanding
as at September 27, 2008.
Medium Term Notes (MTN) $750 million $300 million has been issued
program to date under the current
Base Shelf Prospectus.
Securitization of receivables Transaction Securitization transactions
specific handled through Glacier
Credit Card Trust have
historically proved to be a
relatively cost-effective
form of financing. As of
September 27, 2008, Financial
Services has securitized
$635 million of credit card
receivables in 2008.
Broker deposits Unlimited This avenue of fund-raising
ramped up in the third
quarter and funds are readily
available through broker
networks. As at the end of
the third quarter, Financial
Services held $89.7 million
in broker deposits.
Sale/leaseback transactions Transaction Additional sources of funding
specific available on strategic
transactions involving
Company owned properties as
appropriate. Completed two
sale and leaseback
transactions which raised
$214 million in the quarter.As of September 27, 2008, the GCCT commercial paper program has access of
up to $1.0 billion of the total Canadian Tire committed lines and GCCT had
achieved compliance with DBRS® Global Liquidity Standards.
During the current quarter, the market conditions surrounding the
liquidity of ABCP continued to experience some volatility; however, GCCT has
generally been able to roll over its commercial paper, albeit at varying
spreads and terms. There continues to be constraints on the amount of ABCP
that GCCT is able to issue, as investors are cautious and demand remains
limited. As of September 27, 2008, $135 million of GCCT's commercial paper was
outstanding, fully backed by the bank credit lines.
Debt market conditions
In August 2007, global debt markets began to experience a credit crisis
linked to problems in the U.S. sub-prime mortgage market. This caused a
worldwide reassessment of the financial risks involved with asset-backed
securities and led to market disruptions, constrictions and increased interest
rates for borrowers looking to refinance their short-term debt.
Canadian Tire participates in the asset-backed security markets through
the use of commercial paper and issuance of MTN. GCCT issued five-year MTN in
the first quarter of 2008 and continues to refinance certain of its maturing
commercial paper, demonstrating that access to the capital markets exists but
is challenging.
In November 2008, a five-year $570 million GCCT-issued MTN will be
maturing. As per the Series Purchase Agreement, GCCT is required to accumulate
the principal liquidation amounts for these notes from credit card collections
over the three months preceding maturity into the Liquidation Principal
Funding account. The total required funding for the repayment of the notes has
been accumulated and will be repaid to the noteholders on November 20, 2008.
Should the Company be unable to complete a credit card securitization
transaction in the near term due to the unstable financial market conditions,
the Company believes it has access to other sufficient sources of financing.
In November 2007, Canadian Tire received confirmation from its rating
agencies on its various funding programs, all of which had a stable outlook.
As at September 27, 2008 there has been no change in the ratings.Credit rating summary DBRS S&P
-------------------------------------------------------------------------
Canadian Tire
Commercial paper R-1 (low) A-1 (low) (Cdn)
Debentures A (low) BBB+
Medium-term notes A (low) BBB+
Glacier Credit Card Trust(1)
Asset-backed commercial paper R-1 (high) -
Asset-backed senior notes AAA AAA
Asset-backed subordinated notes A A
Trend or outlook Stable Stable
-------------------------------------------------------------------------
(1) Asset-backed Series 2002 Senior and Subordinated Notes were
discontinued on January 2, 2008.Broker deposits
During the fourth quarter of 2007, CTB began piloting the use of broker
GIC deposits. CTB broker deposits raise cash through sales of GICs through
brokers rather than directly to the retail customer and are typically offered
at a higher interest rate compared to retail GICs. Individual balances up to
$100,000 are Canadian Deposit Insurance Corporation (CDIC) insured and CTB
broker GICs are offered in one year to five year terms and all issued GICs are
non-redeemable prior to maturity. Given that the overall size of the broker
GIC market is estimated to be $57 billion, CTB believes that there is ample
room in the market to take advantage of CTB broker GIC deposits as an
alternative funding source to the securitization of credit card receivables at
reasonable and cost-effective interest rates to fund operations.
As at the end of the third quarter, CTB had approximately $90 million in
short-term and long-term CTB broker deposits outstanding on its balance sheet.
CTB believes that there is potential to generate further increases in this
funding source in the future, depending on the time of year and on market
conditions.
Foreign exchange hedging program
The Company has significant demand for United States dollars, due to
global sourcing. To mitigate the impact of fluctuating foreign exchange rates
on the cost of our globally sourced merchandise and consequently earnings, the
Company had, and continues to have, a comprehensive foreign currency hedging
program. The Company's Foreign Exchange Risk Management Policy has specific
guidelines for determining the minimum hedge percentage required for purchases
of foreign-denominated goods and services that are expected to be completed in
the period from one month to 18 months forward. Consequently, when dramatic
swings in foreign currency rates arise, as experienced since the end of the
third quarter of 2008, the Company has fixed the foreign currency impact for
US denominated purchases for the balance of 2008 and more than half of 2009,
as a majority of the US dollars required are available at hedge rates well
below the current spot reference rate. The current foreign currency hedge
portfolio allows the Company to have a significant amount of margin stability
for 2008 and 2009 and the Company may be able to pass on changes in foreign
currency exchange rates through pricing, subject to competitive conditions.
5.1 Funding program
5.1.1 Funding requirements
We fund our capital expenditures, working capital needs, dividend
payments and other financing needs, such as debt repayments and Class A Non-
Voting Share purchases under the NCIB, from a combination of sources. In the
third quarter of 2008, the primary sources of funding were:- $ 367 million of cash generated from the issuance of commercial
paper;
- $ 214 million of cash generated from the sale and leaseback of
property;
- $140 million of cash generated from operating activities before other
changes in working capital; and
- $ 121 million of cash arising from an increase in net deposits.5.1.2 Cash and cash equivalents
At September 27, 2008, the Company's cash and cash equivalents totaled
$2.1 million compared to a negative cash and cash equivalents position of
$84.2 million at September 29, 2007. There was $367.2 million of commercial
paper outstanding at the end of the third quarter of 2008 compared to
$135.4 million of commercial paper outstanding at the end of the third quarter
of 2007. During the third quarter of 2008, we used cash primarily for the
following:- $382 million for the net growth in new loans receivable;
- $380 million for the accumulation of the maturing $570 million GCCT
MTN to be repaid in November 2008; and
- $122 million for additions to property and equipment.5.1.3 Working capital
Minimizing our working capital requirements continues to be a long-term
priority in order to maximize cash flow for use in the operations of the
Company. The table below shows the change in the value of our working capital
components at the end of the third quarter of 2008 from the third quarter of
2007.Comparable working capital components(1)
Increase/
(decrease)
September September in working
($ in millions) 27, 2008 29, 2007 capital
-------------------------------------------------------------------------
Accounts receivable $ 584.1 $ 519.4 $ 64.7
Loans receivable 1,314.6 847.2 467.4
Merchandise inventories 1,301.2 1,083.7 217.5
Prepaid expenses and deposits 56.3 54.3 2.0
Income taxes recoverable 83.7 117.4 (33.7)
Accounts payable and other (1,417.5) (1,525.9) 108.4
-------------------------------------------------------------------------
$ 826.3
-------------------------------------------------------------------------
(1) 2007 figures have been restated for the implementation, on a
retrospective basis, of CICA HB 3031 - Inventories. See section 13.1
for additional information.The increase in loans receivable is due to increases in the mortgage
portfolio, credit card loans portfolio, line of credit account balances and
the repurchase of the securitized personal loan portfolio in May 2008. The
balance is also higher compared to the third quarter of 2007 due to the timing
of securitization transactions. Since a transaction was not completed during
the third quarter of 2008, a greater amount of receivables is being reflected
on the Consolidated Balance Sheet than would otherwise have been if the
receivables been securitized.
The increase in merchandise inventories is due to:- an increase in the amount of globally sourced product, which has
longer lead times due to increases required by certain business
partners which comprise the global supply chain; and
- Management's decision to keep seasonal inventory from the spring and
summer seasons in storage to sell next year versus heavily
discounting or otherwise disposing of the goods.Plans are in place to manage inventories back to planned levels over the
next several quarters.
The decrease in accounts payable and other is largely due to a decrease,
and consequent reclassification to accounts receivable, of foreign exchange
derivatives resulting in their increase in value due to movement in the
Canadian dollar exchange rate. Payables also decreased due to the timing of a
financing arrangement for Petroleum (which will commence in the fourth quarter
of 2008 compared to beginning in September 2007), partially offset by an
increase in merchandise payables due to higher inventory levels.
5.1.4 Asset-backed commercial paper
Background
The market for Canadian third-party asset-backed commercial paper, which
was greatly impacted by the global disruption in the market experienced in
August 2007, has been addressed in a formal restructuring proposal. On
September 19, 2008, the Supreme Court of Canada denied a challenge to the
restructuring plan clearing the way for the committee of investors to proceed
with the implementation. Under the plan investors will receive the
restructured notes with maturities up to nine years. The new notes were
expected in October 2008 however the restructuring plan has been delayed due
to the recent market upheavals and it is expected that the restructuring will
close by the end of November 2008. The restructuring provides investors with
new long-term notes to replace the short-term ABCP that is currently illiquid.
More than 90 percent of the Company's $8.9 million of affected ABCP will be
converted into notes that will pay interest at the rate paid on banker's
acceptance notes less 50 basis points until maturity, which is currently
expected to be between 2016 and 2017. The committee responsible for the
restructuring proposal is working to ensure that a secondary market in the new
notes develops so that investors will have an opportunity to sell their new
notes, should they so choose.
Valuation and classification
During 2007, the Company recorded a $1.3 million before-tax provision for
impairment of the ABCP in the Consolidated Statement of Earnings based on
management's best estimate of impairment at the time. Due to additional
information provided to investors who hold ABCP through the formal
restructuring proposal, the Company recorded an additional $1.0 million
before-tax provision for impairment of the ABCP in the first quarter of 2008,
bringing the total charge for impairment to $2.3 million or 25 percent. The
Company's valuation is representative of the expected outcome of the plan, and
as such no further write-down was recorded in the second and third quarters of
2008.
The valuation model used by the Company to estimate the fair value of the
ABCP incorporates discounted cash flows considering the best available
information regarding market conditions and other factors that a market
participant would consider for such investments.
Consistent with the terms of the restructuring proposal, the Company has
classified the remaining balance of this investment in ABCP of $6.6 million as
long-term investments on the Consolidated Balance Sheet.
Assumptions underlying valuation
The valuation assumes a redemption term of approximately nine years
corresponding to the expected maturities of the ABCP held by the Company. As
indicated above, the Company's valuation assumes that the replacement notes
will bear interest rates similar to short-term instruments and that such rates
would be commensurate with the nature of the underlying assets and their
associated cash flows. Assumptions have been made as to the amount of
restructuring and other costs that the Company will bear.
There still remains some uncertainty regarding the value of the
underlying assets, the amount and timing of cash flows and whether a secondary
market can be established for the new notes and this could give rise to a
further change in the value of the Company's investment in ABCP which would
impact the Company's future earnings. While these changes could positively or
negatively affect the Company's future earnings, it would not be considered
material to the Company's overall financial position, given the relatively
small amount of ABCP held at September 27, 2008.
Impact on debt covenants and ratings
The write-down and reclassification of the Company's investment in ABCP
has had no effect to date on the Company's debt covenants, debt ratings or
compliance with banking regulations governing the Financial Services segment
or CTB.
As referenced in section 5.0, due to the amount of funds we have
available through committed lines of credit and various other forms of
funding, the Company has sufficient credit facilities to satisfy its financial
obligations as they come due and does not expect any impact on its business as
a result of the current third-party ABCP liquidity issue.
5.1.5 Loans receivable
Our loans receivable securitization program is designed to provide a
cost-effective source of funding for Financial Services. Loans receivable were
as follows at the indicated dates:September September
($ in millions) 27, 2008 29, 2007
-------------------------------------------------------------------------
Securitized $ 2,471.3 $ 2,694.5
Unsecuritized 1,431.9 932.4
-------------------------------------------------------------------------
Net managed loans receivable $ 3,903.2 $ 3,626.9
-------------------------------------------------------------------------Net managed loans receivable continued to increase over the last 12
months as customers' use of the Canadian Tire Options MasterCard and Canadian
Tire Gas Advantage MasterCard grew and mortgage volumes increased. At the end
of the third quarter of 2008, net managed loans receivable were 7.6 percent
higher than at the end of the third quarter of 2007.
CTB sells co-ownership interests in credit card loans to GCCT. The
Company does not have a controlling interest in GCCT, so we do not include
financial results of GCCT in our Consolidated Financial Statements.
We record the sale of loans receivable in accordance with CICA's
Accounting Guideline 12, "Transfers of Receivables". Please see note 1 in the
Notes to the 2007 Consolidated Financial Statements.
We expect the continued growth in the number and average balances of
Canadian Tire MasterCard credit card accounts to lead to an increase in total
loans receivable in 2008. Financial Services expects to continue to fund this
increase from the sale of co-ownership interests in credit card loans to GCCT,
deposit raising by CTB and bank borrowing. GCCT is a third party trust that
was formed to buy our credit card loans and also issues debt to third party
investors to fund its credit card loans purchases. The success of the
securitization program is dependent on GCCT's ability to obtain funds from
third parties by issuing debt instruments with high credit ratings. Please
refer to section 5.0 above for a listing of GCCT's credit ratings and
prevailing market conditions.
The trustee and custodian for GCCT, Computershare Trust Company of
Canada, manages the co-ownership interest and acts as agent for, and on behalf
of, CTB and GCCT, as the owners of the co-ownership interests. Pursuant to an
asset purchase agreement dated February 26, 2007, all rights and obligations
of The Canada Trust Company as custodian have been assigned to Computershare
Trust Company of Canada effective September 5, 2008. BNY Trust Company of
Canada acts as indenture trustee with respect to GCCT and manages the security
interests of the holders of the senior and subordinated notes issued by GCCT.
We are currently not aware of any events, commitments, trends or uncertainties
that may have a negative impact on our arrangement with GCCT.
6.0 Equity
The book value of Common and Class A Non-Voting Shares at the end of the
third quarter of 2008 was $41.45 per share compared to $36.61 at the end of
the third quarter of 2007.
We have a policy of repurchasing Class A Non-Voting Shares to offset the
dilutive effect of shares issued to fulfill the Company's obligations under
various employee profit sharing, stock option and share purchase plans and the
dividend reinvestment plan. In the long term, these repurchases are expected
to offset the issuance of new Class A Non-Voting Shares. In addition, the
Company may purchase additional Class A Non-Voting Shares if the Board
determines, after consideration of market conditions and the Company's
financial flexibility and investment opportunities, that a purchase of
additional Class A Non-Voting Shares is an appropriate means of enhancing the
value of the remaining Class A Non-Voting Shares.
On February 7, 2008, we announced our intention to initiate a NCIB to
purchase up to 3.6 million of the issued and outstanding Class A Non-Voting
Shares over the 12-month period ending February 18, 2009.
A NCIB is a bid by a listed company to buy back its shares, up to a
prescribed number, on a stock exchange, subject to certain rules that protect
investors. A total of approximately 0.5 million Class A Non-Voting Shares were
purchased in 2007 under the previous NCIB.Shares outstanding
September September
27, 2008 29, 2007
-------------------------------------------------------------------------
Class A Non-Voting Shares (CTC.A)
Shares outstanding at beginning of year 78,048,062 78,047,456
Shares issued under plans(1) 495,043 372,463
Shares purchased under NCIB (494,800) (287,000)
-------------------------------------------------------------------------
Shares outstanding at end of quarter 78,048,305 78,132,919
Common Shares (CTC)
Shares outstanding at beginning and end of
the quarter 3,423,366 3,423,366
-------------------------------------------------------------------------
(1) We issue shares under various employee profit sharing and share
purchase plans, and the dividend reinvestment plan.Dividends
Dividends of approximately $17.0 million were declared on Common and
Class A Non-Voting Shares in the third quarter of 2008 compared to dividends
of $15.1 million in the third quarter of 2007. The increase in dividends
declared reflected the Board of Directors' decision in February 2008 to
increase the annual dividend rate by 13.5 percent from $0.74 per share to
$0.84 per share. The third quarterly dividend at the 2008 rate was declared on
August 7, 2008 in the amount of $0.21 per share payable on December 1, 2008 to
shareholders of record as of October 31, 2008.Dividend policy
-------------------------------------------------------------------------
Canadian Tire's policy is to maintain dividend payments equal to
approximately 15 to 20 percent of the prior year's normalized basic net
earnings per share, after giving consideration to the period-end cash
position, future cash requirements, capital market conditions and
investment opportunities. Normalized earnings per share for this purpose
include gains and losses on the ordinary course disposition of property
and equipment.
-------------------------------------------------------------------------7.0 Investing activities
7.1 Q3 2008 Capital expenditures program
Canadian Tire's capital expenditures totaled $131 million in the third
quarter of 2008 (as disclosed in the Consolidated Financial Statements of Cash
Flows, see note 12 in the Notes to the Consolidated Financial Statements),
approximately 21 percent lower than the $165 million spent in the third
quarter of 2007. These capital expenditures were comprised of:- $85 million for real estate projects, including projects associated
with the rollout of CTR's new store projects;
- $12 million for the Eastern Canada distribution centre;
- $14 million for information technology; and
- $20 million for other purposesOverall, capital investments for real estate projects has slowed as the
20/20 store rollout nears completion and a large majority of the investment in
the construction of the Eastern Canada distribution centre will be
substantially completed this year. We have also begun to focus on the next
store concept renewals, including our small market stores, which are less
capital-intensive.
7.2 2008 Capital expenditures plan
The 2008 capital plan was originally to incur gross capital expenditures
of $588 million and has now been revised to be in the range of $520 million to
$550 million. 2008 gross capital expenditures are now forecasted as follows,
which total $543 million:- $385 million for real estate projects, including $244 million
associated with the rollout of CTR's store network;
- $ 77 million for the Eastern Canada distribution centre;
- $ 61 million for information technology; and
- $ 20 million for other purposesThese expenditures have been partially funded by various sale and
leaseback transactions originally expected to be $145 million but which are
now estimated to net $214 million.
8.0 Foreign operations
Since the late 1970s, the Company has established operations outside
Canada for a variety of business purposes. This has resulted in a portion of
the Company's capital and accumulated earnings being in wholly-owned foreign
subsidiaries. As there are currently no plans to repatriate the capital and
earnings, Canadian and foreign taxes that might arise upon such repatriation
have not been provided for. These funds have been accumulated in the following
international operations:- U.S.-based subsidiaries hold highly rated short-term securities and
loans to the Company and its wholly-owned Canadian subsidiaries. The
capital and earnings of these U.S.-based subsidiaries arose from
investments made to offset net operating losses incurred by U.S.
retail operations closed in the 1980s and 1990s and from the
reinsurance of risks relating to certain insurance products marketed
to customers of Financial Services and other reinsurance activities;
- subsidiaries operating in the Pacific Rim have provided the Company
with a variety of important services related to product sourcing,
logistics and vendor management. During 2007, several representative
offices of the Company were created to perform the activities
formerly provided by the subsidiaries due to changes in local
regulations and the need to enhance operational efficiencies; and
- a Bermuda-based reinsurance company was established in 2004 to
reinsure the risk of certain insurance products marketed to customers
of Financial Services. In addition to its reinsurance activities,
this company invests in highly rated short-term securities and makes
loans to the Company and its wholly-owned Canadian subsidiaries.9.0 Tax matters
In the ordinary course of business, the Company is subject to ongoing
audits by tax authorities. While the Company believes that its tax filing
positions are appropriate and supportable, from time to time certain matters
are reviewed and challenged by the tax authorities.
The main issues challenged by the Canada Revenue Agency (CRA) relate to
the tax treatments of commissions paid to foreign subsidiaries of the Company
(covering periods from 1995 to 2007), and dividends received on an investment
made by a wholly-owned subsidiary of the Company related to reinsurance
(covering periods from 1999 to 2003). The applicable provincial tax
authorities have reassessed and are also expected to issue further
reassessments on these matters for the corresponding periods.
The Company has agreed with the CRA to settle the commissions issue for
the period 1995-2003, although the determination of the final tax liability
pursuant to the settlement is subject to the verification by the CRA of
certain information provided by the Company. The Company believes the
provincial tax authorities will also reassess on the same basis. The Company
does not have a significant exposure on this issue subsequent to the 2003
taxation year.
The reassessments with respect to the dividends received issue are based
on multiple grounds, some of which are highly unusual. The Company has
appealed the reassessments and the matter is currently pending before the Tax
Court of Canada. If the CRA (and applicable provincial tax authorities) were
entirely successful in their reassessments - an outcome that the Company and
its tax advisors believe to be unlikely - it is estimated that the total
liability of the Company for additional taxes, interest and penalties could be
approximately $188.3 million. Although the Company has appealed these
reassessments, current tax legislation requires the Company to remit to the
CRA and its provincial counterparts approximately $116.8 million related to
this matter, of which $112.6 million had been remitted by the end of the
quarter.
The Company regularly reviews the potential for adverse outcomes in
respect of tax matters. The Company believes that the ultimate disposition of
the settlements, finalization on the commissions issue, resolution of the
dividends received issue and other tax matters, will not have a material
adverse effect on its liquidity, consolidated financial position or results of
operations because the Company believes that it has adequate provision for
these tax matters. Should the ultimate tax liability materially differ from
the provisions, the Company's effective tax rate and its earnings could be
affected, positively or negatively, in the period in which the matters are
resolved.
Income tax expense for the third quarter of 2008 has been favourably
impacted by the net tax effect of adjustments to taxes on the sale and
leaseback of various properties ($6.6 million) and revisions to the estimate
of tax provisions.
10.0 Off-balance sheet arrangements
10.1 Glacier Credit Card Trust
As noted earlier, GCCT was formed to buy our credit card loans and it
issues debt to third-party investors to fund its credit card loans purchases.
Refer to section 5.1.5 of this MD&A for additional information on GCCT.
10.2 Trust financing for Dealers
A financing program has been established to provide an efficient and
cost- effective way for Dealers to access the majority of the financing they
require for their store operations. Refer to MD&A section 8.2 of our 2007
Financial Report for additional information on this program.
10.3 Bank financing for Dealers and PartSource franchisees
We have guaranteed the bank debt of some Dealers and some PartSource
franchisees. Refer to MD&A section 8.3 of our 2007 Financial Report for
additional information on this program.
10.4 Derivative financial instruments
We use derivative financial instruments to manage our exposure to changes
in interest rates and foreign currency exchange rates. We also use equity
derivative contracts to hedge certain future stock-based compensation
expenses. We do not use hedging to speculate, but rather as a risk management
tool. Refer to MD&A section 8.4 of our 2007 Financial Report for additional
information on derivative financial instruments.
11.0 Enterprise risk management
To preserve and enhance shareholder value, the Company approaches the
management of risk strategically through its Enterprise Risk Management (ERM)
framework. Introduced in 2003, the ERM framework sets out principles and tools
for identifying, evaluating, prioritizing and managing risk effectively and
consistently across the Company.
The ERM framework and the identification of principle risks that the
Company manages on an ongoing basis is described in detail in section 9.0 of
the MD&A in our 2007 Financial Report.
Management reviews risks on an ongoing basis and did not identify any new
principal risks during the third quarter of 2008.
11.1 Financial instruments
The following discussion on risks and risk management includes some of
the required disclosures under the CICA Handbook Section 3862 - Financial
Instruments - Disclosures related to the nature and extent of risks arising
from financial instruments, as required by the standard. Further information
is also available in note 10 of the Notes to the Consolidated Financial
Statements.
The Company is exposed to a number of risks associated with financial
instruments that have the potential to affect its operating and financial
performance. The Company's primary financial instrument risk exposures are
allowances for credit losses and liquidity risk. The Company also has
financial risk exposures to foreign currency risk and interest rate risk which
may be managed through the use of derivative financial instruments to manage
these risks. The Company does not use derivative financial instruments for
trading or speculative purposes.
Allowance for credit losses
The Company's allowances for receivables are maintained at levels which
are considered adequate to absorb future credit losses. A continuity of the
Company's allowances for credit losses is as follows:Credit card loans Other loans(1)
----------------------------------------
September September September September
(Dollars in millions) 27, 2008 29 2007 27, 2008 29 2007
----------------------------------------
Balance, beginning of year $ 51.5 $ 30.4 $ 2.7 $ 2.9
Provision for credit losses 47.1 42.6 8.2 4.5
Recoveries 10.7 7.4 0.4 0.1
Write-offs (59.3) (41.8) (7.5) (4.5)
----------------------------------------
Balance, end of period $ 50.0 $ 38.6 $ 3.8 $ 3.0
----------------------------------------
Accounts receivable Total(2)
----------------------------------------
September September September September
(Dollars in millions) 27, 2008 29 2007 27, 2008 29 2007
----------------------------------------
Balance, beginning of year $ 5.0 $ 4.6 $ 59.2 $ 37.9
Provision for credit losses 0.8 0.2 56.1 47 3
Recoveries 0.3 (0.2) 11.4 7.3
Write-offs (2.5) (0.1) (69.3) (46.4)
----------------------------------------
Balance, end of period $ 3.6 $ 4.5 $ 57.4 $ 46.1
----------------------------------------
(1) Other loans include personal loans, mortgages loans and lines of
credit loans.
(2) Relates to Company owned receivables.
Foreign currency risk
The Company has significant demand for foreign currencies, primarily
United States dollars, due to global sourcing. However, it mitigates its
exposure to foreign exchange rate risk through active hedging programs and
through its ability, subject to competitive conditions, to pass on changes in
foreign currency exchange rates through pricing. Refer to section 5.0 above
for additional information on our foreign currency hedging program.
Liquidity risk
The following table summarizes the Company's contractual maturity for its
financial liabilities. The table includes both interest and principal cash
flows.
(Dollars in millions) 1 year 2 years 3 years 4 years
-------------------------------------------------------------------------
Deposits $ 186.5 $ 11.4 $ 13.1 $ 3.8
Accounts payable and other(1) 1,808.5 - - -
Long-term debt 7.1 465.0 9.0 20.9
Interest payment 92.8 84.6 50.4 49.2
Other - 5.5 - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total $2,094.9 $ 566.5 $ 72.5 $ 73.9
-------------------------------------------------------------------------
(Dollars in millions) 5 years Thereafter Total
---------------------------------------------------------------
Deposits $ 86.2 $ - $ 301.0
Accounts payable and other(1) - - 1,808.5
Long-term debt 7.8 863.6 1,373.4
Interest payment 48.8 677.4 1,003.2
Other 0.1 7.2 12.8
---------------------------------------------------------------
---------------------------------------------------------------
Total $ 142.9 $1,548.2 $4,498.9
---------------------------------------------------------------
(1) Includes bank indebtedness and commercial paper.Interest rate risk
The Company is exposed to interest rate risk, which it manages through
the use of interest rate swaps. The Company has a policy in place whereby a
minimum of 75 percent of its long-term debt (term greater than one year) must
be at fixed versus floating interest rates. The Company is in compliance with
the policy.
11.2 Other risks
In addition to the Principal Risks identified in our 2007 Financial
Report other business risks that may cause actual results or events to differ
materially from those forecasted in this MD&A include:- expansion activity planned for Mark's, PartSource, Petroleum and CTR,
(the retail businesses), as well as the associated supply chain
infrastructure, could be affected by weather conditions that could
impact the timing of construction;
- the Company's ability to acquire and develop real estate properties,
obtain municipal and other required government approvals, access
construction labour and materials at reasonable prices, lease
suitable properties and access sufficient funds from capital markets
to finance the development of properties could also impact the timing
of construction;
- expansion activity planned for the retail businesses, the associated
supply chain infrastructure and Financial Services could be
negatively affected by the Company's ability to access sufficient
funds, in a cost- effective manner, to finance the building projects
due to difficulties experienced in the capital markets;
- expansion activity for CTR could also be affected by the ability of
our Dealers to secure financing through the Trusts referenced in
section 10.0 or through other means;
- unseasonable weather patterns could affect the sales of seasonal
merchandise at CTR and Mark's throughout the year, particularly in
the second and fourth quarters, which historically are these
divisions' largest selling periods;
- adverse environmental occurrences could damage the Company's
reputation or threaten its licences to operate, particularly in the
Petroleum division;
- changes in commodity prices could affect the profitability of
Petroleum, CTR and Mark's;
- fluctuating foreign currency exchange rates could impact cross-border
shopping patterns and employment levels in the manufacturing and
export sectors and, consequently, negatively impact consumer spending
practices;
- disruptions in the supply of gasoline could affect Petroleum's
revenue and earnings;
- the earnings of Financial Services could be affected by customers'
inability to repay their Canadian Tire credit card or loan balances
or by an unsatisfactory response to the retail banking initiative;
and
- failure to comply with applicable laws and regulations could result
in sanctions and financial penalties by regulatory bodies that could
impact our earnings and reputation. Areas of compliance include
environmental, health and safety, competition law, transportation of
dangerous goods, customs and excise tax and laws and regulations
governing financial institutions.
We cannot provide any assurance that forecasted financial or operational
performance will actually be achieved, or if it is, that it will result in an
increase in the price of Canadian Tire shares.
12.0 Contractual obligations
Contractual obligations due by period
In the
remaining
three In years In years
months 2009 - 2011 - After
($ in millions) Total of 2008 2010 2012 2012
-------------------------------------------------------------------------
Long-term debt $1,325.9 $ 0.5 $ 460.3 $ 15.0 $ 850.1
Capital lease
obligations 47.5 1.8 13.2 14.2 18.3
Operating leases 2,144.5 57.4 439.7 368.7 1,278.7
Purchase obligations 811.4 552.2 188.3 45.3 25.6
Other obligations 27.3 2.0 11.8 7.8 5.7
-------------------------------------------------------------------------
Total contractual
obligations $4,356.6 $ 613.9 $1,113.3 $ 451.0 $2,178.4
-------------------------------------------------------------------------
(1) The long-term debt number in the Consolidated Balance Sheet has been
adjusted by $7.4 million due to the implementation of the new
Financial Instrument standard.13.0 Changes in accounting policies
The numbers indicated in this MD&A follow the same accounting policies
and methods of their application as the most recently issued annual financial
statements for the 52 weeks ended December 29, 2007 (contained in our 2007
Annual Report), except as noted below.
13.1 Merchandise inventories
Effective, December 30, 2007 (the first day of the Company's 2008 fiscal
year), the Company implemented, on a retrospective basis with restatement, the
new CICA Handbook Section 3031 - Inventories, which is effective for interim
and annual financial statements for fiscal years beginning on or after January
1, 2008.
This new standard provides guidance on the determination of cost and
requires inventories to be measured at the lower of cost and net realizable
value. The cost of inventories includes the cost of purchase and other costs
incurred in bringing the inventories to their present location and condition.
Costs such as storage costs, administrative overheads that do not contribute
to bringing the inventories to their present location and condition, and
selling costs are specifically excluded from the cost of inventories and are
expensed in the period incurred. Reversals of previous write-downs to net
realizable value are now required when there is a subsequent increase in the
value of inventories. The cost of inventories should be determined using
either a first-in, first-out or weighted average cost formula. Techniques for
the measurement of cost of inventories, such as the retail method or standard
cost method, may be used for convenience if the results approximate actual
cost. The new standard also requires additional disclosures including the
accounting policies adopted in measuring inventories, the carrying amount of
inventories, amount of inventories recognized as an expense during the period,
the amount of write-downs during the period and the amount of any reversal of
write-downs that is recognized as a reduction of expenses.
In order to correspond with the new standard, the Company's new policy
states that merchandise inventories are carried at the lower of cost and net
realizable value, with cost being determined as weighted average cost.
As a result of the retrospective implementation of this new standard, the
cumulative impact on previously reported balances on the following dates is as
follows:Increase/(Decrease)
-------------------------------------------------------------------------
December September December
($ in millions) 29, 2007 29, 2007 30, 2006
-------------------------------------------------------------------------
Retained earnings $ 14.2 $ 8.0 $ 20.1
Inventories 22.0 11.6 31.5
Income taxes recoverable (5.8) 1.0 -
Future income tax assets (2.0) (5.3) (5.3)
Accounts payable and other - (0.7) 0.6
Income taxes payable - - 5.5
-------------------------------------------------------------------------In addition, the impact of the retrospective impact on net earnings for
the 13 weeks ended September 29, 2007 was a reduction of $3.7 million, or
$0.04 per share and for the 26 weeks ended September 29, 2007 was a reduction
of $12.2 million, or $0.15 per share. See note 2 in the Notes to the
Consolidated Financial Statements for additional information.
13.2 Capital management disclosures
Effective December 30, 2007, the Company implemented the new CICA
Handbook Section 1535 - Capital Disclosures which is effective for fiscal
years beginning on or after October 1, 2007. The new standard requires
entities to disclose information about their objectives, policies and
processes for managing capital, as well as their compliance with any
externally imposed capital requirements. See section 4.0 for additional
information. The adoption of this new standard does not require any changes to
the Company's accounting, but does require additional note disclosure.
13.3 Financial instruments
Effective, December 30, 2007, the Company implemented the new CICA
Handbook Section 3862 -Financial Instruments - Disclosures and CICA Handbook
Section 3863 - Financial Instruments - Presentation. These standards replace
the existing CICA Handbook Section 3861 - Financial Instruments - Disclosure
and Presentation. They also require increased disclosures regarding the risks
associated with financial instruments and how these risks are managed. These
new standards carry forward the presentation standards for financial
instruments and non-financial derivatives but provide additional guidance for
the classification of financial instruments, from the perspective of the
issuer, between liabilities and equity. The adoption of these new standards
does not require any changes to the Company's accounting, but does require
additional note disclosure (see note 11.1 in this MD&A and note 10 in the
Notes to the Consolidated Financial Statements for additional information).
13.4 International Financial Reporting Standards
In February 2008, the CICA announced that Canadian generally accepted
accounting principles (GAAP) for publicly accountable enterprises will be
replaced by International Financial Reporting Standards (IFRS) for fiscal
years beginning on or after January 1, 2011. Companies will be required to
provide IFRS comparative information for the previous fiscal year.
Accordingly, the conversion from Canadian GAAP to IFRS will be applicable to
the Company's reporting for the first quarter of 2011 for which the current
and comparative information will be prepared under IFRS. The Company expects
the transition to IFRS to impact accounting, financial reporting, internal
control over financial reporting, taxes, IT systems and processes as well as
certain contractual arrangements. The Company is currently assessing the
impact of the transition to IFRS. Training and hiring additional resources is
underway to ensure the timely conversion to IFRS.
13.5 Goodwill and intangible assets
In February 2008, the CICA issued CICA Handbook Section 3064 - Goodwill
and Intangible Assets, which replaces CICA Handbook Section 3062 - Goodwill
and Other Intangible Assets and CICA Handbook Section 3450 - Research and
Development.
This new standard provides guidance on the recognition, measurement,
presentation and disclosure of goodwill and intangible assets.
As this standard applies to interim and annual financial statements for
fiscal years beginning on or after October 1, 2008, the Company will adopt
this new standard effective January 4, 2009 (the first day of the Company's
2009 fiscal year) retrospectively with a restatement of prior periods, with
the exception of intangible items initially recognized as an expense.
The Company is currently evaluating the potential impact of this new
standard on the financial statements for 2009 and will adjust its systems and
processes as necessary to comply with this new standard.
14.0 Non-GAAP measures
The following measures included in this MD&A do not have a standardized
meaning under Canadian generally accepted accounting principles (GAAP) and may
not be comparable to similar measures presented by other companies:- EBITDA (earnings before interest, income taxes, depreciation and
amortization);
- adjusted earnings; and
- same store salesEBITDA
With the exception of Financial Services, we consider EBITDA to be an
effective measure of the contribution of each of our businesses to our
profitability on an operational basis, before allocating the cost of income
taxes and capital investments. EBITDA is also commonly regarded as an indirect
measure of operating cash flow, a significant indicator of success for many
businesses.
A reconciliation of EBITDA to the most comparable GAAP measure (earnings
before income taxes) is provided as follows:Reconciliation of EBITDA to GAAP measures(1)
($ in millions) Q3 2008 Q3 2007(2) YTD 2008 YTD 2007(2)
-------------------------------------------------------------------------
EBITDA(3)
CTR $ 152.8 $ 148.5 $ 398.0 $ 376.7
Financial Services 52.7 45.7 160.2 162.7
Petroleum 11.7 12.1 32.8 29.1
Mark's 6.7 11.7 24.4 46.4
-------------------------------------------------------------------------
Total EBITDA $ 223.9 $ 218.0 $ 615.4 $ 614.9
-------------------------------------------------------------------------
Less: Depreciation and
amortization expense
CTR $ 43.2 $ 39.5 $ 127.7 $ 114.9
Financial Services 3.4 3.1 10.0 9.4
Petroleum 4.2 4.2 12.3 12.3
Mark's 5.9 4.4 17.0 13.2
-------------------------------------------------------------------------
Total depreciation and
amortization expense $ 56.7 $ 51.2 $ 167.0 $ 149.8
-------------------------------------------------------------------------
Interest expense(3)
CTR $ 15.6 $ 14.1 $ 47.7 $ 40.4
Financial Services 2.3 (1.1) 5.8 (4.4)
Mark's 1.1 1.1 3.2 2.2
-------------------------------------------------------------------------
Total interest expense $ 19.0 $ 14.1 $ 56.7 $ 38.2
-------------------------------------------------------------------------
Earnings (loss) before
income taxes
CTR $ 94.0 $ 94.9 $ 222.6 $ 221.4
Financial Services 47.0 43.7 144.4 157.7
Petroleum 7.5 7.9 20.5 16.8
Mark's (0.3) 6.2 4.2 31.0
-------------------------------------------------------------------------
Total earnings before income
taxes $ 148.2 $ 152.7 $ 391.7 $ 426.9
-------------------------------------------------------------------------
(1) Differences may occur due to rounding.
(2) 2007 figures have been restated for the implementation, on a
retrospective basis, of CICA HB 3031 - Inventories. See section 13.1
for additional information.
(3) Eliminations of inter-company transactions (eg. a loan of funds from
one business unit to another), previously disclosed as a separate
line item, are now presented net of these transactions.References to adjusted earnings
In several places in this MD&A, we refer to adjusted pre-tax and after-
tax earnings before the impact of non-operating items. Historically, non-
operating items have included the net effect of securitization activities and
dispositions of surplus property and equipment. The timing and amount of gains
and losses from these items are not consistent from quarter to quarter. We
believe the adjusted figures allow for a clearer assessment of earnings for
each of our businesses and provide a more meaningful measure of our
consolidated and segmented operating results.
From time to time adjusted earnings may also contain additional unusual
and/or non-recurring items which are explained in detail at that time.
Same store sales
Same store sales is the metric used by management, and most commonly used
in the retail industry, to compare retail sales growth in a more consistent
manner across the industry. CTR's same store sales includes sales from all
stores that have been open for more than 53 weeks and therefore allows for a
more consistent comparison to other stores open during the period and to
results in the prior year.
15.0 Controls and procedures
Disclosure controls and procedures
Management is responsible for establishing and maintaining a system of
controls and procedures over the public disclosure of financial and non-
financial information regarding the Company. Such controls and procedures are
designed to provide reasonable assurance that all relevant information is
gathered and reported, on a timely basis, to senior management, including the
Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), so that
appropriate decisions can be made by them regarding public disclosure.
Our system of disclosure controls and procedures includes, but is not
limited to, our Disclosure Policy, our Code of Business Conduct, the effective
functioning of our Disclosure Committee, procedures in place to systematically
identify matters warranting consideration of disclosure by the Disclosure
Committee, verification processes for individual financial and non-financial
metrics and information contained in annual and interim filings, including the
financial statements, MD&As, Annual Information Forms and other documents and
external communications.
Internal control over financial reporting
Management is also responsible for establishing and maintaining
appropriate internal controls over financial reporting. Our internal controls
over financial reporting include, but are not limited to, detailed policies
and procedures related to financial accounting and reporting, and controls
over systems that process and summarize transactions. Our procedures for
financial reporting also include the active involvement of qualified financial
professionals, senior management and our Audit Committee.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
Management has evaluated whether there were changes in our internal
controls over financial reporting during the interim period ended September
27, 2008 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting. Management has
determined that no material changes occurred in the third quarter.
Commitment to disclosure and investor communication
Canadian Tire strives to maintain a high standard of disclosure and
investor communication and has been recognized as a leader in financial
reporting practices. In many cases, the Company's disclosure practices exceed
the requirements of current legislation. Reflecting our commitment to full and
transparent disclosure, the Investor Relations section of the Company's web
site includes the following documents and information of interest to
investors:- Annual Information Form;
- Management Information Circular;
- quarterly reports;
- quarterly fact sheets; and
- conference call webcasts (archived for one year)
The Company's Annual Information Form, Management Information Circular and
quarterly reports are also available on the SEDAR (System for Electronic
Disclosure and Retrieval) web site at www.sedar.com.
If you would like to contact the Investor Relations department directly,
call Karen Meagher (416) 480-8058 or email investor.relations@cantire.com.
2008 THIRD QUARTER
INTERIM REPORT FINANCIALS
Consolidated Statements of Earnings (Unaudited)
-------------------------------------------------------------------------
(Dollars in millions 13 weeks ended, 39 weeks ended,
except per share September September September September
amounts) 27, 2008 29, 2007 27, 2008 29, 2007
-------------------------------------------------------------------------
(Restated - (Restated -
Notes 2 Notes 2
and 16) and 16)
Gross operating
revenue $ 2,257.5 $ 2,049.2 $ 6,533.5 $ 6,101.0
-------------------------------------------------------------------------
Operating expenses
Cost of merchandise
sold and all other
operating expenses
except for the
undernoted items 2,024.3 1,822.0 5,895.0 5,461.9
Net interest expense
(Note 7) 19.0 14.1 56.7 38.2
Depreciation and
amortization 56.7 51.2 167.0 149.8
Employee Profit
Sharing Plan 9.3 9.2 23.1 24.2
-------------------------------------------------------------------------
Total operating
expenses 2,109.3 1,896.5 6,141.8 5,674.1
-------------------------------------------------------------------------
Earnings before
income taxes 148.2 152.7 391.7 426.9
Income taxes
Current 61.6 42.3 140.7 138.3
Future (22.0) 8.2 (22.0) 8.2
-------------------------------------------------------------------------
Income taxes 39.6 50.5 118.7 146.5
-------------------------------------------------------------------------
Net earnings $ 108.6 $ 102.2 $ 273.0 $ 280.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted
earnings per share $ 1.33 $ 1.25 $ 3.35 $ 3.44
-------------------------------------------------------------------------
Weighted average
number of Common and
Class A Non-Voting
Shares outstanding 81,512,981 81,519,870 81,510,371 81,498,943
-------------------------------------------------------------------------
Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------------------------------------------
13 weeks ended, 39 weeks ended,
September September September September
(Dollars in millions) 27, 2008 29, 2007 27, 2008 29, 2007
-------------------------------------------------------------------------
(Restated - (Restated -
Notes 2 Notes 2
and 16) and 16)
Cash generated from
(used for):
Operating activities
Net earnings $ 108.6 $ 102.2 $ 273.0 $ 280.4
Items not affecting
cash
Depreciation and
amortization 56.7 51.2 167.0 149.8
Net provision for
loans receivable
(Note 3) 25.1 21.4 55.3 47.1
Changes in fair
value of
derivative
instruments 1.7 2.6 16.5 5.7
Employee future
benefits expense
(Note 4) 1.6 1.6 4.8 4.9
Fair market value
adjustment and
impairments on
property and
equipment 1.4 0.4 1.7 2.8
Impairment of
other long-term
investments
(Note 11) - 1.3 1.0 1.3
Other (1.8) 0.7 (1.5) 2.5
Gain on disposals
of property and
equipment (0.1) (6.1) (4.1) (10.1)
Future income
taxes (22.0) 8.2 (22.0) 8.2
Securitization
loans receivable (13.8) (14.1) (40.3) (40.5)
Gain on sales of
loans receivable
(Note 3) (17.4) (21.1) (63.5) (67.0)
Gain on
disposals/
redemptions of
shares - - - (18.4)
-------------------------------------------------------------------------
140.0 148.3 387.9 366.7
-------------------------------------------------------------------------
Changes in other
working capital
components (287.5) (41.4) (660.1) (855.0)
-------------------------------------------------------------------------
Cash generated from
(used for) operating
activities (147.5) 106.9 (272.2) (488.3)
-------------------------------------------------------------------------
Investing activities
Additions to property
and equipment (121.5) (155.9) (375.7) (420.0)
Investment in loans
receivable, net (56.3) (1.5) (35.4) (69.4)
Purchases of stores (10.4) (2.6) (28.5) (6.8)
Other (1.6) (1.4) (3.5) (3.1)
Long-term receivables
and other assets 9.6 1.3 1.5 19.6
Proceeds on
disposition of
property and
equipment 214.5 10.6 230.6 19.1
Net securitization
of loans receivable (382.1) (152.9) 240.3 (16.9)
Reclassification of
other long-term
investments
(Note 11) - (8.9) - (8.9)
Proceeds on
disposals/
redemptions of
shares - - - 18.4
-------------------------------------------------------------------------
Cash generated from
(used for) investing
activities (347.8) (311.3) 29.3 (468.0)
-------------------------------------------------------------------------
Financing activities
Commercial paper 367.2 135.4 367.2 135.4
Net change in
deposits (Note 16) 120.9 11.6 185.7 36.8
Other (0.5) 6.2 1.2 4.6
Dividends (17.1) (15.1) (49.3) (43.6)
Repayment of
long-term debt (1.6) (1.0) (154.3) (2.4)
-------------------------------------------------------------------------
Cash generated from
financing activities 468.9 137.1 350.5 130.8
-------------------------------------------------------------------------
Cash generated (used)
in the period (26.4) (67.3) 107.6 (825.5)
Cash and cash
equivalents, beginning
of period 28.5 (16.9) (105.5) 741.3
-------------------------------------------------------------------------
Cash and cash
equivalents, end of
period (Note 8) $ 2.1 $ (84.2) $ 2.1 $ (84.2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income (Unaudited)
-------------------------------------------------------------------------
13 weeks ended, 39 weeks ended,
September September September September
(Dollars in millions) 27, 2008 29, 2007 27, 2008 29, 2007
-------------------------------------------------------------------------
(Restated - (Restated -
Note 2) Note 2)
Net earnings $ 108.6 $ 102.2 $ 273.0 $ 280.4
Other comprehensive
income (loss), net of
taxes
Gain (loss) on
derivatives
designated as cash
flow hedges, net of
tax of $8.1 and
$12.2 (2007 - $22.0
and $45.0),
respectively 14.3 (41.2) 22.3 (83.5)
Reclassification to
non-financial asset
of loss (gain) on
derivatives
designated as cash
flow hedges, net of
tax of $3.3 and
$8.4 (2007 - $12.3
and $8.2),
respectively (6.1) 22.8 17.9 15.3
Reclassification to
earnings of loss
(gain) on
derivatives
designated as cash
flow hedges, net of
tax of $0.6 and
$2.8 (2007 - $0.2
and $1.4),
respectively 1.3 0.4 6.0 (2.6)
-------------------------------------------------------------------------
Other comprehensive
income (loss) 9.5 (18.0) 46.2 (70.8)
-------------------------------------------------------------------------
Comprehensive income $ 118.1 $ 84.2 $ 319.2 $ 209.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
-------------------------------------------------------------------------
39 weeks ended,
September September
(Dollars in millions) 27, 2008 29, 2007
-------------------------------------------------------------------------
(Restated -
Note 2)
Share capital
Balance, beginning of period $ 700.7 $ 702.7
Transactions, net (Note 5) 5.8 4.4
-------------------------------------------------------------------------
Balance, end of period $ 706.5 $ 707.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contributed surplus
Balance, beginning of period $ 2.3 $ 0.1
Transactions, net (2.3) 1.8
-------------------------------------------------------------------------
Balance, end of period $ - $ 1.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings
Balance, beginning of period as previously
reported $ 2,440.9 $ 2,083.7
Transitional adjustment on adoption of new
accounting policies (Note 2) 14.2 20.1
-------------------------------------------------------------------------
Balance, beginning of period as restated 2,455.1 2,103.8
Net earnings for the period 273.0 280.4
Dividends (51.3) (45.2)
Repurchase of Class A Non-Voting Shares (2.5) -
-------------------------------------------------------------------------
Balance, end of period $ 2,674.3 $ 2,339.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Balance, beginning of period $ (50.0) $ 8.6
Other comprehensive income (loss) for the
period 46.2 (70.8)
-------------------------------------------------------------------------
Balance, end of period $ (3.8) $ (62.2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings and accumulated other
comprehensive income $ 2,670.5 $ 2,276.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Balance Sheets (Unaudited)
-------------------------------------------------------------------------
(Dollars in millions) September September December
As at 27, 2008 29, 2007 29, 2007
-------------------------------------------------------------------------
(Restated - (Restated -
Notes 2 Notes 2
and 16) and 16)
ASSETS
Current assets
Cash and cash equivalents
(Note 8) $ 2.1 $ - $ -
Accounts receivable 584.1 519.4 715.0
Loans receivable (Note 3) 1,314.6 847.2 1,486.1
Merchandise inventories (Note 2) 1,301.2 1,083.7 778.7
Income taxes recoverable 83.7 117.4 53.2
Prepaid expenses and deposits 56.3 54.3 29.5
Future income taxes 53.6 36.5 75.7
-------------------------------------------------------------------------
Total current assets 3,395.6 2,658.5 3,138.2
-------------------------------------------------------------------------
Long-term receivables and other
assets (Note 3) 235.5 254.8 231.2
Other long-term investments, net
(Note 11) 6.6 7.6 7.6
Goodwill 72.2 50.0 51.8
Intangible assets 52.5 52.4 52.4
Property and equipment, net 3,320.0 3,119.6 3,283.6
-------------------------------------------------------------------------
Total assets $ 7,082.4 $ 6,142.9 $ 6,764.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Bank indebtedness (Note 8) $ - $ 84.2 $ 105.5
Commercial paper 367.2 135.4 -
Deposits 186.5 37.9 111.5
Accounts payable and other 1,417.5 1,525.9 1,740.4
Current portion of long-term debt 10.5 153.1 156.3
-------------------------------------------------------------------------
Total current liabilities 1,981.7 1,936.5 2,113.7
-------------------------------------------------------------------------
Long-term debt 1,370.3 1,013.8 1,341.8
Future income taxes 51.3 78.8 71.8
Long-term deposits 114.5 1.1 3.8
Other long-term liabilities 187.6 126.9 125.6
-------------------------------------------------------------------------
Total liabilities 3,705.4 3,157.1 3,656.7
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 5) 706.5 707.1 700.7
Contributed surplus - 1.9 2.3
Accumulated other comprehensive
loss (3.8) (62.2) (50.0)
Retained earnings 2,674.3 2,339.0 2,455.1
-------------------------------------------------------------------------
Total shareholders' equity 3,377.0 2,985.8 3,108.1
-------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 7,082.4 $ 6,142.9 $ 6,764.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (Unaudited)
-------------------------------------------------------------------------
1. Basis of Presentation
These unaudited interim consolidated financial statements (the
"financial statements") have been prepared by management in
accordance with Canadian generally accepted accounting principles
("GAAP") and include the accounts of Canadian Tire Corporation,
Limited and its subsidiaries, collectively referred to as the
"Company". These financial statements do not contain all disclosures
required by Canadian GAAP for annual financial statements, and
accordingly, these financial statements should be read in conjunction
with the most recently issued annual financial statements for the
52 weeks ended December 29, 2007 contained in our 2007 Annual Report.
The preparation of the financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from these
estimates. Estimates are used when accounting for items such as
income taxes, impairment of assets (including goodwill), employee
benefits, product warranties, inventory provisions, amortization,
uncollectible loans, environmental reserves, asset retirement
obligations, financial instruments, and the liability for the
Company's loyalty programs.
2. Change in Accounting Policies
These financial statements follow the same accounting policies and
methods of their application as the most recently issued annual
financial statements for the 52 weeks ended December 29, 2007, except
as noted below.
Merchandise inventories
Effective, December 30, 2007 (the first day of the Company's 2008
fiscal year), the Company implemented, on a retrospective basis with
restatement, the Canadian Institute of Chartered Accountants (CICA)
Handbook Section 3031 - Inventories, which is effective for interim
and annual financial statements for fiscal years beginning on or
after January 1, 2008.
This new standard provides guidance on the determination of cost and
requires inventories to be measured at the lower of cost and net
realizable value. The cost of inventories includes the cost of
purchase and other costs incurred in bringing the inventories to
their present location and condition. Costs such as storage costs,
administrative overheads that do not contribute to bringing the
inventories to their present location and condition, and selling
costs are specifically excluded from the cost of inventories and are
expensed in the period incurred. Reversals of previous write-downs to
net realizable value are now required when there is a subsequent
increase in the value of inventories. The cost of inventories should
be determined using either a first-in, first-out or weighted average
cost formula. Techniques for the measurement of cost of inventories,
such as the retail method or standard cost method, may be used for
convenience if the results approximate actual cost. The new standard
also requires additional disclosures including the accounting
policies adopted in measuring inventories, the carrying amount of
inventories, amount of inventories recognized as an expense during
the period, the amount of write-downs during the period and the
amount of any reversal of write-downs that is recognized as a
reduction of expenses.
The Company's new policy to correspond with the new standard is as
follows:
Merchandise inventories are carried at the lower of cost and net
realizable value, with cost being determined as weighted average
cost.
As a result of the retrospective implementation of this new standard,
the cumulative impact on previously reported balances on the
following dates is as follows:
(Dollars in millions) Increase / (Decrease)
-----------------------------------------
December 29, September 29, December 30,
2007 2007 2006
-----------------------------------------
Retained earnings $ 14.2 $ 8.0 $ 20.1
Inventories 22.0 11.6 31.5
Income taxes recoverable (5.8) 1.0 -
Future income tax assets (2.0) (5.3) (5.3)
Accounts payable and other - (0.7) 0.6
Income taxes payable - - 5.5
In addition, the retrospective impact on net earnings for the
13 weeks ended September 29, 2007 was a reduction of $3.7 million, or
$0.04 per share, and for the 39 weeks ended September 29, 2007 a
reduction of $12.2 million, or $0.15 per share.
Included in "cost of merchandise sold and all other operating
expenses except for the undernoted items" for the 13 weeks and
39 weeks ended September 27, 2008 is $1,604.6 million (2007 -
$1,410.8 million) and $4,610.1 million (2007 - $4,263.2 million),
respectively, of inventory recognized as an expense, which included
$16.0 million (2007 - $9.4 million) and $48.9 million
(2007 - $31.6 million), respectively, of write-downs of inventory as
a result of net realizable value being lower than cost. Inventory
write-downs recognized in previous periods and reversed in the
current quarter and year to date and the comparative quarter and year
to date were insignificant.
Financial instruments
Effective, December 30, 2007, the Company implemented the new CICA
Handbook Section 3862 "Financial Instruments - Disclosures" and CICA
Handbook Section 3863 "Financial Instruments - Presentation". These
standards replaced the existing CICA Handbook Section 3861 "Financial
Instruments - Disclosure and Presentation". They require increased
disclosures regarding the risks associated with financial instruments
and how these risks are managed. These new standards carry forward
the presentation standards for financial instruments and non-
financial derivatives but provide additional guidance for the
classification of financial instruments, from the perspective of the
issuer, between liabilities and equity. The adoption of these new
standards did not require any changes to the Company's accounting,
but does require additional note disclosure, which is included in
note 10.
Capital management disclosures
Effective, December 30, 2007, the Company implemented the new CICA
Handbook Section 1535 "Capital Disclosures" which is effective for
fiscal years beginning on or after October 1, 2007. The new standard
requires entities to disclose information about their objectives,
policies and processes for managing capital, as well as their
compliance with any externally imposed capital requirements. The
adoption of this new standard did not require any changes to the
Company's accounting, but does require additional note disclosure,
which is included in note 9.
Future accounting changes
Goodwill and intangible assets
In February 2008, the CICA issued CICA HB 3064 - Goodwill and
Intangible Assets, which replaces CICA HB 3062 - Goodwill and Other
Intangible Assets as well as CICA HB 3450 - Research and Development.
This new standard provides guidance on the recognition, measurement,
presentation and disclosure of goodwill and intangible assets.
As this standard applies to interim and annual financial statements
for fiscal years beginning on or after October 1, 2008, the Company
will adopt this new standard effective January 4, 2009 (the first day
of the Company's 2009 fiscal year) retrospectively with a restatement
of prior periods with the exception of intangible items initially
recognized as an expense.
The Company is evaluating the potential impact of this new standard
on the financial statements for 2009 and will adjust its systems and
processes as necessary to comply with this new standard.
International Financial Reporting Standards (IFRS)
In February 2008, the CICA announced that Canadian generally accepted
accounting principles (GAAP) for publicly accountable enterprises
will be replaced by International Financial Reporting Standards
(IFRS) for fiscal years beginning on or after January 1, 2011.
Companies will be required to provide IFRS comparative information
for the previous fiscal year. Accordingly, the conversion from
Canadian GAAP to IFRS will be applicable to the Company's reporting
for the first quarter of 2011 for which the current and comparative
information will be prepared under IFRS. The Company expects the
transition to IFRS to impact accounting, financial reporting,
internal control over financial reporting, taxes, IT systems and
processes as well as certain contractual arrangements. The Company is
currently assessing the impact of the transition to IFRS. Training
and hiring additional resources is underway to ensure the timely
conversion to IFRS.
3. Loans Receivable
The Company sells pools of loans receivable (the Loans) to third
party trusts (the Trusts) in transactions known as
securitizations. The transactions are accounted for as sales in
accordance with CICA Accounting Guideline 12 (AcG-12), Transfers of
Receivables, and the Loans are removed from the Consolidated Balance
Sheets.
The Company retains the interest-only strip, and, for the personal
loan securitization, a subordinated interest in the loans sold (the
"seller's interest") and cash deposited with one of the Trusts (the
"securitization reserve"), which are components of retained
interests. The interest-only strip represents the present value of
the expected spread to be earned over the collection period on the
loans receivable sold. The expected spread is equal to the yield
earned, less the net write-offs and interest expense on the loans
receivable sold. The seller's interest and securitization reserve
provide the Trust with a source of funds in the event that the
interest and principal collected on the Loans is not sufficient to
pay the Trust's creditors. The Trusts' recourse to the Company is
limited to the interest-only strip, the seller's interest and the
securitization reserve and for the credit card loan securitization,
the additional enhancement required to be maintained.
The proceeds of the sale are deemed to be the cash received,
interest-only strip and securitization reserve, less any servicing
obligation assumed. The servicing liability represents the Company's
estimated cost of servicing the securitized loans and is amortized
over the life of the securitized loans. The proceeds are allocated
between the Loans, interest-only strip, seller's interest and
securitization reserve based on their relative fair value at the date
of sale, with any excess or deficiency recorded as a gain or loss on
sale, respectively.
The Trusts have not been consolidated in these financial statements
because either they meet the criteria for a qualified special purpose
entity (which are exempt from consolidation) or the Company is not
the primary beneficiary.
Quantitative information about loans managed and securitized by the
Company is as follows:
Total principal amount
(Dollars in millions) of receivables as at (1)
--------------------------------------
September September December
27, 2008 29, 2007 29, 2007
------------ ------------ ------------
Total net managed credit card
loans $ 3,677.6 $ 3,441.7 $ 3,681.3
Credit card loans sold (2,471.2) (2,625.5) (2,233.7)
------------ ------------ ------------
Credit card loans held 1,206.4 816.2 1,447.6
Total net managed personal
loans (2) 101.1 163.4 140.2
Personal loans sold - (69.1) (56.0)
------------ ------------ ------------
Personal loans held 101.1 94.3 84.2
Total net managed mortgage
loans (3) 102.3 21.9 35.4
------------ ------------ ------------
Total net managed line of
credit loans (4) 22.1 - -
------------ ------------ ------------
Total loans receivable 1,431.9 932.4 1,567.2
Less: long-term portion (5) (117.3) (85.2) (81.1)
------------ ------------ ------------
Current portion of loans
receivable $ 1,314.6 $ 847.2 $ 1,486.1
------------ ------------ ------------
------------ ------------ ------------
Average balances
(Dollars in millions) for the 39 weeks ended
-------------------------
September September
27, 2008 29, 2007
------------ ------------
Total net managed credit card
loans $ 3,571.1 $ 3,325.7
Credit card loans sold (2,704.6) (2,685.1)
------------ ------------
Credit card loans held 866.5 640.6
Total net managed personal
loans (2) 121.5 189.2
Personal loans sold (23.7) (92.6)
------------ ------------
Personal loans held 97.8 96.6
Total net managed mortgage
loans (3) 61.4 8.0
------------ ------------
Total net managed line of
credit loans (4) 24.5 -
------------ ------------
Total loans receivable $ 1,050.2 $ 745.2
------------ ------------
------------ ------------
Less: long-term portion (5)
Current portion of loans
receivable
(1) Amounts shown are net of allowance for credit losses.
(2) Personal loans are unsecured loans that are provided to
qualified existing credit cardholders for terms of three to
five years. Personal loans have fixed monthly payments of
principal and interest; however, the personal loans can be
repaid at any time without penalty. The original portfolio of
personal loans of $43.7 million was repurchased in May 2008 for
$26.7 million.
(3) Mortgage loans are issued for terms of up to ten years, have
fixed or variable interest rates, are secured and include a mix
of both high and low ratio loans. High ratio loans are fully
insured and low ratio loans are partially insured.
(4) Line of credit portfolio was purchased in January 2008 for
$29.6 million.
(5) The long-term portion of loans is included in "Long-term
receivables and other assets".
Net credit losses for the owned portfolio for the 13 weeks and 39
weeks ended September 27, 2008 were $25.1 million (2007 -
$21.4 million) and $55.3 million (2007 - $47.1 million),
respectively. Net credit losses for the total managed portfolio for
the 13 weeks and 39 weeks ended September 27, 2008 were $60.6 million
(2007 - $56.9 million) and $181.6 million (2007 - $158.8 million),
respectively.
4. Employee Future Benefits
The net employee future benefit expense for the 13 weeks and 39 weeks
ended September 27, 2008 was $1.6 million (2007 - $1.6 million) and
$4.8 million (2007 - $4.9 million), respectively.
5. Share Capital
September 27, September 29, December 29,
(Dollars in millions) 2008 2007 2007
------------- ------------- -------------
Authorized
3,423,366 Common Shares
100,000,000 Class A
Non-Voting Shares
Issued
3,423,366 Common Shares
(September 29, 2007 -
3,423,366) $ 0.2 $ 0.2 $ 0.2
78,048,305 Class A
Non-Voting Shares
(September 29, 2007 -
78,132,919) 706.3 706.9 700.5
------------- ------------- -------------
$ 706.5 $ 707.1 $ 700.7
------------- ------------- -------------
------------- ------------- -------------
The Company issues and repurchases Class A Non-Voting Shares. The net
excess of the issue price over the repurchase price results in
contributed surplus. The net excess of the repurchase price over the
issue price is allocated first to contributed surplus, to the extent
of any previous net excess from the issue of shares, with any
remainder allocated to retained earnings.
The following transactions occurred with respect to Class A
Non-Voting Shares:
(Dollars in 39 weeks ended 39 weeks ended
millions) September 27, 2008 September 29, 2007
------------------------- -------------------------
Number $ Number $
----------------- ------- ----------------- -------
Shares outstanding
at the beginning
of the period 78,048,062 700.5 78,047,456 702.5
Issued 495,043 29.8 372,463 28.5
Repurchased (494,800) (28.8) (287,000) (22.3)
Excess of
repurchase price
over issue price
(issue price
over
repurchase
price) - 4.8 - (1.8)
----------------- ------- ----------------- -------
Shares outstanding
at the end of
the period 78,048,305 706.3 78,132,919 706.9
----------------- ------- ----------------- -------
----------------- ------- ----------------- -------
6. Stock-based Compensation Plans
All stock-based compensation plans are as disclosed in the most
recently issued annual financial statements for the 52 weeks ended
December 29, 2007 except as follows:
2008 Performance Share Unit Plan
The Company has granted 2008 performance share units (2008 PSUs) to
certain employees. Each 2008 PSU entitles the participant to receive
a cash payment in an amount equal to the weighted average closing
price of Class A Non-Voting Shares traded on the Toronto Stock
Exchange for the 20-day period prior to and including the last day of
the performance period, multiplied by an applicable multiplier
determined by specific performance-based criteria. Compensation
expense related to 2008 PSUs is accrued over the performance period
based on the expected total compensation to be paid out at the end of
the performance period. For the 13 weeks and 39 weeks ended
September 27, 2008, $0.6 million and $1.5 million of compensation
expense was recorded for the 2008 PSUs, respectively.
7. Segmented Information - Statement of Earnings
---------------------------------------------------------------------
13 weeks 39 weeks
ended ended
September September
13 weeks 29, 2007 39 weeks 29, 2007
ended (Restated - ended (Restated -
September Notes 2 September Notes 2
(Dollars in millions) 27, 2008 and 16) 27, 2008 and 16)
---------------------------------------------------------------------
Gross operating revenue
CTR $ 1,399.3 $ 1,304.0 $ 4,032.7 $ 3,889.8
Financial Services 197.8 187.2 608.0 555.6
Petroleum 519.3 424.0 1,456.9 1,232.4
Mark's 168.7 159.8 516.8 499.1
Eliminations (27.6) (25.8) (80.9) (75.9)
-----------------------------------------------
Total gross
operating revenue $ 2,257.5 $ 2,049.2 $ 6,533.5 $ 6,101.0
---------------------------------------------------------------------
---------------------------------------------------------------------
Earnings (loss)
before income taxes
CTR $ 94.0 $ 94.9 $ 222.6 $ 221.4
Financial Services 47.0 43.7 144.4 157.7
Petroleum 7.5 7.9 20.5 16.8
Mark's (0.3) 6.2 4.2 31.0
-----------------------------------------------
Total earnings
before income
taxes 148.2 152.7 391.7 426.9
Income taxes 39.6 50.5 118.7 146.5
-----------------------------------------------
Net earnings $ 108.6 $ 102.2 $ 273.0 $ 280.4
---------------------------------------------------------------------
---------------------------------------------------------------------
Net Interest
expense(1)
CTR $ 15.6 $ 14.1 $ 47.7 $ 40.4
Financial Services 2.3 (1.1) 5.8 (4.4)
Mark's 1.1 1.1 3.2 2.2
-----------------------------------------------
Total interest
expense $ 19.0 $ 14.1 $ 56.7 $ 38.2
---------------------------------------------------------------------
---------------------------------------------------------------------
Depreciation and
amortization expense
CTR $ 43.2 $ 39.5 $ 127.7 $ 114.9
Financial Services 3.4 3.1 10.0 9.4
Petroleum 4.2 4.2 12.3 12.3
Mark's 5.9 4.4 17.0 13.2
-----------------------------------------------
Total depreciation
and amortization
expense $ 56.7 $ 51.2 $ 167.0 $ 149.8
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Net interest expense includes interest on short-term and long-
term debt, offset by passive interest income. Interest on long-
term debt for the 13 weeks and 39 weeks ended September 27, 2008
was $18.6 million (2007 - $16.6 million) and $57.6 million (2007
- $46.6 million), respectively.
Segmented Information - Total Assets
---------------------------------------------------------------------
September 29, December 29,
2007 2007
September (Restated - (Restated -
(Dollars in millions) 27, 2008 Note 2) Note 2)
---------------------------------------------------------------------
CTR $ 6,208.9 $ 5,509.3 $ 5,732.4
Financial Services 2,147.2 1,504.0 1,852.0
Petroleum 281.5 290.0 573.4
Mark's 568.6 519.8 464.1
Eliminations (2,123.8) (1,680.2) (1,857.1)
----------------------------------------
Total $ 7,082.4 $ 6,142.9 $ 6,764.8
---------------------------------------------------------------------
8. Cash and Cash Equivalents (Bank Indebtedness)
The components of cash and cash equivalents (bank indebtedness) are:
September September December
(Dollars in millions) 27, 2008 29, 2007 29, 2007
----------- ----------- -----------
Cash (bank overdraft) $ (58.0) $ (108.9) $ 71.8
Line of credit borrowings (49.8) (49.8) (316.8)
Short-term investments 109.9 74.5 139.5
----------- ----------- -----------
Cash and cash equivalents
(bank indebtedness) $ 2.1 $ (84.2) $ (105.5)
----------- ----------- -----------
----------- ----------- -----------
9. Capital Management Disclosures
The Company's objectives when managing capital are:
- minimizing the after-tax cost of capital; and
- maintaining flexibility in capital structure to ensure the ongoing
ability to execute the Strategic Plan;
Management includes the following items in its definition of capital:
(Dollars September % of September % of December % of
in millions) 27, 2008 total 29, 2007 total 29, 2007 total
---------- -------- ---------- -------- ---------- --------
Current
portion of
long-term
debt $ 10.5 0.2% $ 153.1 3.6% $ 156.3 3.4%
Long-term
debt 1,370.3 28.1% 1,013.8 24.0% 1,341.8 28.8%
Long-term
deposits 114.5 2.4% 1.1 0.0% 3.8 0.1%
Other long-term
liabilities(1) 0.3 0.0% 12.4 0.3% 10.6 0.2%
Share capital 706.5 14.5% 707.1 16.7% 700.7 15.0%
Contributed
surplus - -% 1.9 0.0% 2.3 0.0%
Components of
accumulated
other
comprehensive
loss(2) (12.1) (0.2)% (6.0) (0.1)% (8.5) (0.2)%
Retained
earnings 2,674.3 55.0% 2,339.0 55.5% 2,455.1 52.7%
---------- -------- ---------- -------- ---------- --------
Net capital
under
management $4,864.3 100.0% $4,222.4 100.0% $4,662.1 100.0%
---------- -------- ---------- -------- ---------- --------
---------- -------- ---------- -------- ---------- --------
(1) Long-term liabilities that are derivative or hedge instruments
related to capital items only.
(2) Components of other comprehensive loss relating to derivative or
hedged items only.
The Company has in place various policies which it uses to manage
capital, including a leverage and liquidity policy and a securities
and derivatives policy. As part of the overall management of capital,
management's Financial Risk Management Committee and the Audit
Committee of the Board review the Company's compliance with and
performance against these policies.
In addition, management's Financial Risk Management Committee and the
Audit Committee of the Board perform periodic reviews of the policies
to ensure they remain consistent with the risk tolerance acceptable
to the Company and with current market trends and conditions.
To assess its effectiveness in managing capital, management monitors
certain key ratios to ensure they are within targeted ranges.
September September December
(Dollars in millions) 27, 2008 29, 2007(1) 29, 2007(1)
-------------------------------------
Debt ratio
Long-term debt to total
capitalization(2) 25.2% 26.0% 31.2%
Coverage ratio
Interest coverage(3) 8.1 times 11.5 times 10.7 times
-------------------------------------
-------------------------------------
(1) 2007 results have been restated for the implementation, on a
retrospective basis, of CICA HB 3031 - Inventories.
(2) Long-term debt includes the current portion of long-term debt.
Capitalization is based on current and long-term debt,
commercial paper, long-term deposits, future income taxes,
other long-term liabilities and shareholders' equity.
(3) Interest coverage is calculated on a rolling 12-month basis
after annualizing short-term and long-term interest on debt
issued and retired during the period.
As part of existing debt agreements, two key financial covenants are
monitored on an on-going basis by management to ensure compliance
with the agreements. The key covenants are as follows:
- net tangible assets coverage - calculated as:
- total assets less intangible assets, current liabilities
(excluding current portion of long-term debt), and liability
for employee future benefits
- divided by long-term debt (including current portion of long-
term debt)
- limitations on surplus available for distribution to shareholders
- the Company is restricted from distributions (including
dividends and redemptions or purchases of shares) exceeding its
accumulated net income over a defined period.
The Company was in compliance with these covenants during the period.
The Company's wholly-owned subsidiary, Canadian Tire Bank (the
"Bank") manages its capital under guidelines established by the
Office of the Superintendent of Financial Institutions Canada
("OSFI"). The regulatory capital guidelines measure capital in
relation to credit, market and operational risks. The Bank has
various capital policies, procedures and controls which it utilizes
to achieve its goals and objectives.
The Bank's objectives include:
- Providing sufficient capital to maintain the confidence of
depositors.
- Being an appropriately capitalized institution, as measured
internally, defined by regulatory authorities and compared
with the Bank's peers.
- Achieving the lowest overall cost of capital consistent with
preserving the appropriate mix of capital elements to meet
target capitalization levels.
The Bank's total capital consists of two tiers of capital approved
under OSFI's current regulatory capital guidelines. As at
September 30, 2008 (the bank's fiscal third quarter), Tier 1 capital
includes common shares and retained earnings reduced by net
securitization exposures. The Bank currently does not hold any
instruments in Tier 2 capital. Risk-weighted assets ("RWA"),
referenced in the regulatory guidelines, include all on-balance sheet
assets weighted for the risk inherent in each type of asset as well
as an operational risk component based on a percentage of average
risk-weighted revenues.
The Bank's ratios are above internal minimum targets of 12% for
Tier 1 and Total capital ratios and within internal maximum targets
of 11.0 times for the assets to capital multiple. OSFI's minimum
Tier 1 and Total capital ratios for Canadian banks are 7% and 10%,
respectively. OSFI will consider applications for authorized
assets-to-capital multiples in excess of 20 times for institutions
that meet certain requirements. CTB is currently restricted to a
maximum assets-to-capital multiple of 12.5.
During the nine months ended September 27, 2008, the Bank complied
with the capital guidelines issued by OSFI under the "International
Convergence of Capital Measurement and Capital Standards - A Revised
Framework" ("Basel II"). For the comparative period, the Bank
complied with the capital guidelines issued by OSFI under the then
current Basel I Capital Accord ("Basel I").
10. Financial Instruments Disclosures
Allowance for credit losses
The Company's allowances for receivables are maintained at levels
which are considered adequate to absorb future credit losses. A
continuity of the Company's allowances for credit losses is as
follows:
Credit card loans Other loans(1)
-------------------------------------------------------
(Dollars September 27, September 29, September 27, September 29,
in millions) 2008 2007 2008 2007
-------------------------------------------------------
Balance,
beginning of year $ 51.5 $ 30.4 $ 2.7 $ 2.9
Provision for
credit losses 47.1 42.6 8.2 4.5
Recoveries 10.7 7.4 0.4 0.1
Write-offs (59.3) (41.8) (7.5) (4.5)
-------------------------------------------------------
Balance,
end of period $ 50.0 $ 38.6 $ 3.8 $ 3.0
-------------------------------------------------------
-------------------------------------------------------
Accounts receivable Total(2)
-------------------------------------------------------
(Dollars September 27, September 29, September 27, September 29,
in millions) 2008 2007 2008 2007
-------------------------------------------------------
Balance,
beginning of year $ 5.0 $ 4.6 $ 59.2 $ 37.9
Provision for
credit losses 0.8 0.2 56.1 47.3
Recoveries 0.3 (0.2) 11.4 7.3
Write-offs (2.5) (0.1) (69.3) (46.4)
-------------------------------------------------------
Balance,
end of period $ 3.6 $ 4.5 $ 57.4 $ 46.1
-------------------------------------------------------
-------------------------------------------------------
(1) Other Loans include personal loans, mortgages loans and lines
of credit loans.
(2) Relates to Company owned receivables.
Foreign currency risk
The Company has significant demand for foreign currencies, primarily
United States dollars, due to global sourcing. However, it mitigates
its exposure to foreign exchange rate risk through active hedging
programs and through its ability, subject to competitive conditions,
to pass on changes in foreign currency exchange rates through
pricing.
Liquidity risk
The following table summarizes the Company's contractual maturity for
its financial liabilities. The table includes both interest and
principal cash flows.
(Dollars
in millions) 1 year 2 years 3 years 4 years
------------------------------------------------------
Deposits $ 186.5 $ 11.4 $ 13.1 $ 3.8
Accounts
payable and
other(1) 1,808.5 - - -
Long-term debt 7.1 465.0 9.0 20.9
Interest
payment 92.8 84.6 50.4 49.2
Other - 5.5 - -
------------------------------------------------------
Total $ 2,094.9 $ 566.5 $ 72.5 $ 73.9
------------------------------------------------------
------------------------------------------------------
(Dollars
in millions) 5 years Thereafter Total
----------------------------------------
Deposits $ 86.2 $ - $ 301.0
Accounts
payable and
other(1) - - 1,808.5
Long-term debt 7.8 863.6 1,373.4
Interest
payment 48.8 677.4 1,003.2
Other 0.1 7.2 12.8
----------------------------------------
Total $ 142.9 $ 1,548.2 $ 4,498.9
----------------------------------------
----------------------------------------
(1) Includes commercial paper and bank indebtedness.
Interest rate risk
The Company is exposed to interest rate risk, which it manages
through the use of interest rate swaps. The Company has a policy in
place that requires a minimum of 75% of its long term debt (term
greater than one year) to be at fixed versus floating interest rates.
The Company is in compliance with the policy.
11. Other Long-Term Investments
The market for Canadian third-party asset-backed commercial paper
(ABCP), which was greatly impacted by the global disruption in the
market experienced in August 2007, has been addressed in a formal
restructuring proposal. On April 25, 2008, the majority of the note
holders with investments in the affected ABCP voted in favour of the
restructuring proposal. The restructuring provides investors with new
long-term notes to replace the short-term ABCP that is currently
illiquid. The deal, however, included a controversial clause that
would give all players in the market immunity from lawsuits.
Subsequent court hearings were held regarding these clauses in the
plan and after slight modifications were made to the plan, the court
has permitted the plan to proceed. Several parties appealed the
court's decision and on September 19, 2008, the Supreme Court of
Canada denied a challenge to the restructuring plan approved on
April 25, 2008. The restructuring plan has been delayed due to the
recent market upheavals and it is expected that the restructuring
will close by the end of November 2008. More than 90 percent of the
Company's $8.9 million of affected ABCP will be converted into notes
that will pay interest at the rate paid on banker's acceptance notes
less 50 basis points until maturity, which is currently expected to
be between 2016 and 2017. The committee responsible for the
restructuring proposal is working to ensure that a secondary market
in the new notes develops so that investors will have an opportunity
to sell their new notes, should they so choose.
During 2007, the Company recorded a $1.3 million before-tax provision
for impairment of the ABCP in the Consolidated Statement of Earnings
based on management's best estimate of impairment at the time. Due to
additional information provided to investors who hold ABCP through
the formal restructuring proposal, the Company recorded an additional
$1.0 million before-tax provision for impairment of the ABCP during
the first quarter of 2008. The Company's valuation is
representative of the expected outcome of the plan, and as such no
further write down was recorded in the third quarter of 2008. The
total charge for impairment is $2.3 million or 25 percent of the
original value of the ABCP.
The valuation model used by the Company to estimate the fair value of
the ABCP incorporates discounted cash flows considering the best
available information regarding market conditions and other factors
that a market participant would consider for such investments. The
valuation assumes a redemption term of approximately nine years
corresponding to the expected maturities of the ABCP held by the
Company. As indicated above, the Company's valuation assumes that the
replacement notes will bear interest rates similar to short-term
instruments and that such rates would be commensurate with the nature
of the underlying assets and their associated cash flows. Assumptions
have been made as to the amount of restructuring and other costs that
the Company will bear.
Consistent with the terms of the restructuring proposal, the Company
has classified the remaining balance of this investment in ABCP of
$6.6 million as long-term investments on the Consolidated Balance
Sheet.
There still remains some uncertainty regarding the value of the
underlying assets, the amount and timing of cash flows and whether a
secondary market can be established for the new notes and this could
give rise to a further change in the value of the Company's
investment in ABCP. While these changes could positively or
negatively affect the Company's future earnings, it would not be
considered material to the Company's overall financial position,
given the relatively small amount of ABCP held at September 27, 2008.
The write-down and reclassification of the Company's investment in
ABCP has had no effect to date on the Company's debt covenants, debt
ratings or compliance with banking regulations governing the
Financial Services segment or Canadian Tire Bank.
The Company does not expect a material adverse impact on its business
as a result of the current third-party ABCP liquidity issue.
12. Supplementary Cash Flow Information
The Company paid income taxes during the 13 weeks ended September 27,
2008 of $57.1 million (2007 - $47.8 million) and made interest
payments of $14.8 million (2007 - $13.9 million). For the 39 weeks
ended September 27, 2008, the Company paid income taxes of
$170.6 million (2007 - $304.0 million) and made interest payments of
$73.2 million (2007 - $57.1 million).
During the 13 weeks ended September 27, 2008, property and equipment
were acquired at an aggregate cost of $131.3 million (2007 -
$165.1 million). During the 39 weeks ended September 27, 2008,
property and equipment were acquired at an aggregate cost of
$337.0 million (2007 - $397.9 million). The amount of property and
equipment acquired that is included in accounts payable and other at
September 27, 2008 was $27.7 million (2007 - $38.0 million).
13. Legal Matters
The Company and certain of its subsidiaries are party to a number of
legal proceedings. The Company believes that each such proceeding
constitutes a routine legal matter incidental to the business
conducted by the Company and that the ultimate disposition of the
proceedings will not have a material effect on the Company's
consolidated earnings, cash flow or financial position.
14. Tax Matters
In the ordinary course of business, the Company is subject to ongoing
audits by tax authorities. While the Company believes that its tax
filing positions are appropriate and supportable, from time to time
certain matters are reviewed and challenged by the tax authorities.
The main issues challenged by the Canada Revenue Agency (CRA) relate
to the tax treatment of commissions paid to foreign subsidiaries of
the Company (covering periods from 1995 to 2007), and dividends
received on an investment made by a wholly-owned subsidiary of the
Company related to reinsurance (covering periods from 1999 to 2003).
The applicable provincial tax authorities have reassessed and are
also expected to issue further reassessments on these matters for the
corresponding periods.
The Company has agreed with the CRA to settle the commissions issue
for the period 1995-2003, although the determination of the final tax
liability pursuant to the settlement is subject to the verification
by the CRA of certain information provided by the Company. The
Company believes the provincial tax authorities will also reassess on
the same basis. The Company does not have a significant exposure on
this issue subsequent to the 2003 taxation year.
The reassessments with respect to the dividends received issue are
based on multiple grounds, some of which are highly unusual. The
Company has appealed the reassessments and the matter is currently
pending before the Tax Court of Canada. If the CRA (and applicable
provincial tax authorities) were entirely successful in their
reassessments - an outcome that the Company and its tax advisors
believe to be unlikely - it is estimated that the total liability of
the Company for additional taxes, interest and penalties could be
approximately $188.3 million. Although the Company has appealed
these reassessments, current tax legislation requires the Company to
remit to the CRA and its provincial counterparts approximately
$116.8 million related to this matter, of which $112.6 million had
been remitted by the end of the quarter.
The Company regularly reviews the potential for adverse outcomes in
respect of tax matters. The Company believes that the ultimate
disposition of the settlements, finalization of the commissions
issue, resolution of the dividends received issue and other tax
matters, will not have a material adverse effect on its liquidity,
consolidated financial position or results of operations because the
Company believes that it has adequate provision for these tax
matters. Should the ultimate tax liability materially differ from
the provision, the Company's effective tax rate and its earnings
could be affected positively or negatively in the period in which the
matters are resolved.
15. Sale and Leaseback of Retail Properties
The Company completed the sale and leaseback of 13 Canadian Tire
retail properties to third parties during the quarter. The proceeds
from the sale of these stores totaled $214.0 million, resulting in a
net pre-tax gain of approximately $66.8 million. As the Company
entered into long-term leasebacks of the 13 stores from the third
parties, the gain will be amortized over the term of the leases. The
unamortized gain is included in other long-term liabilities.
16. Comparative Figures
Certain of the prior period's figures have been reclassified to
conform to the current year's presentation, including amounts with
respect to securitizations and net provision for loans receivable in
the consolidated statements of cash flows. As a result, cash flow
from operations has been restated by $77.0 million and $223.0 million
for the 13 weeks and 39 weeks ended September 29, 2007, respectively
with a corresponding offset to investing activities. There is no
impact on cash generated/used in the respective periods. In
addition, passive interest income has been reclassified from gross
operating revenue to net short-term interest expense on the
consolidated statement of earnings.
The Company's wholly-owned subsidiary, Canadian Tire Bank, began
taking deposits from customers commencing in 2007. Previously, these
amounts were classified in accounts payable and other in the
consolidated balance sheets and in changes in other working capital
components in the consolidated statements of cash flows. Commencing
in the second quarter of 2008, these deposits are shown as current
and long-term deposits in the consolidated balance sheets and a
separate line in financing activities in the consolidated statements
of cash flows. The prior period's figures have been reclassified to
conform to the current year's presentation.
Interest Coverage Exhibit to the Consolidated Financial Statements
(unaudited)
---------------------------------------------------------------------
The Company's long-term interest requirements for the 39 weeks ended
September 27, 2008, after annualizing interest on long-term debt
issued and retired during this period, amounted to $87.2 million.
The Company's earnings before interest on long-term debt and income
taxes for the 39 weeks then ended were $653.2 million, which is
7.5 times the Company's long-term interest requirements for this
period.%SEDAR: 00000534EF
For further information:
For further information: Media: Lisa Gibson, (416) 544-7655, lisa.gibson@cantire.com; Investors: Karen Meagher, (416) 480-8058, karen.meagher@cantire.com