• EPS: $3.56, up from $3.08 last year.

• Retail Sales: $5 billion, down 4.1% and 4.6% on a comparable basis, excluding petroleum.

• Comparable Sales at CTR: Down 5.6% in Q2.

• Retail Gross Margin Rate: 36%, up 36 basis points compared to last year, excluding petroleum.

• SG&A: Down 6% on a normalized basis.

• Corporate Inventory: Down 15% or $477 million.

• Financial Services IBT: $89 million, flat to last year on a normalized basis.

• Triangle Rewards Membership: eCTM redemption up more than 8% over last year.

• New Store Openings: 18 refreshed or expanded CTR stores, 4 new Pro Hockey Life stores.

• Warning! GuruFocus has detected 6 Warning Sign with CDNAF.

Release Date: August 08, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Canadian Tire Corp Ltd (CDNAF) reported a strong improvement in profitability with EPS of $3.56, up from $3.8 last year.

• The company's Triangle Rewards program showed resilience, with loyalty sales outperforming non-loyalty sales and a significant increase in new membership uptake.

• Retail gross margin rate, excluding petroleum, was up 36 basis points compared to last year, driven by lower freight costs and contributions from Helly Hansen.

• The company successfully managed down corporate inventory by 15%, contributing to improved operational efficiency.

• Canadian Tire Corp Ltd (CDNAF) saw growth in essential categories, with own brand essentials outperforming national brands by 600 basis points.

Negative Points

• Retail sales were down 4.1% in the quarter, with a more significant decline in high-ticket discretionary categories like Backyard Living.

• Comparable sales at Canadian Tire Retail (CTR) were down 5.6% in Q2, impacted by softer consumer demand and unseasonably cold and wet weather.

• The company faced increased promotional intensity, particularly in Sport Chek and Mark's, due to aggressive discounting by competitors.

• Financial services saw a slight increase in the write-off rate to 6.7%, reflecting challenges in credit risk management.

• The strategic review of Canadian Tire Financial Services is ongoing, creating uncertainty around future capital allocation and strategic direction.

Q & A Highlights

Q: How do you categorize the current consumer spending trends, and what is the outlook for 2025? A: Greg Hicks, President and CEO, noted that consumers are cautious, focusing on essentials and value. The trends seen in recent quarters persist, with spending less dependent on income and more on household indebtedness. The company plans to continue leveraging its membership, assets, and operating leverage strategies into 2025, expecting no significant economic growth in the near term.

Q: Can you discuss the dealer inventory levels and expectations for replenishment needs? A: TJ Flood, Executive Vice President & President of Canadian Tire Retail, explained that corporate inventory is down 15%, and dealer inventory is down 6% year-over-year. The company is strategically managing inventory, focusing on essentials, and expects dealer buying to align more closely with consumer demand without significant build or burn strategies.

Q: How is Canadian Tire Financial Services (CTFS) managing credit risk, given the current economic environment? A: George Craig, Executive Vice President and CFO, stated that CTFS has managed credit risk conservatively since the COVID-19 pandemic. The write-off rate is 6.7%, and early-stage aging metrics are improving. The team is monitoring unemployment rates, which could impact credit risk, but overall, CTFS is performing well.

Q: What are the expectations for promotional activity and its impact on retail gross margins? A: Greg Hicks noted that while there has been aggressive discounting in some areas due to inventory bulges, the company has not significantly increased promotional activity. The focus remains on understanding demand elasticity and applying discounts strategically. The retail gross margin, excluding petroleum, was better than expected, aided by freight cost benefits and strong performance in essential categories.

Q: Can you provide insights into the performance of new product introductions and own brands? A: Greg Hicks highlighted that new product sales were up 4%, with a strong pipeline of innovation across own brands. The company is accelerating the introduction of new products and balancing national and own brands to stimulate demand and enhance customer offerings.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.