Canadian Tire Corporation "On Offence"

Canadian Tire Corporation, Limited is announcing its intention to create a real estate investment trust (REIT) to surface the value of billions of dollars of owned property, appointing a new leader for Canadian Tire Retail and releasing overall positive Q1 earnings.

REAL ESTATE INVESTMENT TRUST

The Company today announced its intention to create a high-quality REIT that would:

  • Surface the value of Canadian Tire's real estate holdings
  • Create a stand-alone vehicle for Canadian Tire's real estate which will support continued real estate investment
  • Provide Canadian Tire with increased financial flexibility to pursue new opportunities to invest in and grow its business.

"We are executing a strategy that reinforces the strength of our Company while pursuing new growth opportunities organically and through acquisition," said Stephen Wetmore, President and CEO, Canadian Tire Corporation.  "Today's announcement regarding a REIT would increase CTC's financial flexibility, providing us with the ability to access funds at an attractive cost of capital as we continue to invest in and grow our business."

The proposed new REIT would acquire a majority of the Company's owned real estate, including a geographically diverse portfolio of approximately 250 properties comprised largely of Canadian Tire Retail stores, Canadian Tire anchored retail developments and one distribution centre; approximately 18 million square feet; and approximately $3.5 billion of estimated market value.  Canadian Tire owned properties currently comprise approximately 25 million square feet and are located in all provinces and two territories.  Canadian Tire Retail stores that are being considered for replacement, relocation, or further development would initially be retained by the Company and not be part of the REIT.

CTC would retain a significant ownership interest of 80% to 90% of the REIT with the remainder of the REIT's units offered to the public via an initial public offering anticipated in the fall of 2013.  The REIT would be designed to meet appropriate standards for management, governance and financial structure and with leases reflecting market rates and terms.

The REIT's financial statements would be consolidated with CTC's financial statements and it is expected that there would be minimal impact on consolidated net earnings, cash flow and debt metrics.

The creation of the CTC REIT would have no impact on the arrangements that exist between Canadian Tire and its Associate Dealer network.

The ongoing ownership and management of real estate assets have been and will continue to be an integral part of Canadian Tire Retail's success and operational flexibility.

The Company confirmed that its creation of a REIT would be subject to due diligence, favourable market conditions, regulatory and third party approvals and approval by the Canadian Tire Board of Directors.

ALLAN MACDONALD NAMED HEAD OF CANADIAN TIRE RETAIL

The Company also announced that its Senior Vice-President, Automotive and Marketing, Allan MacDonald will be the new Chief Operating Officer of Canadian Tire Retail.

Mr. MacDonald joined CTC four years ago and has held senior roles influencing all of CTR's areas of operations, including Dealer relations, global sourcing, merchandising, supply chain, marketing, digital strategy, store design and vendor management.

"Allan has clearly demonstrated the skills and commitment to lead Canadian Tire Retail as we enter a sustained period of unprecedented change in our industry," said Wetmore.

Marco Marrone, CTR's current Chief Operating Officer, has decided to leave the company following a 27 year career. Mr. Marrone has advised the Company that he is not able to make a longer-term commitment to his current role. With the recent agreement between the Company and its Dealers to a new Dealer contract, Mr. Marrone believes that the time is right for a smooth transition of his role to Mr. MacDonald.

Mr. Marrone has been known for exceptional execution throughout his career at Canadian Tire, including his successful leadership of the Financial Services division, his role as Chief Financial Officer for CTC and most recently as Chief Operating Officer at CTR where he has successfully executed a number of key initiatives to improve CTR.

Q1 EARNINGS

The Company today released first quarter results for the period ended March 30, 2013, showing positive sales, revenue and margin growth.

Consolidated revenue increased 1.7% or $40.3 million to $2.5 billion in the quarter as a result of strong performance at FGL Sports and sales growth at Petroleum, Financial Services and Mark's. Consolidated net income increased to $73.0 million and diluted earnings per share rose to $0.90, an increase of 3.3% over Q1 2012. Consolidated retail sales increased 0.8% or $20.4 million to $2.4 billion in the quarter.

"Following a strong 2012, we had a very encouraging start to the year with the successful execution of key initiatives across all of our banners, including reaching an agreement on the significant terms of our contracts with our Canadian Tire Associate Dealers," said Wetmore.

"We had a great start for the first 70 days of the quarter but that shifted dramatically in the last two weeks as a result of last March's early spring temperatures combined with this March's cold, wintry weather.  That said, the first quarter is our smallest for the retail segment.  Financial Services is the major contributor to our first quarter earnings and it continued its strong performance in 2013."

Consolidated financial results
(C$ in millions, except per share amounts)  Q1 2013 Q1 2012 Change
Retail sales $2,435.5 $2,415.1 0.8 %
Revenue $2,479.8 $2,439.5 1.7 %
Net income 73.0 71.0 2.9 %
Basic earnings per share 0.90 0.87 3.3 %
Diluted earnings per share 0.90 0.87 3.3 %

RETAIL SEGMENT OVERVIEW

Retail segment revenue increased 1.5% or $32.8 million to $2.2 billion in the quarter due to strong performance at FGL Sports and sales growth at Petroleum and Mark's.

Retail segment income before income taxes of $23.0 million was down 5.8% or $1.5 million compared to the prior year largely due to the timing of marketing and advertising expenses and higher depreciation and occupancy costs from additional stores in the network compared to the prior year.  Excluding depreciation and net finance costs, Retail EBITDA increased 1.8% in the quarter resulting from improved revenue and strong margin management across the businesses.

Consolidated retail sales were $2.4 billion, representing a 0.8% increase compared to the same period last year, primarily as a result of strong sales at FGL Sports and increased sales at Petroleum and Mark's, which were partly offset by a sales decline at CTR.

CTR had positive sales in January and February but experienced a sharp drop in the last two weeks of March, resulting in a 1.6% sales decline and 2.4% decrease in same store sales for the quarter.  Canadian Tire stores saw sales increases in key categories offset by declines in seasonal, gardening and outdoor living. While sales were lower compared to the previous year, gross margin rates were higher due to active management of the sales and margin mix.

Automotive started the quarter with solid sales of light automotive parts and in maintenance categories such as batteries, battery accessories and wipers. The strong performance at the beginning of the quarter was off-set by cooler March temperatures which impacted sales of automotive cleaning products and delayed both spring automotive maintenance and switching over to all-season tires.

Petroleum retail sales increased 3.7% primarily due to increased convenience store sales and gas volumes related to the opening of 10 new sites, including two additional 400/401 series highway sites, and due to higher gasoline prices compared to the previous year.

FGL Sports had a very good start to the year with retail sales growth of 5.6% over the same period in 2012.  Same store sales grew by 8.8%, partly due to the planned closure of non-strategic banners such as Sport Mart and Athletes World. Adjusting for store closures, corporate same store sales still grew by a strong 3.1%, notwithstanding the impact of March weather. The core corporate banner, Sport Chek, experienced strong sales in apparel and equipment, particularly in winter-related categories such as hockey, ski and snowboard.

At Mark's, retail sales were up 1.6% and same store sales increased by 1.5% driven by growth in women's casual wear and industrial apparel and accessories sales, particularly in the Greater Toronto region of Ontario. Sales gains were partly offset by lower footwear and men's wear sales due to fewer clearance sales compared to 2012 and cooler March weather.

FINANCIAL SERVICES OVERVIEW

Financial Services was a very strong performer in the first quarter.  Revenue increased 3.4% to $250 million and income before income taxes of $77.3 million increased 5.8% compared to the prior year due to higher credit card charges on higher credit card receivables balances.

Financial Services gross margin rate increased 203 basis points in the quarter compared to the prior year primarily due to higher revenue from increased credit charges and favourable net write-offs.

Financial Services operating expenses increased 6.2% in the quarter compared to the prior year due to marketing expenses related to growing receivable balances.

CAPITAL EXPENDITURES

Capital expenditures for the first quarter were $62.0 million compared to prior year spending of $64.1 million.

QUARTERLY DIVIDEND

Canadian Tire Corporation has declared a quarterly dividend of 35 cents per share on each Common and Class A Non-Voting share. The dividend is payable September 1, 2013 to Common and Class A non-voting shareholders of record as of July 31, 2013. The dividend is considered an "eligible dividend" for tax purposes.

NORMAL COURSE ISSUER BID

During the first quarter of 2013, the Company purchased 215,900 Class A Non-Voting Shares under its normal course issuer bid program. This includes 196,100 shares which were purchased in addition to shares purchased for anti-dilutive purposes.

Please refer to Management's Discussion and Analysis for further details and to view a PDF version of Canadian Tire Corporation's full quarterly earnings report.

on May 9, 2013