--------------------------------------
Year-
over
Consolidated 2008 2007(2) year
Highlights(1): 1st quarter 1st quarter change
-------------------------------------------------------------------------
Retail sales $1.84 billion $1.81 billion 1.9%
Gross operating revenue $1.83 billion $1.74 billion 5.0%
Earnings before income taxes $98.8 million $85.7 million 15.4%
Adjusted earnings before income
taxes (excludes non-operating
gains and losses)(3) $81.8 million $89.3 million (8.4)%
Net earnings $66.7 million $55.7 million 19.8%
Adjusted net earnings (excludes
non-operating gains and
losses)(3) $55.2 million $58.1 million (4.9)%
Basic earnings per share $0.82 $0.68 19.8%
Adjusted basic earnings per
share (excludes non-operating
gains and losses)(3) $0.68 $0.71 (4.9)%
(1) All dollar figures in this table are rounded.
(2) The 2007 earnings figures have been restated for adoption of CICA HB
3031 - Inventories as required by the CICA. Please refer to Note 2 in
the Notes to the Consolidated Financial Statements.
(3) Non-GAAP measure. Please refer to Section 12.0 of Management's
Discussion and Analysis contained in our 2007 Financial Report.
TORONTO, May 8 /CNW/ - Canadian Tire Corporation, Limited (CTC.a, CTC) today reported a 5.0 per cent increase in gross operating revenue for the first quarter of 2008.
Net earnings were $66.7 million, an increase of 19.8 per cent compared to $55.7 million for the corresponding 2007 period. Adjusted net earnings for the quarter, which exclude non-operating gains and losses, were $55.2 million, a 4.9 per cent decrease compared to $58.1 million last year.
Basic earnings per share in the quarter were $0.82, a 19.8 per cent increase from the $0.68 recorded in the same period last year. Adjusted basic earnings per share, which exclude non-operating gains and losses, were down 4.9 per cent to $0.68 compared to $0.71 in the first quarter of 2007.
Consolidated retail sales, up 1.9 per cent over last year, were soft, particularly in Ontario and Quebec, as customers reacted to news of slowing economic growth and higher gasoline prices. The impact of a first quarter Easter holiday period and Ontario's new Family Day holiday in February were also factors affecting retail sales performance.
Incremental investments in the information technology renewal initiative, slower retail sales and shipments, and an increase in the allowance on the loan portfolio at Financial Services, partially offset by strong earnings at Petroleum, were the key factors impacting the consolidated adjusted net earnings.
Reported earnings in the first quarter and the 2007 comparable period were restated as required by the adoption of a new accounting standard for inventory issued by the Canadian Institute of Chartered Accountants.
The first quarter of the year traditionally accounts for the smallest portion of the company's earnings, at 15 to 18 per cent of consolidated annual earnings.
"First quarter earnings were in line with our expectations given the investments we made in a number of longer term initiatives, the change in Easter holiday timing and customer concerns over a slowing economy," said Tom Gauld, president and CEO. "We are, however, encouraged by the strong customer response to Canadian Tire Retail's spring seasonal product offerings, which helped us post solid retail sales growth throughout April. We remain confident in our long-term strategies and our financial plan for the year and we are confirming our original forecast that 2008 operating earnings per share will be in the range of $5.15 to $5.40."
Business Overview
CANADIAN TIRE RETAIL (CTR)
($ in millions) Q1 2008 Q1 2007(1) Change
-------------------------------------------------------------------------
Retail sales(2) $1,218.8 $1,242.6 (1.9)%
Same store sales(3)
(year-over-year % change) (4.0)% 1.3%
Gross operating revenue $1,071.3 $1,070.9 0.0%
Net shipments (year-over-year % change) (0.2)% 11.1%
Earnings before income taxes $43.6 $38.0 15.1%
-------------------------------------------------------------------------
Less adjustment for:
Gain on disposals of property and
equipment(4) $3.9 -
Former CEO retirement obligation $0.4 -
-------------------------------------------------------------------------
Adjusted earnings before income taxes(5) $39.3 $38.0 3.7%
-------------------------------------------------------------------------
(1) The 2007 earnings figures have been restated for the adoption of CICA
HB 3031 - Inventories as required by the CICA. Please refer to Note 2
in the Notes to the Consolidated Financial Statements.
(2) 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.
(3) Same store sales include sales from all stores that have been open
for more than 53 consecutive weeks in the same location.
(4) Includes fair market value adjustments and impairments on property
and equipment.
(5) Non-GAAP measure. Please refer to section 12.0 of Management's
Discussion and Analysis contained in our 2007 Financial Report.
CTR's gross operating revenue for the quarter was equal to the prior year, at $1.07 billion. Retail sales were $1.22 billion, a 1.9 per cent decrease from $1.24 billion recorded last year. Same store sales were down 4.0 per cent in the quarter.
Retail sales in the quarter were impacted by approximately $18 million due to the introduction of the new Family Day statutory holiday in Ontario and the Good Friday and Easter Sunday holiday shift to March of 2008 from April of 2007. Sales trends in April have, however, significantly improved on the strength of the new spring '08 seasonal programs, a more competitive pricing strategy and the arrival of warmer weather in Eastern Canada.
CTR's first quarter earnings before taxes were $43.6 million, a 15.1 per cent increase over the $38.0 million recorded in the comparable 2007 period. Adjusted pre-tax earnings increased by 3.7 per cent to $39.3 million from $38.0 million a year ago.
The increase in earnings reflects improved product margins and the continued focus on productivity, which more than offset approximately $3 million of incremental investments in long-term growth and productivity initiatives.
For the year, CTR plans to open 36 Concept 20/20 stores, eight of which will include a Mark's store. Two new store concepts will be tested in six locations in the second half of the year.
The first new concept, designed specifically for small markets, is a 14,000-18,000 square foot Canadian Tire/Mark's store with an on-site Petroleum outlet. CTR plans to open four of these "small market" concept stores in 2008 and 64 over the life of the current five year strategic plan.
The second concept, called the "smart" store, will be a pilot for the next wave of renewal for existing stores. The "smart" store concept will be significantly different from previous formats. It will be lower in cost to retrofit and it will focus more of its square footage on better performing product lines. It will also offer customers a very engaging and distinctive shopping experience through in-store boutiques, easier navigation and self-service checkouts. CTR plans to open two "smart" concept stores in 2008.
PartSource generated double-digit sales growth in the quarter, driven by the ongoing expansion of the network and growth in the commercial customer segment. PartSource acquired three stores during the quarter, bringing its total store network to 74. PartSource plans to open up to 14 new stores during 2008, including six with expanded warehouses (hub stores), which will also supply emergency parts to Canadian Tire stores.
CANADIAN TIRE PETROLEUM (Petroleum)
($ in millions) Q1 2008 Q1 2007 Change
-------------------------------------------------------------------------
Sales volume (millions of litres) 413.8 415.3 (0.4)%
Retail sales $449.0 $385.4 16.5%
Gross operating revenue $422.8 $362.8 16.5%
Earnings before income taxes $5.0 $2.5 96.3%
-------------------------------------------------------------------------
Less adjustment for:
Loss on disposals of property and
equipment(1) $(0.2) $(0.2)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(2) $5.2 $2.7 84.5%
-------------------------------------------------------------------------
(1) Includes asset impairment losses.
(2) Non-GAAP measure. Please refer to section 12.0 in Management's
Discussion and Analysis in our 2007 Financial Report.
Petroleum's gross operating revenue totaled $422.8 during the quarter, a 16.5 percent increase over the $362.8 million in the comparable 2007 period reflecting higher pump prices. Gasoline sales volumes declined slightly during the quarter to 413.8 million litres from 415.3 million litres a year ago, reflecting consumer response to higher fuel prices.
Convenience store sales increased 11.6 per cent over the comparable 2007 period.
Petroleum recorded strong earnings before taxes of $5.0 million, compared to the $2.5 million recorded in the comparable 2007 period. Adjusted pre-tax earnings, which exclude the impact of disposals of property and equipment, increased to $5.2 million from $2.7 million one year ago. The increase in earnings was due to better margins during the quarter, as well as effective expense management.
Petroleum opened two new gas bars and refurbished two existing gas bars during the quarter. Plans for 2008 include opening approximately eight new sites and refurbishing or rebuilding approximately 25 existing sites to enhance the customer experience.
MARK'S WORK WEARHOUSE (Mark's)
($ in millions) Q1 2008 Q1 2007(1) Change
-------------------------------------------------------------------------
Total retail sales(2) $172.5 $178.3 (3.2)%
Same store sales(3)
(year-over-year % change) (7.0)% 15.7%
Gross operating revenue(4) $147.5 $152.1 (3.0)%
-------------------------------------------------------------------------
Earnings before income taxes $(3.4) $(0.2) N/A
-------------------------------------------------------------------------
Less adjustment for:
Loss on disposals of property and
equipment - $(0.3)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(5) $(3.4) $0.1 N/A
-------------------------------------------------------------------------
(1) The 2007 earnings results have been restated for the adoption of CICA
HB 3031 - inventories as required by the CICA. Please refer to Note 2
in the Notes to the Consolidated Financial Statements.
(2) Includes retail sales from corporate and franchise stores.
(3) Mark's same store sales exclude new stores, stores not open for the
full period in each year and store closures.
(4) Gross operating revenue includes retail sales at corporate stores
only.
(5) Non-GAAP measure. Please refer to section 12.0 of Management's
Discussion and Analysis contained in our 2007 Financial Report.
Mark's first quarter gross operating revenue was $147.5 million, a 3.0 per cent decline from the $152.1 million recorded a year ago. Total retail sales were $172.5 million, a 3.2 per cent decrease against very strong sales results (+17.6 per cent) in the comparable 2007 period. Sales were impacted by the shift in timing of the Easter holidays, Family Day in Ontario and the continued softening of retail and economic conditions.
Mark's recorded a first quarter loss of $3.4 million before taxes compared to a loss of $0.2 million one year ago. Lower earnings were primarily caused by the lower sales noted above, the impact of which was only partially offset by stronger margins.
During the quarter, Mark's opened three new stores, including one CTR-Mark's Concept 20/20 combination store, and renovated one store. In 2008, Mark's expects to open 17 new stores and expand, relocate or renovate an additional 24 stores.
CANADIAN TIRE FINANCIAL SERVICES (Financial Services)
($ in millions) Q1 2008 Q1 2007 Change
-------------------------------------------------------------------------
Total managed portfolio end of period $3,783.9 $3,473.5 8.9%
Gross operating revenue $208.7 $176.1 18.5%
Earnings before income taxes $53.6 $ 45.4 18.1%
-------------------------------------------------------------------------
Less adjustment for:
Loss on disposals of property and
equipment $ - $(0.1)
Net effect of securitization
activities(1) $12.9 $(3.0)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(2) $40.7 $48.5 (16.0)%
-------------------------------------------------------------------------
(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 12.0 in Management's
Discussion and Analysis in our 2007 Financial Report.
Financial Services' gross operating revenue was $208.7 million in the quarter, an 18.5 per cent increase over the $176.1 million recorded in the prior year. The increase was a result of higher credit interest earned due to an increase in receivables quarter over quarter, as well as a $12.9 million gain on the net effect of securitization activities due to the securitization deal completed in the quarter compared to a loss of $3.0 million in the same quarter of 2007.
At the end of the first quarter, Financial Services' total managed portfolio of loans receivable was $3.8 billion, an 8.9 per cent increase over the $3.5 billion at the end of the comparable 2007 period. Credit card receivables grew 9.5 per cent to $3.6 billion. The increase was a result of a 9.6 per cent increase in the first quarter average account balance compared to the same quarter of 2007.
Financial Services' net write-off rate for the total managed portfolio on a rolling 12-month basis was 5.83 per cent, an improvement from 5.95 per cent in the comparable 2007 period. The net write-off rate on a rolling 12-month basis for the credit card portfolio was 5.77 per cent compared to 5.89 per cent in the 2007 period.
Financial Services' first quarter earnings before taxes were $53.6 million, an 18.1 per cent increase from the $45.4 million recorded in the corresponding 2007 period. The increase in earnings reflects a gain from the net effect of securitization activities of $12.9 million compared to a securitization loss of $3.0 million in the same period last year.
Adjusted pre-tax earnings for the quarter, which exclude the net effect of securitization activities, declined 16.0 per cent to $40.7 million from $48.5 million in the previous year. Adjusted earnings were impacted by a 13 basis point increase in the allowance rate for doubtful accounts ($4.9 million), incremental expenses related to the retail banking initiative ($2.6 million) and expenses related to the re-launch of the Canadian Tire Options(R) Mastercard(R) ($1.0 million). The increase in the allowance rate was due to slightly higher aging and the impact of changes to the collection process, the benefits of which are expected to be realized over the long term.
Financial Services continued its retail banking pilot and at quarter-end had over $147 million in deposits and approximately $48 million in mortgages. Financial Services plans to continue testing and refining the retail banking pilot and will invest approximately $28 million in the test during 2008, $7.3 million of which was incurred in the first quarter.
EARNINGS GUIDANCE
The Company confirms its expectation that earnings per share for 2008 will be in the range of $5.15 to $5.40 per share, excluding non-operating items. Due to the level of investments in revenue generating and productivity initiatives, second quarter operating earnings are expected to be lower than in 2007, but earnings performance in the second half of the year is expected to be significantly stronger than the prior year.
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 in the Annual 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, as outlined previously, and that have the potential to affect the operating performance and results of the Company's divisions include:
- expansion activity planned for Mark's, PartSource, Petroleum and CTR
("the retail businesses"), including the associated supply chain
infrastructure, could be affected by the Company's ability to acquire
and develop suitable real estate properties, obtain municipal and
other required government approvals, access construction labour and
materials at reasonable prices and lease suitable properties, as well
as by weather conditions that could impact the timing of
construction;
- expansion activity planned for the retail businesses, as well as for
the associated supply chain infrastructure and Financial Services,
could be affected by the Company and CTR dealers' ability to access
sufficient funds in a cost effective manner, due to difficulties in
the capital markets;
- expansion activity planned for CTR could also be affected by the
dealers' ability to secure financing through the trusts referenced in
section 10.0 of management's discussion and analysis or through other
means;
- unseasonable weather patterns could affect the sales of seasonal
merchandise at CTR and Mark's, 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 licenses to operate, particularly in the
Petroleum division;
- changes in commodity prices could affect the profitability of
Petroleum, CTR and Mark's;
- fluctuating foreign exchange currency rates could impact cross-border
shopping patterns and employment levels in the manufacturing and
export sector and, consequently, negatively impact consumer spending
practices;
- the earnings of Financial Services could be affected by customers'
inability to repay their Canadian Tire credit card, mortgage,
personal loan or line of credit balances or by an unsatisfactory
response to the retail banking pilot initiative; and
- failure to comply with applicable laws and regulations could result
in sanctions and financial penalties by regulatory bodies that could
impact the Company's earnings and reputation. Areas of compliance
include environment, health and safety, competition, transportation
of dangerous goods, tax, customs and excise and regulations governing
financial institutions.
The Company has developed its 2008 forecast on the assumption that there will not be a material deviation in the risks described in this disclosure 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 4:00 p.m. EDT on Thursday, May 8, 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 1,170 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 74 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 266 gas bars, 259 convenience stores and kiosks, and 74 car washes. Mark's Work Wearhouse is one of the country's leading apparel retailers operating 360 stores in Canada. Under the Clothes that Work(TM) 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 5 million Canadian Tire MasterCards and also markets related financial products and services for retail and petroleum customers. Canadians can also access Financial Services online at www.ctfs.com. Over 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 May 8, 2008.
Quarterly and annual comparisons in this MD&A
Unless otherwise indicated, all comparisons of results for the first quarter (13 weeks ended March 29, 2008) are against results for the first quarter of 2007 (13 weeks ended March 31, 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 14 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 detailed in note 1 in the Notes to the Consolidated Financial Statements for the quarter ended March 29, 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(TM) (Petroleum) agents and PartSource(R) and Mark's Work Wearhouse(R) (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 11.1 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, franchisees and Petroleum agents operate more than 1,170 general merchandise and apparel retail stores and gas bars. The Canadian Tire Financial Services(R) (Financial Services) division of the Company also markets a variety of financial services to Canadians, primarily its proprietary Options(R) MasterCard(R), personal loans, 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'(R) - 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. Canadian Tire 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 74 specialty automotive hard parts stores that cater to serious "do-it-yourselfers" and professional installers of automotive parts. The PartSource network consists of 38 franchise stores and 36 corporate stores.
Mark's is one of Canada's leading clothing and footwear retailers, operating 360 stores nationwide, including 313 corporate and 47 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(R)". Mark's also conducts a business-to-business operation under the "Imagewear(TM) by Mark's Work Wearhouse" brand.
Petroleum is Canada's largest independent retailer of gasoline with a network of 266 gas bars, 259 convenience stores and kiosks, 74 car washes, 13 Pit Stops and 89 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(R) MasterCard(R) and Gas Advantage(R) MasterCard(R). Financial Services also markets personal loans, insurance and warranty products and an emergency roadside assistance service called Canadian Tire Roadside Assistance(R). Canadian Tire Bank(R), 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. Canadian Tire Bank also offers high interest savings accounts, guaranteed investment certificates and residential mortgages in three pilot markets as well as the Canadian Tire One-and-Only(TM) 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
-------------------------------------------------------------------------
March 29, March 31,
Number of stores and retail square footage 2008 2007
-------------------------------------------------------------------------
Consolidated store count
CTR retail stores(1) 473 468
PartSource stores 74 64
Mark's retail stores(1) 360 340
Petroleum gas bar locations 266 265
-------------------------------------------------------------------------
Total stores 1,173 1,137
Consolidated retail square footage
CTR retail square footage (in millions) 17.8 16.4
PartSource retail square footage (in millions) 0.3 0.3
Mark's retail square footage (in millions) 3.0 2.7
-------------------------------------------------------------------------
Total retail square footage(2) 21.1 19.4
-------------------------------------------------------------------------
(1) Store count numbers reflect individual selling locations; therefore,
CTR and Mark's totals include both CTR-Mark's combination stores and
Mark's-inside-a-CTR concept stores.
(2) The average retail square footage for Petroleum's convenience stores
was 400 square feet per store in 2007 and 392 square feet per store
in 2006 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 section 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 (POS)
(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 results
Consolidated financial results
($ in millions except per share amounts) Q1 2008 Q1 2007(1) Change
-------------------------------------------------------------------------
Retail sales(2) $1,840.3 $1,806.3 1.9%
Gross operating revenue 1,825.3 1,737.7 5.0%
EBITDA(3) 174.5 144.4 20.9%
Earnings before income taxes 98.8 85.7 15.4%
Effective tax rate 32.5% 35.0%
Net earnings $ 66.7 $ 55.7 19.8%
Basic earnings per share 0.82 0.68 19.8%
Adjusted basic earnings per share(3) 0.68 0.71 (4.9)%
---------------------------------------------------------------
(1) 2007 figures have been restated for adoption of CICA HB 3031 -
Inventories as required by the CICA. 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) Q1 2008 Q1 2007
---------------------------------------------------------------
CTR retail sales(1) (1.9)% 3.1%
CTR gross operating revenue 0.0% 10.9%
CTR net shipments (0.2)% 11.1%
Mark's retail sales (3.2)% 17.6%
Petroleum retail sales 16.5% 8.9%
Petroleum gasoline volume (litres) (0.4)% 7.9%
Financial Services' credit card sales 7.3% 14.2%
Financial Services' gross average receivables 8.9% 6.2%
---------------------------------------------------------------
(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 first quarter of 2008, our retail businesses faced similar challenges in the economic and retail environments as those that affected the fourth quarter of 2007. In addition, the introduction of the new Family Day statutory holiday in Ontario and a shift in the timing of the Good Friday and Easter Sunday holidays contributed to reduced sales from the strong sales results achieved in the first quarter of 2007. Unseasonable March weather patterns, particularly in Central and Eastern Canada, may have challenged the willingness of some customers to travel to our stores due to record snowfalls and icy conditions. Despite these challenges, consolidated gross operating revenue increased in the first quarter primarily due to higher sales at Petroleum and receivables growth at Financial Services. Financial Services growth was driven by both increased transaction volume and increased account balances. Increased Petroleum revenues were a function of sustained higher retail gasoline prices as well as strong convenience store sales.
Net earnings
Increased earnings in CTR, Financial Services and Petroleum were partially offset by a decrease in earnings for Mark's in the first quarter. The increase in CTR earnings reflects stronger operating margins and the continued focus on improving productivity. Mark's earnings for the first quarter of 2008 were $3.5 million below last year due to softer sales which were only partially offset by higher margins.
Earnings for our retail businesses during the first quarter of 2008 and the restated quarter of 2007 were also affected by the adoption of the new accounting standard, issued by the CICA, regarding inventory, with the largest impact on Mark's earnings. See section 13.1 for additional information on the impact of the changes to this accounting standard.
Impact of non-operating items
The following tables show our consolidated earnings on a pre-tax and after-tax basis.
Adjusted consolidated earnings before income taxes(1)
-------------------------------------------------------------------------
($ in millions) Q1 2008 Q1 2007(2) Change
-------------------------------------------------------------------------
Earnings before income taxes $ 98.8 $ 85.7 15.4%
Less pre-tax adjustment for:
Former CEO retirement obligation(3) 0.4 -
Net effect of securitization activities(4) 12.9 (3.0)
Gain (loss) on disposals of property and
equipment 3.7 (0.6)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(1) $ 81.8 $ 89.3 (8.4)%
-------------------------------------------------------------------------
(1) See section 14.0 on non-GAAP measures.
(2) 2007 figures have been restated for the adoption of CICA HB 3031 -
Inventories as required by the CICA. 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 amounts) Q1 2008 Q1 2007(2) Change
-------------------------------------------------------------------------
Net earnings $ 66.7 $ 55.7 19.8%
Less after-tax adjustment for:
Former CEO retirement obligation 0.3 -
Net effect of securitization activities(3) 8.7 (2.0)
Gain on disposals of property and equipment 2.5 (0.4)
-------------------------------------------------------------------------
Adjusted net earnings after tax(1) $ 55.2 $ 58.1 (4.9)%
-------------------------------------------------------------------------
Basic earnings per share $ 0.82 $ 0.68 19.8%
Adjusted basic earnings per share(1) $ 0.68 $ 0.71 (4.9)%
-------------------------------------------------------------------------
(1) See section 14.0 on non-GAAP measures.
(2) 2007 figures have been restated for the adoption of CICA HB 3031 -
Inventories as required by the CICA. 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.
Seasonal impact
The first quarter of the year is the smallest quarter for both revenue and earnings at Canadian Tire. In addition, we experience stronger revenues and earnings in the second and fourth quarters of each year 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 Q1 Q4 Q3 Q2
share amounts) 2008 2007 2007 2007
-------------------------------------------------------------------------
Gross operating revenue $1,825.3 $2,503.1 $2,047.2 $2,311.7
Net earnings 66.7 131.3 101.2 123.5
Basic earnings per share 0.82 1.61 1.24 1.52
Diluted earnings per share 0.82 1.61 1.24 1.52
-------------------------------------------------------------------------
($ in millions except per Q1 Q4 Q3 Q2
share amounts) 2007 2006 2006 2006
-------------------------------------------------------------------------
Gross operating revenue $1,737.7 $2,426.1 $2,023.3 $2,247.6
Net earnings 55.7 108.3 95.4 103.3
Basic earnings per share 0.68 1.33 1.17 1.27
Diluted earnings per share 0.68 1.32 1.16 1.25
-------------------------------------------------------------------------
(1) 2007 quarterly results have been restated for adoption of CICA HB
3031 - Inventory as required by the CICA. 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 Q1 2008 performance overview
-------------------------------------------------------------------------
Canadian Tire Retail Mark's Work Wearhouse
-------------------------------------------------------------------------
Q1 2008 Performance highlights Q1 2008 Performance highlights
- continued development of store - opened three corporate stores
network, now a total of 473 including one CTR-Mark's
stores including 195 Concept combination store and one
20/20 stores; mobile unit;
- continued development of next - store network increased to
new store concepts; and 360 locations and increased
- replaced two traditional stores total retail space by 10.3
with Concept 20/20 stores. percent over the first quarter
of 2007;
PartSource Q1 2008 performance - continued focus on Clothes That
highlights Work campaign, with the
introduction of one new women's
- acquired three stores and wear Clothes That Work item
converted all to PartSource during the quarter.
banner;
- network growth to 74 stores
including three hub stores;
and
- double-digit total sales
growth.
-------------------------------------------------------------------------
Canadian Tire Financial Services Petroleum
-------------------------------------------------------------------------
Q1 2008 Performance highlights Q1 2008 Performance highlights
- continued testing of the retail - growth of network to 266 gas
banking initiative; bars and 259 convenience
- continued overall improvement in stores;
the net write-off rate of the - refurbishment of two gas bars
total managed portfolio of as part of the initiative to
loans receivable, reflecting the improve the overall customer
benefits of a number of experience at Petroleum's
initiatives implemented over the sites; and
last few years to improve the - strong improvement in earnings
portfolio quality. over the prior year, reflecting
higher and stabilized gasoline
prices and margins during the
quarter as well as effective
expense management.
-------------------------------------------------------------------------
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 store concepts 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 Q1 2008 Strategic Plan performance
The following outlines CTR's performance for the first quarter of 2008 in the context of our 2012 Strategic Plan.
-------------------------------------------------------------------------
Initiatives to build a "BIGGER" Canadian Tire
-------------------------------------------------------------------------
New store concept program
Concept 20/20 has been the cornerstone of CTR's growth agenda since 2003.
Based on the results from the Concept 20/20 stores opened to date, CTR is
developing the next new store concepts which are designed to build on the
successes of the Concept 20/20 store with a greater focus on improving
sales and productivity. Plans for 2008 include opening two of the new
concept "smart" stores that will have the same focus of improving sales
and productivity, as well as providing a more exciting customer
experience and four new stores with the further goal of expanding our
presence in smaller markets.
-------------------------------------------------------------------------
2008 Key initiatives 2008 Performance
-------------------------------------------------------------------------
CTR's strategy for the continued First quarter
rollout of new concept stores
including our existing Concept 20/20 CTR opened three new stores in the
stores, new small market concept quarter, including two replacement
and new "smart" concept stores is stores and one store that was new
an important aspect of the 2012 to the network. One of the three
Plan. stores opened in the quarter was a
CTR-Mark's combination store. In
addition, one traditional store was
closed during the quarter.
The store network now totals 473
stores, 33 of which include a Mark's
component.
-------------------------------------------------------------------------
Customers for Life
Canadian Tire is committed to building customer loyalty through fostering
a positive, consistent and memorable customer experience. 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 First quarter
consistent and coherent customer
service measures, tracking and The Customer Satisfaction Index
performance. (CSI) was successfully developed,
piloted and rolled out in 2007.
The collecting of CSI data for
2008 has begun with phase one of
six having just been completed.
The Dealer relations team has also
been 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 First quarter
include building CTR as a new
commercial account for emergency During the quarter PartSource made
shipments, updating the significant progress on building the
organizational structure, testing CTR commercial account and is now
new operating systems and launching the first call for emergency auto
a new auto parts catalogue. parts to 130 Canadian Tire stores.
Progress on this initiative will
continue building throughout the
year.
PartSource acquired and opened three
corporate stores bringing the
network total to 74 stores,
including three 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. This
investment over the next five to seven years will be directed at
increasing auto parts sales and generating a high rate of return for the
project, and will benefit Canadian Tire, PartSource and our Dealers.
-------------------------------------------------------------------------
2008 Key initiatives 2008 Performance
-------------------------------------------------------------------------
The Automotive Infrastructure First quarter
initiative will be an important
factor in CTR's future growth and Progress on Phase One of the
will involve significant investment Automotive Infrastructure initiative
in fixed assets and working capital continued in the first quarter as
and a redesign of key technology follows:
solutions.
Emergency supply implementation:
- 130 CTR stores began sourcing
emergency auto parts from
PartSource as their first call;
and
- 120 CTR stores finalized
arrangements with local
Uni-Select stores as the second
source for emergency auto
parts.
Corporate assortment expansion:
- creation, testing and
implementation of new stock
keeping unit (SKU) system; and
- modifications to and integration
testing of warehouse management
system in the Vaughan facility.
Enabling technologies:
- preliminary progress made on
system analysis and design work;
and
- vendor negotiations initiated to
secure licenses and professional
services for analysis and design
work.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CTR Change program
Canadian Tire is committed to continually working to improve the way that
we do business for enhanced returns. 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, better
decisions and improve our agility and speed to market.
-------------------------------------------------------------------------
2008 Key initiatives 2008 Performance
-------------------------------------------------------------------------
CTR will implement productivity/ First quarter
control initiatives in the areas of
pricing and product hierarchy to Progress made on the CTR change
streamline and strengthen program in the first quarter
operations and improve included:
organizational structures and
efficiencies. - implementation of new
customer-centric hierarchy
functions in operating system;
- continued testing of new pricing
system and began implementation
readiness activities;
- establishment of future
promotional planning design
principles; and
- vendor management workshops held
to understand vendor data links
and dependencies.
-------------------------------------------------------------------------
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;
- average sales per square foot of retail space; and
- average transaction value
CTR total retail and same store sales
(year-over-year percentage change) Q1 2008 Q1 2007
-------------------------------------------------------------------------
Total retail sales(1) (1.9)% 3.1%
Same store sales(2) (4.0)% 1.3%
-------------------------------------------------------------------------
(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) Q1 2008
---------------------------------------------------------------
Same store sales(1)
Concept 20/20 stores (2.9)%
New-format stores (5.2)%
Traditional stores (4.9)%
---------------------------------------------------------------
(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 first quarter MD&A, we
continue to report three separate classes of stores, defined as follows:
-------------------------------------------------------------------------
Concept 20/20 store New-format store Traditional store
format format format
(mid 2003 to 2008) (1994 to mid 2003) (1994 and prior)
Average retail Average retail Average retail
square footage: square footage: square footage:
54,000 32,000 16,000
-------------------------------------------------------------------------
Larger format launched Large format, including Smaller than either
in September 2003, "Class Of" and "Next the new-format or
ranging in size from Generation" stores, Concept 20/20 stores
24,000 to 89,000 square ranging in size from on average.
feet (excluding Mark's- 16,000 to 66,000 square Traditional stores
inside-a-CTR concept feet, most of which were are characterized by
stores which can be opened between 1994 and varied sizes and
significantly larger). mid 2003. New-format layouts. Traditional
Concept 20/20 stores stores make up stores make up
make up approximately 58 approximately 34 percent approximately eight
percent of the retail of the retail square percent of the retail
square footage of the footage in the network. square footage in
network. See section This format immediately the network.
3.3.1.1, Q1 2008 preceded the Concept
Strategic Plan 20/20 format.
performance for more
information on the
Concept 20/20 rollout.
-------------------------------------------------------------------------
Concept 20/20 stores represented approximately 58 percent of CTR's retail
square footage and 50 percent of total retail sales in the first quarter of
2008.
CTR store count
Q1 2008 2007 2006 2005 2004
-------------------------------------------------------------------------
Concept 20/20 stores(1) 195 192 126 53 25
New-format stores(2) 189 189 237 292 302
Traditional stores 89 92 105 117 130
-------------------------------------------------------------------------
Total new-format,
traditional and Concept
20/20 stores 473 473 468 462 457
PartSource stores 74 71 63 57 47
-------------------------------------------------------------------------
(1) Concept 20/20 store total in 2008 count includes two Concept 20/20
Mark's-inside-a-CTR concept stores which were opened in pilot phase
in 2007 and 28 CTR-Mark's combination Concept 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 Concept 20/20 store format while
introducing new store formats consistent with the goals of the 2012 Plan.
Average retail sales per Canadian Tire store(1),(2)
For the For the
12 months 12 months
ended ended
March 29, March 31,
($ in millions) 2008 2007
-------------------------------------------------------------------------
Concept 20/20 stores $ 18.4 $ 18.9
New-format stores 14.1 14.4
Traditional stores 7.8 8.0
-------------------------------------------------------------------------
(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.
Concept 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
March 29, March 31,
($ in millions) 2008 2007
-------------------------------------------------------------------------
Retail square footage(1),(3) (millions of square feet) 17.8 16.4
Concept 20/20 stores(2),(3)($) $ 366 $ 375
New-format stores(2),(3)($) 442 452
Traditional stores(2),(3)($) 493 506
-------------------------------------------------------------------------
(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 Concept 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 utilized to display more merchandise, accommodate wider aisles, include more appealing product displays and provide a more compelling shopping experience overall. The larger Concept 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
First quarter
CTR's first quarter retail sales were impacted by approximately $18 million due to the introduction of the new Family Day statutory holiday in Ontario and the Good Friday and Easter Sunday holiday shift to March in 2008 from April in 2007. Sales trends in April have, however, significantly improved on the strength of the new Spring 2008 seasonal programs, a more competitive pricing strategy and the arrival of warmer weather in Eastern Canada.
In addition, sales continued to be affected by a decline in the tools category of approximately 15 percent year-over-year, due in part to changes to the pricing and promotional strategy and a decline in consumer tool purchases throughout the industry. While tool sales in the quarter remain below levels seen in 2007, the business started to recover over the course of the quarter as promotional strategies were refined.
PartSource generated double-digit sales growth in the first quarter, driven by the continued expansion of the network and growth in the commercial customer segment.
3.3.1.3 CTR's financial results
($ in millions) Q1 2008 Q1 2007(1) Change
-------------------------------------------------------------------------
Retail sales $1,218.8 $1,242.6 (1.9)%
Net shipments (year-over-year % change) (0.2)% 11.1%
Gross operating revenue 1,071.3 1,070.9 0.0%
EBITDA(2) 99.0 93.1 6.4%
-------------------------------------------------------------------------
Earnings before income taxes 43.6 38.0 15.1%
Less adjustment for:
Gain on disposals of property and equipment 3.9 -
Former CEO retirement obligation 0.4 -
-------------------------------------------------------------------------
Adjusted earnings before income taxes(2) $ 39.3 $ 38.0 3.7%
-------------------------------------------------------------------------
(1) 2007 earnings figures have been restated for the adoption of CICA HB
3031 - Inventories as required by the CICA. 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, recorded at the wholesale price that
we charge to our Dealers and PartSource franchisees.
-------------------------------------------------------------------------
Explanation of CTR's financial results
First quarter
For the quarter, gross operating revenue was flat compared to the first quarter of 2007, a result of weaker net shipment trends and consistent with first quarter retail sales results.
Despite flat revenues, adjusted pre-tax earnings in CTR increased 3.7 percent in the first quarter due to improved product margins, lower advertising expenses due to the replacement of the print version of the Spring catalogue with the on-line version and reduced operating costs due to general productivity improvements throughout CTR's operations. First quarter earnings growth also accommodated an incremental $3.4 million of investments in long-term productivity and growth initiatives. As referred to in sections 3.1 and 13.1, CTR's earnings were impacted by accounting changes required by the CICA HB 3031 - Inventories that were implemented retrospectively during the quarter.
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. CTR has demonstrated its ability to mitigate this risk in the past.
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 Q1 2008 Strategic Plan performance
The following outlines Mark's performance for the first 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 Q1 2008 Performance
-------------------------------------------------------------------------
Mark's will continue network First quarter
development through opening new
stores, relocating or expanding - opened three new stores,
existing stores and renovating including one CTR-Mark's
older stores to the newest Mark's Concept 20/20 combination
format. store;
- closed one corporate store;
- renovated one corporate store;
and
- repurchased three franchise
stores.
Mark's total retail square footage
at the end of the quarter was
3.0 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 Q1 2008 Performance
-------------------------------------------------------------------------
Mark's will continue to expand the First quarter
store network by developing new and
innovative ways to bring Clothes - opened one new CTR-Mark's
That Work to consumers across the Concept 20/20 combination
country, resulting in an increased store (included in total
physical presence across the above); and
geographic regions of Canada. - opened one new mobile Mark's
store (not included in total
above).
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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, women's wear is
expected to be the fastest growing segment of the business over the plan
period as it is the least developed of the Mark's main category lines.
Improvements in the product assortment in the women's wear category is
expected to bring continued growth during the Plan period.
-------------------------------------------------------------------------
2008 Key initiatives Q1 2008 Performance
-------------------------------------------------------------------------
In 2008, Mark's will continue to First quarter
expand its product assortment in
the three main categories of - sales of industrial wear
apparel and footwear with a focus increased by 3.6 percent;
on the Clothes That Work campaign. - sales of men's wear decreased
by 8.2 percent; and
- sales of women's wear decreased
by 8.4 percent.
Mark's continued to focus on the
Clothes That Work campaign with the
introduction of one new women's
wear Clothes That Work item 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) Q1 2008 Q1 2007
-------------------------------------------------------------------------
Total retail sales (3.2)% 17.6%
Same store sales(1) (7.0)% 15.7%
-------------------------------------------------------------------------
(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.
-------------------------------------------------------------------------
First quarter
Mark's retail sales during the first quarter of 2008 were impacted by a
shift in timing of the Easter holidays, the new Family Day statutory holiday
in Ontario and the continued softening of retail and economic conditions
experienced across many parts of Canada. Same store sales growth decreased
7.0 percent compared to the first quarter of 2007, which had experienced
particularly strong same store sales results, due to more favourable weather
conditions compared to those that prevailed in the first quarter of 2008 and
stronger economic conditions at that time. Men's industrial footwear and men's
accessories demonstrated the largest sales dollar increases in corporate store
sales in the first quarter.
Average corporate store sales(1)
For the For the For the
12 months 12 months 12 months
ended, ended, ended,
March 29, March 31, April 1,
2008 2007 2006
-------------------------------------------------------------------------
Average retail sales per store
($ thousands)(2) $ 2,743 $ 2,817 $ 2,443
Average sales per square foot ($)(3) 327 347 314
-------------------------------------------------------------------------
(1) Calculated on a rolling 12-month basis.
(2) Average retail sales per corporate store include corporate stores
that have been open for 12 months or more.
(3) Average sales per square foot is based on sales from corporate
stores. We have prorated square footage for corporate stores that
have been open for less than 12 months.
Mark's continues to focus on productivity at its stores. Due to the
softening retail environment in Canada during the first quarter of 2008, there
was a decrease in average sales per store and average sales per square foot,
but this followed strong 15.3 percent and 10.5 percent year-over-year
increases in those respective measures in the first quarter of 2007 over the
first quarter of 2006.
3.3.2.3 Mark's financial results
($ in millions) Q1 2008 Q1 2007(1) Change
-------------------------------------------------------------------------
Retail sales(2) $ 172.5 $ 178.3 (3.2)%
Gross operating revenue(3) 147.5 152.1 (3.0)%
EBITDA(4) 3.0 4.5 (34.1)%
-------------------------------------------------------------------------
Earnings before income taxes (3.4) (0.2) N/A
Less adjustment for:
Loss on disposals of property and equipment - (0.3)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(4) $ (3.4) $ 0.1 N/A
-------------------------------------------------------------------------
(1) Mark's 2007 results have been restated for the adoption of CICA HB
3031 - inventories as required by the CICA. 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
First quarter
Mark's pre-tax earnings decreased in the first quarter of 2008 primarily as a result of the decrease in gross operating revenue from the first quarter of 2007 for reasons explained above. This was partially offset by the gross margin rate improving by 130 basis points, due to an improvement in most cost factors, particularly increased purchase markups, offset to some degree by higher total markdowns. The gross margin was also favourably impacted by exchange rates during the quarter although Mark's participates in Canadian Tire's hedging program, designed to manage the variability in exchange rates and moderate their effect on earnings. Total expenses increased by 5.2 percent over the first quarter of 2007, largely attributable to higher occupancy and depreciation costs related to the growth experienced in the store network over the last few years. As referred to in sections 3.1 and 13.1, Mark's first quarter 2008 and first quarter 2007 earnings were also impacted by accounting changes required by the CICA HB 3031 - Inventories which were implemented retrospectively during the quarter.
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. 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, resulting from the general increase in consumer spending for winter clothing and Christmas related purchases. With the adoption of CICA HB-3031 - Inventories, an even higher percentage of Mark's annual pre-tax earnings is 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 Q1 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 first 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.
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2008 Key initiatives Q1 2008 Performance
-------------------------------------------------------------------------
In 2008, Petroleum will continue to First quarter
strengthen the existing network by
opening new sites and refurbishing - opened two new gas bars;
or rebuilding existing sites. - refurbished two gas bars; and
- closed two locations.
At the end of the quarter,
Petroleum had 266 gas bars,
including 42 re-branded sites.
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-------------------------------------------------------------------------
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 also in the process of
enhancing its interrelatedness strategy to further extend its marketing
leverage across the Company.
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2008 Key initiatives Q1 2008 Performance
-------------------------------------------------------------------------
In 2008, Petroleum will aggressively First quarter
seek out additional cross-marketing
opportunities to further leverage - issued multiplier coupons that
its interrelatedness strategy to increase the Canadian Tire
drive customer traffic, 'Money' offered on gas
transactions, customer loyalty and purchases paid for in cash or
earnings across the enterprise. by Canadian Tire Options
MasterCard;
- offered discount coupons on
Canadian Tire merchandise with
the purchase of gas;
- sold car wash vouchers at CTR
stores; and
- held a cross-promotion offer
with Mark's.
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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
Q1 2008 Q1 2007 Change
-------------------------------------------------------------------------
Sales volume (millions of litres) 413.8 415.3 (0.4)%
-------------------------------------------------------------------------
Petroleum has continued to grow its market share over the past couple of
years in a mature market where gas prices are at historically high levels,
largely due to our loyalty program, customer service experience at our gas
bars and an increased combined penetration rate on our Canadian Tire Options
MasterCard and the Gas Advantage MasterCard. Gasoline sales during the quarter
were down slightly due to lower same site sales, offset by increases in new
site openings over the past few years. On a same site basis, our gasoline
volume decreased by 1.9 percent in the quarter. The decrease in volume was
partially attributable to a year-over-year increase in gas prices of
approximately 18 percent and unfavourable driving conditions due to record
breaking snowfalls.
Petroleum's convenience and car wash sales
(year-over-year percentage change) Q1 2008 Q1 2007
--------------------------------------------------------------
Total retail sales
Convenience store sales 11.6% 16.9%
Car wash sales (24.4)% 20.8%
---------------------------------------------------------------
Same store sales
Convenience(1) 9.7% 12.3%
Car wash (24.8)% 17.1%
---------------------------------------------------------------
(1) Same store convenience sales excludes three "Q" convenience stores.
Convenience store sales in the first quarter of 2008 increased as a result
of new site openings and increases in tobacco and lottery sales. The decline
in car wash sales is largely attributable to the impact of the unfavourable
weather conditions and record breaking snowfalls experienced in the first
quarter of 2008 compared to the previous year.
3.3.3.3 Petroleum's financial results
($ in millions) Q1 2008 Q1 2007 Change
-------------------------------------------------------------------------
Retail sales $ 449.0 $ 385.4 16.5%
Gross operating revenue 422.8 362.8 16.5%
EBITDA(1) 9.0 6.5 38.2%
-------------------------------------------------------------------------
Earnings (loss) before income taxes 5.0 2.5 96.3%
Less adjustment for:
Loss on disposals of property and equipment (0.2) (0.2)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(1) $ 5.2 $ 2.7 84.5%
-------------------------------------------------------------------------
(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
First quarter
Higher and more stable gasoline margins and an increase in convenience store sales, partially offset by lower gasoline volumes, contributed to Petroleum's revenue growth in the first quarter. Average gasoline prices during the first quarter of 2008 increased by approximately 18 percent over the first quarter of 2007, driving this increased revenue.
Increased gasoline margins was the major factor that contributed to Petroleum's positive earnings performance during the quarter combined with strong expense management. Petroleum incurred $0.7 million in environmental expenses in the first quarter related to clean-up costs associated with certain site closures compared to $0.2 million incurred in the first 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 Q1 2008 Strategic Plan performance
The following outlines Financial Service's performance for the first 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 loans, personal
loans, line of credit loans and mortgage 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 Q1 2008 Performance
-------------------------------------------------------------------------
For 2008, Financial Services has First quarter
targeted increasing gross average
credit card receivables and the Gross average loans receivable were
number of accounts carrying a $3.8 billion in the first quarter.
balance and growing its total The growth reflects an 8.6 percent
managed portfolio as key increase in the average account
initiatives. balance and a 0.3 percent increase
in the number of accounts carrying
In addition, Financial Services is a balance.
planning a major re-launch of the
Canadian Tire Options MasterCard In January 2008, Financial Services
in 2008. purchased a portfolio of line of
credit loans receivable for
$29.6 million.
During the quarter Financial
Services continued planning for
the re-launch of the Canadian
Tire Options MasterCard and began
the rollout of new cards in
March 2008.
-------------------------------------------------------------------------
Retail banking
Financial Services began offering retail banking products in two pilot
markets in October 2006, including high interest savings accounts,
guaranteed investment certificates 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 Q1 2008 Performance
-------------------------------------------------------------------------
Financial Services' retail banking First quarter
plans include increasing the
ending mortgage portfolio balance Financial Services had accumulated
and deposit balances. over $147 million in deposits and
approximately $48 million in
Financial Services will incur mortgages as at the end of the
approximately $28 million in net first quarter of 2008.
expenses associated with the
marketing and operations of the Financial Services incurred
retail banking initiative in $7.3 million in net expenses
2008. associated with the marketing and
operations of the retail banking
initiative during the first quarter
of 2008.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Initiatives to build a "BETTER" Canadian Tire
-------------------------------------------------------------------------
Insurance and other ancillary products
Financial Services plans to enhance its insurance and warranty product
offering to credit card customers. Revenues from insurance and warranty
products have increased significantly in the last five years through
direct marketing to Canadian Tire's growing base of customers.
-------------------------------------------------------------------------
2008 Key initiatives Q1 2008 Performance
-------------------------------------------------------------------------
Financial Services plans to Revenues from insurance and
increase revenues from insurance warranty products increased 4.8
and warranty products during 2008. percent in the first quarter
year-over-year.
-------------------------------------------------------------------------
3.3.4.2 Key performance indicators
The following are key indicators of Financial Services' performance:
- size of the total managed portfolio
- profitability of the portfolio
- quality of the portfolio
Financial Services' total managed portfolio of loans receivable
($ in millions, except where noted) Q1 2008 Q1 2007 Change
-------------------------------------------------------------------------
Average number of accounts with a balance
(thousands) 1,849 1,845 0.3%
Average account balance ($) $ 2,072 $ 1,907 8.6%
Gross average receivables (GAR) 3,831.7 3,517.9 8.9%
Total managed portfolio (end of period) 3,783.9 3,473.5 8.9%
Net managed portfolio (end of period) 3,735.1 3,438.0 8.6%
-------------------------------------------------------------------------
Net managed portfolio
Financial Services' net managed portfolio is the total value, after allowances, of loans receivable including credit card loans, personal loans, line of credit loans and residential mortgage loans.
Financial Services' gross average receivables were up in the first quarter, due primarily to marketing programs designed to increase average balances. The continued success of the Gas Advantage MasterCard in Ontario contributed to the increase in total portfolio growth, offset by a decline in personal loan accounts.
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.
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(R) (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 Sheets, 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) Q1 2008 Q1 2007 Change ------------------------------------------------------------------------- Average number of accounts with a balance (thousands) 1,809 1,804 0.3% Average account balance ($) $ 2,004 $ 1,829 9.6% Gross average receivables 3,625.3 3,298.7 9.9% Total managed portfolio (end of period) 3,572.0 3,261.6 9.5% -------------------------------------------------------------------------
Ending credit card loans receivable grew 9.5 percent to $3.6 billion at the end of the quarter primarily due to a 9.6 percent increase in the average account balance 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)
Q1 2008 Q1 2007 Q1 2006
-------------------------------------------------------------------------
Total revenue as a % of GAR(2) 24.54% 24.96% 25.22%
Gross margin as a % of GAR(2) 12.63% 13.12% 13.31%
Operating expenses as a % of GAR(3) 7.84% 7.78% 8.27%
Return on average total managed
portfolio(2),(3),(4) 4.79% 5.34% 5.03%
-------------------------------------------------------------------------
(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 earnings before taxes as a percentage of GAR.
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, the loyalty program 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 first quarter of 2006, 2007 and 2008.
Portfolio quality
Q1 2008 Q1 2007 Q1 2006
-------------------------------------------------------------------------
Net write-off rate (rolling 12-month basis) 5.83% 5.95% 5.98%
Account balances less than 30 days overdue
at end of period 96.10% 96.29% 96.31%
Allowance rate 2.61% 2.48% 2.55%
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Net write-offs
Net write-offs represents account balances that have been written off, net of collections of amounts previously written off. Net write-off rate is the net write-offs expressed as a percentage of gross average receivables in a given period.
Financial Services' net write-off rate was 5.83 percent in the first quarter of 2008, falling within the target range of 5.0 to 6.0 percent and an improvement of 12 basis points over the same period of the previous year.
Allowance
The allowance is determined using historical loss experience of account balances based on the aging and arrears status, with certain adjustments for other relevant circumstances influencing the recoverability of the loans.
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.
3.3.4.3 Financial Services' financial results
($ in millions) Q1 2008 Q1 2007 Change
-------------------------------------------------------------------------
Gross operating revenue 208.7 176.1 18.5%
EBITDA(2) $ 63.5 $ 46.1 38.0%
-------------------------------------------------------------------------
Earnings before income taxes 53.6 45.4 18.1%
Less adjustment for:
Loss on disposals of property and equipment - (0.1)
Net effect of securitization activities(1) 12.9 (3.0)
-------------------------------------------------------------------------
Adjusted earnings before income taxes(2) $ 40.7 $ 48.5 (16.0)%
-------------------------------------------------------------------------
(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) See section 14.0 on non-GAAP measures.
Explanation of Financial Services' financial results
First quarter
Financial Services' gross operating revenue increased over the first quarter of 2007 largely as a result of higher credit interest earned from the increase in total receivables and due to the gain from the net effect of securitization activities as compared with a loss in the first quarter of the prior year. This gain resulted from the deferral of fourth quarter securitizations in 2007 to the first quarter of 2008.
First quarter earnings before income taxes increased over the first quarter of 2007 reflecting the gain from the net effect of securitization activities compared to a loss in the same period last year. Adjusted earnings before income taxes decreased from the first quarter of 2007 due to the impact of a 13 basis point increase in the allowance rate for doubtful accounts ($4.9 million) and incremental expenses related to the retail banking initiative of $2.6 million. The increase in the allowance rate was due to slightly higher aging and the impact of changes to the collection process, the benefits of which are expected to be realized over the long term.
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 and the sale of personal loans to another third party trust. 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 notes issued by GCCT as described in section 5.2.4. A decline in the marketability of the commercial paper and notes would require the Company to find new sources of funding. Developments in the last half of 2007 in the international credit markets had an impact on some companies' securitization programs; see sections 5.2.3 and 5.2.4 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 5.2.4 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 5.2 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 Canadian Tire Bank'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 objectives
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.
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:
March 29, % March 31, %
($ in millions) 2008 of total 2007 of total
-------------------------------------------------------------------------
Capital components
Current portion of long-term debt $ 156.7 3.3% $ 2.9 0.1%
Long-term debt 1,355.5 28.8% 1,166.5 29.1%
Other long-term liabilities(1) - - 13.0 0.3%
Share capital 701.9 14.9% 702.7 17.5%
Contributed surplus 1.5 0.1% 0.2 0.1%
Components of accumulated other
comprehensive income(2) (11.3) (0.2)% (7.0) (0.2)%
Retained earnings 2,504.8 53.1% 2,144.4 53.1%
-------------------------------------------------------------------------
Net capital under management $4,709.1 100.0% $4,022.7 100.0%
-------------------------------------------------------------------------
December 29, %
2007 of total
-----------------------------------------------------
Capital components
Current portion of long-term debt $ 156.3 3.4%
Long-term debt 1,341.8 28.9%
Other long-term liabilities(1) 10.6 0.2%
Share capital 700.7 15.0%
Contributed surplus 2.3 0.1%
Components of accumulated other
comprehensive income(2) (8.5) (0.2)%
Retained earnings 2,455.1 52.6%
-----------------------------------------------------
Net capital under management $4,658.3 100.0%
-----------------------------------------------------
(1) Long-term liabilities that are derivative or hedge instruments
related to capital items only.
(2) Components of other comprehensive income relating to capital items
only.
The Company has in place various policies which it uses to manage capital, including the leverage and liquidity policy and 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 a periodic review of the policies to ensure they remain consistent with approved risk tolerance levels.
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 first quarter of 2008. Under these covenants, the Company 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 and/or increase or decrease the amount of sales of loan receivable to Glacier Credit Card Trust.
4.3.1 Canadian Tire Bank's regulatory environment
The Company's wholly-owned subsidiary, Canadian Tire 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. 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 first 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 (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.
CTB's ratios are above internal minimum targets of 11.0 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 seven 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 first 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.
March 29, March 31, December
2008 2007 29, 2007
-------------------------------------------------------------------------
Debt ratio
Long-term debt to total capitalization(1) 32.1% 29.2% 32.5%
Coverage ratio
Interest coverage(2) 7.3 times 8.2 times 7.3 times
-------------------------------------------------------------------------
(1) Long-term debt includes current portion and capitalization is based
on book value of debt plus shareholders' equity.
(2) Long-term interest coverage is calculated on a rolling 12-month basis
after annualizing interest on long-term debt issued and retired
during the period. See section 14.0 for additional information on
non-GAAP measures.
5.0 Financing
5.1 Credit facilities
At the end of the first quarter of 2008, the Company had committed bank lines of $1.0 billion in place. The bank lines are provided by 11 domestic and international banks reflecting the strong support for Canadian Tire and the GCCT commercial paper program.
The committed bank lines provide flexibility to the Company to support its growing retail and financial services businesses and help the Company to better manage seasonal cash flow activity. In addition to the above-noted lines, Canadian Tire has the following sources of financing:
- A $750.0 million shelf prospectus for its MTN Program, $300.0 million
of which was issued successfully in an oversubscribed transaction in
October 2007; and
- An $800.0 million Canadian Tire commercial paper program that has
strong investor demand at cost-effective rates and is fully supported
by the aforementioned committed bank lines.
The GCCT commercial paper program has access to $760.0 million of the total Canadian Tire committed lines and, as of March 29, 2008, GCCT had achieved compliance with DBRS(R) Global Liquidity Standards. During the current quarter, the market conditions surrounding the liquidity of ABCP continued to experience some volatility; however, GCCT has been successful at rolling over its commercial paper, albeit at varying spreads. There continues to be a constrained amount of ABCP that GCCT is able to issue, as investor demand remains limited. As of March 29, 2008, $132.4 million of GCCT's commercial paper was outstanding and backed by the bank credit lines.
Debt market conditions
In August and September of 2007, global debt markets experienced 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 Medium Term Notes (MTN). GCCT issued five-year MTN in the quarter and continues to refinance its maturing commercial paper, demonstrating that these market challenges have not affected our ability to access funding.
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 March 29, 2008 there has been no change in the ratings.
Credit rating summary DBRS S&P
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Canadian Tire
Commercial paper R-1 (low) A-1 (low)
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.
Overall, Canadian Tire believes it is in a strong position with respect to
its financial flexibility and is well positioned to support its proposed
growth agenda.
5.2 Funding program
5.2.1 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 first
quarter of 2008, the primary sources of funding were:
- $621 million of cash generated from the net effect of securitization
activities; and
- $158 million of cash arising from the issuance of commercial paper.
5.2.2 Cash and cash equivalents
At March 29, 2008, the Company's cash and cash equivalents totaled
$288.6 million and outstanding commercial paper totaled $158.2 million
compared to a negative cash position of $20 million at March 31, 2007 and
outstanding commercial paper of $21.5 million. This change in cash balances
was largely due to a securitization transaction that historically has occurred
in the fourth quarter being deferred and instead completed during the current
quarter. During the first quarter of 2008, we used cash primarily for the
following:
- $508 million to fund increased operational working capital
requirements; and
- $138 million for the addition of property and equipment.
5.2.3 Working capital
Minimizing our working capital requirements continues to be a long-term
priority in order to maximize cash flow for use in the operations of the
Company. The table below shows the change in the value of our working capital
components at the end of the first quarter of 2008 from the first quarter of
2007.
Comparable working capital components(1)
Increase/
(decrease)
in
March 29, March 31, working
($ in millions) 2008 2007 capital
-------------------------------------------------------------------------
Accounts receivable $ 514.5 $ 576.8 $ (62.3)
Loans receivable 705.3 577.2 128.1
Merchandise inventories 1,021.3 902.9 118.4
Prepaid expenses and deposits 69.3 61.5 7.8
Income taxes (payable)/recoverable 76.3 (3.8) 80.1
Accounts payable and other (1,383.5) (1,184.8) (198.7)
-------------------------------------------------------------------------
$ 73.4
-------------------------------------------------------------------------
(1) 2007 figures have been restated for the implementation of CICA HB
3031 - Inventories as required by the CICA. See section 13.1 for
additional information.
The decrease in accounts receivable is largely due to lower Dealer receivables which is consistent with lower shipment volumes during the quarter. The increase in loans receivable is due to increases in the mortgage portfolio balances and the purchase of the line of credit portfolio. The increase in merchandise inventories is due to the timing of shipments of domestic and foreign-sourced goods. Accounts payable increased during the quarter largely due to an increase in deposits at Canadian Tire Bank (CTB), which stand at approximately $147 million at the end of the first quarter of 2008.
5.2.4 Asset-backed commercial paper
Background
The global disruption in the market experienced in August 2007 which greatly impacted the Canadian market for third-party ABCP 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, includes a controversial clause that would give all players in the market immunity from lawsuits, something that has caused concern for many of the ABCP holders and has led to challenges in court that the presiding judge is still considering. The judge is scheduled to rule on the fairness of the proposal by the end of May 2008. 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 during the first quarter of 2008, bringing the total charge for impairment to $2.3 million or 25 percent.
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 March 29, 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 Financial Services or Canadian Tire Bank.
As referenced in section 5.1, 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 a material adverse impact on its business as a result of the current third-party ABCP liquidity issue.
5.2.5 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:
March 29, March 31,
($ in millions) 2008 2007
-------------------------------------------------------------------------
Securitized $2,944.5 $2,784.8
Unsecuritized 790.7 653.3
-------------------------------------------------------------------------
Net managed loans receivable $3,735.2 $3,438.1
-------------------------------------------------------------------------
Net managed loans receivable continued to increase over the last 12 months as customers' use of the Canadian Tire MasterCard and Canadian Tire Gas Advantage MasterCard grew. At the end of the first quarter of 2008, net managed loans receivable were 8.6 percent higher than at the end of the first quarter of 2007.
Canadian Tire Bank 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.
During the first quarter of 2008, the Company sold a portion of its loans receivable to GCCT in a securitization transaction, receiving approximately $630 million in net proceeds. The loans receivable were removed from the Consolidated Balance Sheet.
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 most of this increase from the sale of co-ownership interests in credit card loans to GCCT. 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 mainly due to GCCT's ability to obtain funds from third parties by issuing debt instruments with high credit ratings. Please refer to section 5.1 above for a listing of GCCT's credit ratings.
The trustee and custodian for GCCT, The Canada Trust Company, 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. Computershare Trust Company of Canada acts as agent for The Canada Trust Company in its capacity as custodian. Pursuant to an asset purchase agreement dated February 26, 2007, all rights and obligations of The Canada Trust Company as custodian will be assigned to Computershare Trust Company of Canada once the legal requirements have been fulfilled. 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 first quarter of 2008 was $39.23 per share compared to $34.89 at the end of the first 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
March 29, March 31,
2008 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) 103,395 91,765
Shares purchased under NCIB (100,000) (90,000)
-------------------------------------------------------------------------
Shares outstanding at end of quarter 78,051,457 78,049,221
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 first quarter of 2008 compared to dividends of $15.1 million in the first 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 first quarterly dividend at the 2008 rate was declared on March 6, 2008 in the amount of $0.21 per share payable on June 1, 2008 to shareholders of record as of April 30, 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 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 Q1 2008 Capital expenditures program
Canadian Tire's capital expenditures totaled $113 million in the first
quarter of 2008 (as disclosed in the Consolidated Financial Statements of Cash
Flows, see Note 11), approximately 21 percent higher than the $93 million
spent in the first quarter of 2007. These 2008 capital expenditures were
comprised of:
- $66 million for real estate projects, including $65 million
associated with the rollout of CTR's Concept 20/20 stores;
- $19 million for the Eastern Canada distribution centre;
- $8 million for information technology; and
- $20 million for other purposes
Overall, capital investments for real estate projects were up significantly year-over-year in 2008, primarily due to the acceleration of the Concept 20/20 store rollout, investment in the construction of an Eastern Canada distribution centre and other capital required for certain larger urban store developments.
7.2 2008 Capital expenditures plan
The 2008 capital plan is for net capital expenditures in the range of $430
million to $455 million (including the impact of $145 million in proceeds we
expect to receive from the sale and leaseback of three CTR urban store
developments during the year). The 2008 gross capital plan is comprised of the
following, which total $588 million:
- $416 million for real estate projects, including $200 million
associated with the rollout of CTR's Concept 20/20 stores;
- $ 71 million for the Eastern Canada distribution centre;
- $ 78 million for information technology; and
- $ 23 million for other purposes
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. These subsidiaries have earned
commissions for such services for over 20 years. 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 Canada Revenue Agency (CRA) has reassessed and is also expected to issue further reassessments regarding the tax treatments of commissions paid to foreign subsidiaries of the Company (covering periods from 1995 onwards) 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 for the corresponding periods. The Company does not have a significant exposure on these matters subsequent to the 2003 taxation year. The reassessments and expected reassessments in these matters are based on multiple grounds, some of which are highly unusual and the Company will appeal these reassessments as and when they are received.
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 very unlikely - it is estimated that the total liability of the Company for additional taxes, interest and penalties could be approximately $259.0 million. Although the Company will appeal these reassessments, current tax legislation requires the Company to remit to the CRA and its provincial counterparts approximately $159.9 million, of which $154.0 million had been remitted by the end of the current period.
The Company regularly reviews the potential for adverse outcomes in respect of tax matters. The Company believes that the ultimate disposition of these reassessments 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.
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 sections 5.1 and 5.2.4 of this MD&A for additional information on GCCT.
10.2 Trust financing for Dealers
A financing program has been established to provide an efficient and cost-effective way for Dealers to access the majority of the financing they require for their store operations. 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 first quarter of 2008.
11.1 Operational risks
In addition to the Principal Risks identified above, operational 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
nine In years In years
months 2009 - 2011 - After
($ in millions) Total of 2008 2010 2012 2012
-------------------------------------------------------------------------
Long-term debt $1,472.3 $ 152.4 $ 454.8 $ 15.0 $ 850.1
Capital lease obligations 33.5 3.5 8.2 8.6 13.2
Operating leases 1,919.8 155.3 384.4 319.5 1,060.6
Purchase obligations 882.4 825.2 46.0 10.1 1.1
Other obligations 17.5 3.9 6.4 2.8 4.4
-------------------------------------------------------------------------
Total contractual
obligations $4,325.5 $1,140.3 $ 899.8 $ 356.0 $1,929.4
-------------------------------------------------------------------------
13.0 Changes in accounting policies
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 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.
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 using the weighted average cost method.
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 29, March 31, December
($ in millions) 2007 2007 30, 2006
-------------------------------------------------------------------------
Retained earnings $ 14.2 $ 11.3 $ 20.1
Inventories 22.0 16.6 31.5
Income taxes recoverable (5.8) - -
Future income tax assets (2.0) (5.3) (5.3)
Accounts payable and other - (0.8) 0.6
Income taxes payable - 0.8 5.5
-------------------------------------------------------------------------
In addition, the impact of the retrospective impact on net earnings for the 13 weeks ended March 31, 2007 was a reduction of $8.8 million.
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 9 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, IT systems and processes as well as certain contractual arrangements. The Company is currently assessing the impact of the transition to IFRS. Training and additional resources will be engaged 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.
We are currently evaluating the potential impact of this new standard on our financial statements for 2009 and will adjust our 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 sales
EBITDA
With the exception of Financial Services, we consider EBITDA to be an effective measure of the contribution of each of our businesses to our profitability on an operational basis, before allocating the cost of income taxes and capital investments. EBITDA is also commonly regarded as an indirect measure of operating cash flow, a significant indicator of success for many businesses.
A reconciliation of EBITDA to the most comparable GAAP measure (earnings before income taxes) is provided as follows:
Reconciliation of EBITDA to GAAP measures(1)
($ in millions) Q1 2008 Q1 2007(2)
-------------------------------------------------------------------------
EBITDA
CTR $ 99.0 $ 93.1
Financial Services 63.5 46.1
Petroleum 9.0 6.5
Mark's 3.0 4.5
Eliminations - (5.8)
-------------------
Total EBITDA $ 174.5 $ 144.4
-------------------
Less: Depreciation and amortization expense
CTR $ 42.0 $ 36.8
Financial Services 3.2 3.3
Petroleum 4.0 4.0
Mark's 5.4 4.3
-------------------
Total depreciation and amortization expense $ 54.6 $ 48.4
-------------------
Interest expense
CTR $ 13.4 $ 18.3
Financial Services 6.7 (2.6)
Mark's 1.0 0.4
Eliminations - (5.8)
-------------------
Total interest expense $ 21.1 $ 10.3
-------------------------------------------------------------------------
Earnings (loss) before income taxes
CTR $ 43.6 $ 38.0
Financial Services 53.6 45.4
Petroleum 5.0 2.5
Mark's (3.4) (0.2)
-------------------
Total earnings before income taxes $ 98.8 $ 85.7
-------------------------------------------------------------------------
(1) Differences may occur due to rounding.
(2) 2007 figures have been restated for adoption of CICA HB 3031 -
Inventories as required by the CICA. See section 13.1 for additional
information.
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.
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 March 29, 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 first 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 FIRST QUARTER
INTERIM REPORT FINANCIALS
Consolidated Statements of Earnings (Unaudited)
-------------------------------------------------------------------------
13 weeks ended,
March 29, March 31,
(Dollars in millions except per share amounts) 2008 2007
-------------------------------------------------------------------------
(Restated -
Notes 2 and 14)
Gross operating revenue $ 1,825.3 $ 1,737.7
-------------------------------------------------------------------------
Operating expenses
Cost of merchandise sold and all other
operating expenses except for the
undernoted items 1,644.5 1,587.5
Net interest expense (Note 6) 21.1 10.3
Depreciation and amortization 54.6 48.4
Employee Profit Sharing Plan 6.3 5.8
-------------------------------------------------------------------------
Total operating expenses 1,726.5 1,652.0
-------------------------------------------------------------------------
Earnings before income taxes 98.8 85.7
Income taxes 32.1 30.0
-------------------------------------------------------------------------
Net earnings $ 66.7 $ 55.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted earnings per share (Note 5) $ 0.82 $ 0.68
-------------------------------------------------------------------------
Weighted average number of Common and
Class A Non-Voting Shares outstanding 81,518,607 81,503,488
-------------------------------------------------------------------------
Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------------------------------------------
13 weeks ended,
March 29, March 31,
(Dollars in millions) 2008 2007
-------------------------------------------------------------------------
(Restated -
Notes 2 and 14)
Cash generated from (used for):
Operating activities
Net earnings $ 66.7 $ 55.7
Items not affecting cash
Depreciation and amortization 54.6 48.5
Other 20.8 (9.2)
Net provision for loans receivable (Note 3) 17.3 16.1
Employee future benefits expense (Note 4) 1.6 1.7
Impairment of other long-term investments
(Note 10) 1.0 -
Loss (gain) on disposals of property and
equipment (3.8) 0.6
Securitization loans receivable (12.2) (13.4)
Gain on sales of loans receivable (Note 3) (24.4) (21.8)
-------------------------------------------------------------------------
121.6 78.2
-------------------------------------------------------------------------
Changes in other working capital components (508.2) (874.7)
-------------------------------------------------------------------------
Cash used for operating activities (386.6) (796.5)
-------------------------------------------------------------------------
Investing activities
Additions to property and equipment (138.3) (125.6)
Purchases of stores (15.4) (3.2)
Long-term receivables and other assets (11.3) 16.3
Other (0.9) (0.6)
Proceeds on disposition of property and equipment 14.9 0.6
Investment in loans receivable, net 168.4 157.5
Net securitization of loans receivable 620.6 (16.9)
-------------------------------------------------------------------------
Cash generated from investing activities 638.0 28.1
-------------------------------------------------------------------------
Financing activities
Commercial paper 158.2 21.5
Other 0.5 -
Repayment of long-term debt (1.0) (0.8)
Dividends (15.0) (13.5)
-------------------------------------------------------------------------
Cash generated from financing activities 142.7 7.2
-------------------------------------------------------------------------
Cash generated (used) in the period 394.1 (761.2)
Cash and cash equivalents, beginning of period (105.5) 741.3
-------------------------------------------------------------------------
Cash and cash equivalents, end of period
(Note 7) $ 288.6 $ (19.9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income (Unaudited)
-------------------------------------------------------------------------
13 weeks ended,
March 29, March 31,
(Dollars in millions) 2008 2007
-------------------------------------------------------------------------
(Restated -
Note 2)
Net earnings $ 66.7 $ 55.7
Other comprehensive income (loss), net of taxes
Gain/(loss) on derivatives designated as cash
flow hedges (net of tax of $9.7 (2007 -
$(1.8))) 19.8 (3.4)
Reclassification to non-financial asset of
(gain)/loss on derivatives designated
as cash flow hedges (net of tax of $7.5
(2007 - $(4.8))) 15.5 (9.0)
Reclassification to earnings of (gain)/loss on
derivatives designated as cash flow hedges
(net of tax of $1.5 (2007 - $(0.7))) 3.0 (1.4)
-------------------------------------------------------------------------
Other comprehensive income (loss) 38.3 (13.8)
-------------------------------------------------------------------------
Comprehensive income $ 105.0 $ 41.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
-------------------------------------------------------------------------
13 weeks ended,
March 29, March 31,
(Dollars in millions) 2008 2007
-------------------------------------------------------------------------
(Restated -
Note 2)
Share capital
Balance, beginning of period $ 700.7 $ 702.7
Transactions, net 1.2 -
-------------------------------------------------------------------------
Balance, end of period $ 701.9 $ 702.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contributed surplus
Balance, beginning of period $ 2.3 $ 0.1
Transactions, net (0.8) 0.1
-------------------------------------------------------------------------
Balance, end of period $ 1.5 $ 0.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings
Balance, beginning of period as previously
reported $ 2,440.9 $ 2,083.7
Transitional adjustment on adoption of new
accounting policies - Inventory (Note 2) 14.2 20.1
-------------------------------------------------------------------------
Balance, beginning of period as restated 2,455.1 2,103.8
Net earnings for the period 66.7 55.7
Dividends (17.0) (15.1)
-------------------------------------------------------------------------
Balance, end of period $ 2,504.8 $ 2,144.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Balance, beginning of period $ (50.0) $ 8.6
Other comprehensive income (loss) for the
period 38.3 (13.8)
-------------------------------------------------------------------------
Balance, end of period $ (11.7) $ (5.2)
-------------------------------------------------------------------------
Retained earnings and accumulated other
comprehensive income (loss) $ 2,493.1 $ 2,139.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Balance Sheets (Unaudited)
-------------------------------------------------------------------------
(Dollars in millions) March 29, March 31, December 29,
As at 2008 2007 2007
-------------------------------------------------------------------------
(Restated - (Restated -
Note 2) Note 2)
ASSETS
Current assets
Cash and cash equivalents
(Note 7) $ 288.6 $ - $ -
Accounts receivable 514.5 576.8 707.1
Loans receivable (Note 3) 705.3 577.2 1,486.1
Merchandise inventories (Note 2) 1,021.3 902.9 778.7
Income taxes recoverable 76.3 - 53.2
Prepaid expenses and deposits 69.3 61.5 29.5
Future income taxes 57.7 36.5 75.7
-------------------------------------------------------------------------
Total current assets 2,733.0 2,154.9 3,130.3
-------------------------------------------------------------------------
Long-term receivables and other
assets (Note 3) 246.9 255.6 231.2
Other long-term investments, net
(Note 10) 6.6 - 7.6
Goodwill 62.4 49.6 51.8
Intangible assets 52.4 52.4 52.4
Property and equipment 3,336.0 2,925.3 3,283.6
-------------------------------------------------------------------------
Total assets $ 6,437.3 $ 5,437.8 $ 6,756.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Bank indebtedness (Note 7) $ - $ 19.9 $ 105.5
Commercial paper 158.2 21.5 -
Accounts payable and other 1,383.5 1,184.8 1,847.8
Income taxes payable - 3.8 -
Current portion of long-term debt 156.7 2.9 156.3
-------------------------------------------------------------------------
Total current liabilities 1,698.4 1,232.9 2,109.6
-------------------------------------------------------------------------
Long-term debt 1,355.5 1,166.5 1,341.8
Future income taxes 71.8 70.6 71.8
Other long-term liabilities 115.1 125.7 125.6
-------------------------------------------------------------------------
Total liabilities 3,240.8 2,595.7 3,648.8
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 5) 701.9 702.7 700.7
Contributed surplus 1.5 0.2 2.3
Accumulated other comprehensive
loss (11.7) (5.2) (50.0)
Retained earnings 2,504.8 2,144.4 2,455.1
-------------------------------------------------------------------------
Total shareholders' equity 3,196.5 2,842.1 3,108.1
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 6,437.3 $ 5,437.8 $ 6,756.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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, the financial statements should be read in conjunction
with the most recently prepared 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 prepared 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 new 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 March 31, December
29, 2007 2007 30, 2006
------------------------------
Retained earnings $ 14.2 $ 11.3 $ 20.1
Inventories 22.0 16.6 31.5
Income taxes recoverable (5.8) - -
Future income tax assets (2.0) (5.3) (5.3)
Accounts payable and other - (0.8) 0.6
Income taxes payable - 0.8 5.5
------------------------------
In addition, the retrospective impact on net earnings for the 13
weeks ended March 31, 2007 was a reduction of $8.8 million, or $0.11
per share.
Included in "cost of merchandise sold and all other operating
expenses except for the undernoted items" is $1,228.7 million (2007 -
$1,191.5 million) of inventory recognized as an expense, which
included $16.8 million (2007 - $11.7 million) of write-downs of
inventory as a result of net realizable value being lower than cost.
Inventory writedowns recognized in previous years and reversed in the
current quarter and the comparative quarter 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 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, which is included in
note 9.
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 does not require any changes to the
Company's accounting, but does require additional note disclosure,
which is included in note 8.
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.
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 is currently
assessing the impact of the transition 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
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.
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:
Average balances
Total principal amount for the
(Dollars in millions) of receivables as at(1) 13 weeks ended
------------------------------ -------------------
March 29, March 31, December March 29, March 31,
2008 29, 2007 2007 2008 2007
---------- --------- --------- --------- ---------
Total net managed
credit card loans $3,526.4 $3,229.4 $3,719.1 $3,576.7 $3,268.1
Credit card loans
sold (2,897.5) (2,679.0) (2,271.5) (2,585.0) (2,691.0)
---------- --------- --------- --------- ---------
Credit card loans
held 628.9 550.4 1,447.6 991.7 577.1
Total net managed
personal loans(2) 132.2 205.5 143.6 136.4 214.1
Personal loans sold (47.1) (105.8) (59.4) (53.1) (115.2)
---------- --------- --------- --------- ---------
Personal loans held 85.1 99.7 84.2 83.3 98.9
Total net managed
mortgage loans(3) 48.4 3.2 35.4 42.9 2.0
---------- --------- --------- --------- ---------
Total net managed
line of credit
loans(4) 28.2 - - 24.0 -
---------- --------- --------- --------- ---------
Total loans receivable 790.6 653.3 1,567.2 $1,141.9 $ 678.0
--------- ---------
--------- ---------
Less: long-term
portion(5) (85.3) (76.1) (81.1)
---------- --------- ---------
Current portion of
loans receivable $ 705.3 $ 577.2 $1,486.1
---------- --------- ---------
---------- --------- ---------
(1) Amounts shown are net of allowance for credit losses.
(2) Personal loans are unsecured loans that are provided to
qualified existing credit cardholders for terms of three to
five years. Personal loans have fixed monthly payments of
principal and interest; however, the personal loans can be
repaid at any time without penalty.
(3) Mortgage loans are issued for terms of up to ten years, have
fixed or variable interest rates, are secured and include a mix
of both high and low ratio loans. High ratio loans are fully
insured and low ratio loans are partially insured.
(4) 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 ended
March 29, 2008 were $17.3 million (2007 - $16.1 million). Net credit
losses for the total managed portfolio for the 13 weeks ended March
29, 2008 were $62.3 million (2007 - $50.3 million).
4. Employee Future Benefits
The net employee future benefit expense for the 13 weeks ended
March 29, 2008 was $1.6 million (2007 - $1.7 million).
5. Share Capital
March 29, March 31, December
(Dollars in millions) 2008 2007 29, 2007
--------- --------- ---------
Authorized
3,423,366 Common Shares
100,000,000 Class A Non-Voting Shares
Issued
3,423,366 Common Shares (March 31,
2007 - 3,423,366) $ 0.2 $ 0.2 $ 0.2
78,051,457 Class A Non-Voting Shares
(March 31, 2007 - 78,049,221) 701.7 702.5 700.5
--------- --------- ---------
$ 701.9 $ 702.7 $ 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:
13 weeks ended 13 weeks ended
(Dollars in millions) March 29, 2008 March 31, 2007
--------------------- ---------------------
Number $ Number $
----------- --------- ----------- ---------
Shares outstanding at
the beginning of the
period 78,048,062 700.5 78,047,456 702.5
Issued 103,395 6.7 91,765 6.5
Repurchased (100,000) (6.3) (90,000) (6.5)
Excess of repurchase
price over issue price - 0.8 - -
----------- --------- ----------- ---------
Shares outstanding at
the end of the period 78,051,457 701.7 78,049,221 702.5
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Effective November 2006, all outstanding stock options have a feature
that enables the employee to exercise the stock option or receive a
cash payment equal to the difference between the market price of a
Class A Non-Voting Share at the exercise date and the exercise price
of the stock option. As the employee can request settlement in cash
and the Company is obligated to pay cash upon demand, compensation
expense is accrued over the vesting period of the stock options based
on the expected total compensation to be paid upon the stock options
being exercised. Accordingly, outstanding stock options no longer
have a dilutive impact on the average number of shares outstanding.
6. Segmented Information - Statement of Earnings
---------------------------------------------------------------------
13 weeks 13 weeks
ended ended
March 29, March 31,
2008 2007
(Restated
- Notes
(Dollars in millions) 2 and 14)
---------------------------------------------------------------------
Gross operating revenue
CTR $1,071.3 $1,070.9
Financial Services 208.7 176.1
Petroleum 422.8 362.8
Mark's 147.5 152.1
Eliminations
Total gross operating revenue (25.0) (24.2)
-------------------
$1,825.3 $1,737.7
---------------------------------------------------------------------
Earnings (loss) before income taxes
CTR $ 43.6 $ 38.0
Financial Services 53.6 45.4
Petroleum 5.0 2.5
Mark's (3.4) (0.2)
-------------------
Total earnings before income taxes 98.8 85.7
Income taxes 32.1 30.0
-------------------
Net earnings $ 66.7 $ 55.7
---------------------------------------------------------------------
Net Interest expense(1)
CTR $ 13.4 $ 18.3
Financial Services 6.7 (2.6)
Petroleum - -
Mark's 1.0 0.4
Eliminations - (5.8)
-------------------
Total interest expense $ 21.1 $ 10.3
---------------------------------------------------------------------
Depreciation and amortization expense
CTR $ 42.0 $ 36.8
Financial Services 3.2 3.3
Petroleum 4.0 4.0
Mark's 5.4 4.3
-------------------
Total depreciation and amortization expense $ 54.6 $ 48.4
---------------------------------------------------------------------
(1) Net interest expense includes interest on short term and long
term debt, offset by passive interest income. Long-term interest
for the 13 weeks ended March 29, 2008 was $20.7 million (2007 -
$15.7 million).
Segmented Information - Total Assets
---------------------------------------------------------------------
March 29, March 31, December
2008 2007 29, 2007
(Restated (Restated
(Dollars in millions) - Notes - Notes
2 and 14) 2 and 14)
---------------------------------------------------------------------
CTR $5,631.5 $4,557.9 $5,724.5
Financial Services 1,346.8 1,310.2 1,852.0
Petroleum 256.7 244.7 573.4
Mark's 507.2 450.8 470.3
Eliminations (1,304.9) (1,125.8) (1,863.3)
-----------------------------
Total $6,437.3 $5,437.8 $6,756.9
---------------------------------------------------------------------
7. Cash and Cash Equivalents (Bank Indebtedness)
The components of cash and cash equivalents (bank indebtedness) are:
March 29, March 31, December
(Dollars in millions) 2008 2007 29, 2007
--------- --------- ---------
Cash (bank overdraft) $ (62.9) $ (103.9) $ 71.8
Line of credit borrowings - - (316.8)
Short-term investments 351.5 84.0 139.5
--------- --------- ---------
Cash and cash equivalents (bank
indebtedness) $ 288.6 $ (19.9) $ (105.5)
--------- --------- ---------
--------- --------- ---------
8. 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:
March 29, % March 31, %
(Dollars in millions) 2008 of total 2007 of total
------------------- -------------------
Current portion of long-term
debt $ 156.7 3.3% $ 2.9 0.1%
Long-term debt 1,355.5 28.8% 1,166.5 29.1%
Other long-term liabilities(1) - - 13.0 0.3%
Share capital 701.9 14.9% 702.7 17.5%
Contributed surplus 1.5 0.1% 0.2 0.1%
Components of accumulated other
comprehensive income(2) (11.3) (0.2)% (7.0) (0.2)%
Retained earnings 2,504.8 53.1% 2,144.4 53.1%
------------------- -------------------
Net capital under management $4,709.1 100.0% $4,022.7 100.0%
------------------- -------------------
------------------- -------------------
December %
29, 2007 of total
-------------------
Current portion of long-term
debt $ 156.3 3.4%
Long-term debt 1,341.8 28.9%
Other long-term liabilities(1) 10.6 0.2%
Share capital 700.7 15.0%
Contributed surplus 2.3 0.1%
Components of accumulated other
comprehensive income(2) (8.5) (0.2)%
Retained earnings 2,455.1 52.6%
-------------------
Net capital under management $4,658.3 100.0%
-------------------
-------------------
(1) Long-term liabilities that are derivative or hedge instruments
related to capital items only.
(2) Components of other comprehensive income relating to capital
items only.
The Company has in place various policies which it uses to manage
capital, including the leverage and liquidity policy and the
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.
March 29, March 31, December
2008 2007 29, 2007
------------------------------
Debt ratio
Long-term debt to total
capitalization(1) 32.1% 29.2% 32.5%
Coverage ratio
Interest coverage(2) 7.3 times 8.2 times 7.3 times
------------------------------
(1) Long-term debt includes current portion and capitalization is
based on book value of debt plus shareholders' equity.
(2) Long-tem interest coverage is calculated on a rolling 12-month
basis after annualizing interest on long-term 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 March 31,
2008 (the bank's fiscal first 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 11% 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 three months ended March 31, 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").
9. 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:
(Dollars in millions) Credit card loans Other loans(1)
---------------------------------------
March 29, March 31, March 29, March 31,
2008 2007 2008 2007
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Balance, beginning of period $ 51.5 $ 30.4 $ 2.7 $ 2.9
Provision for credit losses 15.7 14.2 1.7 1.6
Recoveries 3.6 2.4 0.1 -
Write-offs (25.2) (14.8) (1.8) (1.3)
Portfolio acquisition - - 0.6 -
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Balance, end of period 45.6 32.2 3.3 3.2
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(Dollars in millions) Accounts receivable Total(2)
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March 29, March 31, March 29, March 31,
2008 2007 2008 2007
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Balance, beginning of period $ 5.0 $ 4.6 $ 59.2 $ 37.9
Provision for credit losses 0.3 0.4 17.7 16.2
Recoveries - - 3.7 2.4
Write-offs (2.3) (0.1) (29.3) (16.2)
Portfolio acquisition - - 0.6 -
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Balance, end of period 3.0 4.9 51.9 40.3
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(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 5 years
-------------------------------------------------
Accounts payable
and other(1) $1,374.3 $ - $ - $ - $ -
Long-term debt 411.3 89.6 534.8 54.3 53.6
Other - 0.9 6.4 - -
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Total $1,785.6 $ 90.5 $ 541.2 $ 54.3 $ 53.6
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Thereafter Total
-------------------
Accounts payable
and other(1) $ - $1,374.3
Long-term debt 1,564.1 2,707.7
Other - 7.3
-------------------
Total $1,564.1 $4,089.3
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-------------------
(1) Includes Canadian Tire Bank deposits from customers 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 in pace a
policy that requires that for debt with terms greater than one year,
a minimum of 75% must be fixed versus floating rates. The Company is
in compliance with the policy.
10. Other Long-Term Investments
The global disruption in the market experienced in August 2007 which
greatly impacted the market for Canadian third-party ABCP 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, includes a
controversial clause that would give all players in the market
immunity from lawsuits, something that has caused concern for many of
the ABCP holders and has led to challenges in court that the
presiding judge is still considering. The judge is scheduled to rule
on the fairness of the proposal by the end of May 2008. 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, bringing the total charge for impairment
to $2.3 million or 25 percent.
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 March 29, 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 Financial
Services or Canadian Tire Bank.
The Company has sufficient credit facilities available through
committed lines of credit and various other forms of funding to
satisfy its financial obligations as they come due and does not
expect a material adverse impact on its business as a result of the
current third-party ABCP liquidity issue.
11. Supplementary Cash Flow Information
The Company paid income taxes during the 13 weeks ended March 29,
2008, amounting to $55.8 million (2007 - $105.4 million) and made
interest payments of $20.3 million (2007 - $14.7 million).
During the 13 weeks ended March 29, 2008, property and equipment were
acquired at an aggregate cost of $112.7 million (2007 -
$93.0 million). The amount of property and equipment acquired that is
included in accounts payable and other at March 29, 2008 was
$39.6 million (2007 - $27.5 million).
12. 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.
13. 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 Canada Revenue Agency (CRA) has reassessed and is also expected
to issue further reassessments regarding the tax treatments of
commissions paid to foreign subsidiaries of the Company (covering
periods from 1995 onwards), 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 for the corresponding periods. The
Company does not have a significant exposure on these matters
subsequent to the 2003 taxation year. The reassessments and expected
reassessments in these matters are based on multiple grounds, some of
which are highly unusual and the Company will appeal these
reassessments as and when they are received.
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 $259.0 million. Although the Company
will appeal these reassessments, current tax legislation requires the
Company to remit to the CRA and its provincial counterparts
approximately $159.9 million, of which $154.0 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 these reassessments 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.
14. 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 $72.4 million for the 13 weeks
ended March, 31 2007 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.
Interest Coverage Exhibit to the Consolidated Financial Statements
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The Company's long-term interest requirements for the 13 weeks ended March 29, 2008, after annualizing interest on long-term debt issued and retired during this period, amounted to $95.2 million. The Company's earnings before interest on long-term debt and income taxes for the 13 weeks then ended were $695.4 million, which is 7.3 times the Company's long-term interest requirements for this period.
%SEDAR: 00000534EF
