MILD WINTER STRATEGY
Canadian Tire controls cost
Canadian Tire Corp. didn’t sell nearly as many winter tires, snowboards or tuques as it normally would in the fourth quarter of 2015, thanks to an uncharacteristically warm winter.
But the retailer’s ability to squeeze out an increase in profits, margins and some divisional samestore sales nonetheless impressed analysts Thursday, who complimented executives on a conference call for using solid merchandising and cost management strategies during a tough period for retailers.
Investors liked that they saw, too: Shares rose $9.08 or 7.8 per cent to $125.63 in Toronto trading.
The Toronto-based retailer of auto parts and housewares and owner of the Sport Chek and Mark’s retail chains said revenue in the period ended Jan. 2 slid $273.6 million to $3.38 billion, down from $3.65 billion a year ago, as sales slid in apparel and sporting goods and gas prices fell.
But net earnings in the period climbed to $241.5 million, or $3.01 per share, up from $206.6-million ($2.44) in last year’s fourth quarter, and the retailer reported a 97 basis point improvement in its retail gross margin rate, excluding petroleum, during the period.
“We believe investors will be relieved that Canadian Tire was able to improve its margins despite the pressures on the Canadian consumer, the weakness in Alberta, and the decline in the Canadian dollar,” said retail analyst Peter Sklar of BMO Capital Markets in a note to clients.
Sales at Canadian Tire’s retail stores fell 2.6 per cent overall due to warm weather, but same-store-sales, an important measure that strips out the impact of square footage changes, rose two per cent compared with the same period in 2014.
About 25 per cent of all sales in the fourth quarter typically comes from winter-weather merchandise, chief financial officer Dean McCann told analysts, with the clothing division Mark’s depending on the season the most, followed by its FGL Sports division and then by Canadian Tire’s retail division.
Chief executive Michael Medline said Canadian Tire performed well during the period in its nonseasonal categories, due in part to broadening its assortment of private label merchandise over the course of last year.
He also said executives “learned from past experience” and made a deliberate decision not to discount winter goods as heavily or as early as they had in the past despite lower-than-normal sales volumes.
The company also tapped into data to help control costs and keep its margins intact despite foreign exchange pressure.
“(Foreign exchange) is just one component of the cost of goods that we purchase and sell,” McCann told analysts, saying smart data helped management negotiate more effectively with merchandise suppliers, or “having more analytics associated with how those discussions take place.”
He used kettles as an example for how goods could be sold more profitably. “If we have five kettles on a shelf and we used to buy them from four different suppliers, and we do the analytics to figure out which of those five kettles make us the most money, (then executives might decide) we don’t need to sell five kettles from four different suppliers — maybe we need to sell four different kettles from two different suppliers,” he said. “It’s amazing what can happen out of that.”
Keith Howlett of Desjardins Securities said Canadian Tire’s outlook is solid even though he expects retail sales trends will be challenging until the fourth quarter of this year.
“It is positive, in our view, that management is proactively managing the business to more than compensate for the current economic headwinds and to deliver ongoing per-share earnings growth,” Howlett said in a note to clients Thursday.