Canadian Tire releases fourth quarter earnings - Results impacted by
challenging economy & unseasonable weather - Focused efforts in 2009 position
company well for long-term growth
- 2009 full year adjusted net earnings down 12.2%, primarily due to
increased provisions at Financial Services
- Strong financial management results in improved liquidity, a strong
balance sheet and significantly reduced capital expenditures
- Increases in sales in growth categories in core CTR business and
positive momentum from new format stores
- Investor Conference scheduled in April 2010 to discuss details of
long-term strategy
"Despite the challenging market conditions, we achieved our number one priority of successfully managing through uncertain economic times, focused on margin performance, optimizing capital expenditures, retiring expensive debt and lowering on-hand inventory at CTR," commented
"Our Financial Services division delivered
For the year, a significant increase in credit card loan losses in the Financial Services business was the primary reason for CTC's 12.2% decline in adjusted net earnings. Lower retail sales in winter related categories at Canadian Tire Retail (CTR) and Mark's Work Wearhouse (Mark's) contributed to a decrease of 19.8% in adjusted net earnings in the fourth quarter compared to the same quarter in 2008.
The Company is encouraged by the positive results of its new format CTR stores with both the Smart and Small Market stores demonstrating double digit increases in key categories. Significantly lower sales of discretionary and winter related merchandise in the fourth quarter were offset, in part, by sales increases in targeted CTR growth categories, including household cleaning, kitchen and pet care.
2009 CONSOLIDATED FINANCIAL HIGHLIGHTS
Fiscal 2009 sales and earnings figures are based on a 13-week period for the fourth quarter and a 52-week period for the year compared to a 14-week period for the fourth quarter in 2008 and a 53-week period for the year in 2008. Where noted, comparisons are also provided on a same calendar week basis to facilitate comparison of the results.
----------------------------------------------------------
Consolidated 2009 Year-over- 2009 Year-over-
Highlights(1): 4th quarter year change full year year change
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Retail sales $ 3.0 billion (7.0)% $ 10.0 billion (5.6)%
Gross operating
revenue $ 2.4 billion (5.8)% $ 8.7 billion (4.8)%
EBITDA(2) $248.7 million (10.1)% $873.7 million (2.0)%
Adjusted
earnings
before income
taxes
(excludes
non-operating
gains and
losses)(3) $153.5 million (20.2)% $498.3 million (13.2)%
Net earnings $ 96.2 million (5.2)% $335.0 million (10.8)%
Adjusted net
earnings
(excludes
non-operating
gains and
losses)(3) $104.4 million (19.8)% $348.0 million (12.2)%
Basic earnings
per share $ 1.18 (5.4)% $ 4.10 (10.9)%
Adjusted basic
earnings per
share
(excludes
non-operating
gains and
losses)(3) $ 1.28 (20.0)% $ 4.26 (12.4)%
(1) All dollar figures in this table are rounded.
(2) Earnings before interest, taxes, depreciation and amortization. Non-
GAAP measure. Please refer to Section 18.0 of the 2008 Management's
Discussion and Analysis.
(3) Non-GAAP measure. Please refer to Section 18.0 of the 2008
Management's Discussion and Analysis.
Net earnings for the fourth quarter were impacted by the non-operating items indicated below:
($ in millions) Q4 2009 Change 2009 Change
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Net earnings $ 96.2 (5.2)% $ 335.0 (10.8)%
Less after-tax adjustment for:
Former CEO retirement
obligation 0.0 0.3
Redemption of debentures (5.2) (4.1)
Net effect of securitization
activities (0.7) (5.3)
Costs associated with the sale
of the mortgage portfolio (3.6) (3.6)
Gain (loss) on disposals of
property and equipment 1.3 (0.3)
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Adjusted net earnings $ 104.4 (19.8)% $ 348.0 (12.2)%
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HIGHLIGHTS OF TOP-LINE PERFORMANCE BY BUSINESS
Retail sales and gross revenues for both the fourth quarter and full year 2009 were impacted by the additional week in the prior year comparative for our retail businesses. Below are highlights of the top-line performance by business, including retail sales compared on a same calendar week basis.
As reported(2) On a same calendar
week basis(3)
(year-over-year percentage Q4
change) Q4 2009(2) 2009(2) 2009(3) 2009(3)
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CTR retail sales(1) (8.3)% (2.8)% (3.1)% (1.1)%
CTR gross operating revenue (8.7)% (2.1)% N/A N/A
CTR net shipments (8.6)% (2.4)% N/A N/A
Mark's retail sales (4.1)% (4.8)% 0.7% (3.5)%
Petroleum retail sales (3.0)% (16.8)% N/A N/A
Petroleum gasoline volume (8.1)% (1.1)% N/A N/A
Financial Services' credit card
sales 3.4% 2.4% N/A N/A
Financial Services' gross average
receivables 1.8% 4.1% N/A N/A
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(1) Includes sales from Canadian Tire stores, PartSource stores and the
labour portion of CTR's auto service sales.
(2) Fiscal 2009 sales and earnings figures are based on a 13-week period
for the fourth quarter and a 52-week period for the year compared to
14 weeks for the fourth quarter in 2008 and 53 weeks for the year in
2008.
(3) Selected retail sales figures have been provided on a comparable
"same calendar week basis" for fiscal 2008, to make fiscal 2009 sales
more comparable to the prior year
Business Overview
CANADIAN TIRE RETAIL (CTR)(1)
Q4 Q4
($ in millions) 2009 2008(2) Change 2009 2008(2) Change
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Retail
sales(3) $2,167.8 $2,364.2 (8.3)% $7,407.2 $7,617.8 (2.8)%
Same store
sales(4)
(year-over-
year %
change) (9.4%) 7.3% (4.2%) 1.8%
Gross
operating
revenue 1,494.4 1,636.4 (8.7)% 5,552.2 5,669.1 (2.1)%
Net shipments
(year-over-
year %
change) (8.6%) 3.0% (2.4%) 3.5%
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Earnings
before income
taxes 38.0 26.7 42.4% 261.6 249.4 4.9%
Less
adjustment
for:
Redemption
of
debentures (7.7) - (6.1) -
Delayed-start
interest rate
swap - (28.7) - (28.7)
Gain on
disposals of
property and
equipment(5) 2.2 3.7 1.8 7.4
Former CEO
retirement
obligation 0.0 (6.2) 0.5 (5.1)
-------------------------------------------------------------------------
Adjusted
earnings
before
income
taxes(6) $ 43.5 $ 57.9 (24.8)% $ 265.4 $ 275.8 (3.7)%
-------------------------------------------------------------------------
(1) Fiscal 2009 sales and earnings figures are based on a 13-week period
for the fourth quarter and a 52-week period for the year compared to
14 weeks for the fourth quarter in 2008 and 53 weeks for the year in
2008.
(2) 2008 figures have been restated for implementation, on a
retrospective basis, of the CICA HB 3064 Goodwill and Intangible
Assets and the amendments to CICA HB 1000 - Financial Statement
Concepts. Please refer to Note 2 in the Consolidated Financial
Statements.
(3) Includes sales from Canadian Tire stores, PartSource stores and the
labour portion of CTR's auto service sales.
(4) Same store sales include sales from all stores that have been open
for more than 53 weeks.
(5) Includes fair market value adjustments and impairments on property
and equipment.
(6) Non-GAAP measure. Please refer to section 18.0 in the 2008
Management's Discussion and Analysis.
CTR's fourth quarter retail sales decreased 8.3% and same store sales decreased 9.4% from the same quarter in 2008 due in part to an additional 53rd trading week in the 2008 comparative. When adjusted on the same calendar week basis, fourth quarter retail sales in 2009 declined a more modest 3.1% and same store sales by 4.1%.
When adjusted for the calendar differences in 2008, sales in key growth categories, including household cleaning, kitchen and pet care, significantly increased in the quarter, but were more than offset by reduced sales of electronics and other discretionary merchandise. In addition, the lack of snow, especially in Ontario and
Despite a decline in net shipments year over year, CTR maintained stable margins over the same quarter last year, supply chain costs were reduced and savings were realized in payroll, advertising and other operating expenses due to effective cost management and lower volumes.
Unadjusted fourth quarter earnings increased 42.4%, influenced significantly by the impact of the unwind of the delayed start interest rate swap in the prior year results. In the current year, the Company took advantage of the opportunity to retire debentures, prior to their 2010 maturity date. While the net cost associated with this redemption decision impacted the current quarter by
As a result of the Company's completion of major capital intensive initiatives, including the Eastern
During the quarter, CTR replaced one traditional store with a Smart store, opened 25 Smart store retrofits and opened 3 incremental Small Market stores with 2 of them offering a full size Mark's, bringing the total number of stores in the network to 479.
In 2009, PartSource built 3 new stores including 1 hub store, retrofitted 1 existing store to a hub store, converted 7 franchise stores to corporate stores and closed 2 stores. As a result, there were 87 stores at the end of the year, including 10 hub stores.
CANADIAN TIRE FINANCIAL SERVICES (Financial Services)
Q4 Q4
($ in millions) 2009 2008(1) Change 2009 2008(1) Change
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Total managed
portfolio
(end of
period) $4,108.5 $4,120.9 (0.3)%
Gross
operating
revenue $ 237.7 $ 212.4 11.9% $ 909.9 $ 820.4 10.9%
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Earnings
before
income
taxes 38.4 45.8 (16.0)% 131.9 192.0 (31.3)%
Less
adjustment
for:
Costs
associated
with the
sale of the
mortgage
portfolio (5.3) - (5.3) -
Gain (loss)
on disposals
of property
and equipment 0.4 - (0.3) (0.6)
Net effect of
securitization
activities(2) (1.0) (10.6) (7.8) (2.9)
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Adjusted
earnings
before
income
taxes(3) $ 44.3 $ 56.4 (21.5)% $ 145.3 $ 195.5 (25.7)%
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(1) 2008 figures have been restated for implementation, on a
retrospective basis, of the CICA HB 3064 Goodwill and Intangible
Assets and the amendments to CICA HB 1000 - Financial Statement
Concepts. Please refer to Note 2 in the Consolidated Financial
Statements.
(2) Includes initial gain/loss on the sale of loans receivable,
amortization of servicing liability, change in securitization reserve
and gain/loss on reinvestment.
(3) Non-GAAP measure. Please refer to section 18.0 in the 2008
Management's Discussion and Analysis.
Financial Services' total managed portfolio of loans receivable was
Financial Services' gross operating revenue was
Adjusted earnings before income taxes for the fourth quarter decreased 21.5% from the comparable 2008 period primarily due to a significant increase in the loan loss provision. The return on receivables for the total managed portfolio was 3.57% versus 5.00% in 2008. This was due primarily to the increase in net write-off rate for the total managed portfolio on a rolling 12-month basis, which was 7.58% compared to 6.34% in the comparable 2008 period, and overall aging of past due credit card accounts, which deteriorated by 32 basis points from
While the increased provisioning, reflecting the increase in consumer bankruptcies and proposals due to the softer economy, impacted the Company's results, national statistics indicate that Financial Services continues to experience a lower growth in bankruptcies than the Canadian average due to credit risk management strategies adopted over the past few years. Financial Services partially compensated for the higher provisioning by continuing to reduce its operating cost structure.
As previously announced, Financial Services sold its mortgage portfolio to National Bank during the quarter for proceeds of
As at
MARK'S WORK WEARHOUSE (Mark's)(1)
Q4 Q4
($ in millions) 2009 2008(2) Change 2009 2008(2) Change
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Retail
sales(3) $ 391.7 $ 408.4 (4.1)% $ 960.0 $1,008.5 (4.8)%
Same store
sales(4) (4.9)% 3.9% (6.0)% 0.3%
Gross operating
revenue(5) 340.3 355.7 (4.3)% 833.8 872.4 (4.4)%
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Earnings before
income taxes 63.1 71.2 (11.4%) 61.5 75.0 (18.0)%
Less adjustment
for:
Loss on
disposals of
property and
equipment (0.4) (0.5) (1.2) (0.9)
-------------------------------------------------------------------------
Adjusted
earnings
before
income
taxes(6) $ 63.5 $ 71.7 (11.4%) $ 62.7 $ 75.9 (17.4)%
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(1) Fiscal 2009 sales and earnings figures are based on a 13-week period
for the fourth quarter and a 52-week period for the year compared to
14 weeks for the fourth quarter in 2008 and 53 weeks for the year in
2008.
(2) 2008 figures have been restated for implementation, on a
retrospective basis, of the CICA HB 3064 Goodwill and Intangible
Assets and the amendments to CICA HB 1000 - Financial Statement
Concepts. Please refer to Note 2 in the Consolidated Financial
Statements.
(3) Includes retail sales from corporate and franchise stores.
(4) Mark's same store sales exclude new stores, stores not open for the
full period in each year and store closures.
(5) Gross operating revenue includes retail sales at corporate stores
only.
(6) Non-GAAP measure. Please refer to section 18.0 in the 2008
Management's Discussion and Analysis.
Mark's fourth quarter total retail sales declined 4.1%, primarily due to the 2009 fourth quarter being 13 weeks compared to 14 weeks in 2008 and a shift in the calendar weeks. Adjusted on a calendar week basis, fourth quarter total retail sales increased by 0.7%. This is considered a very reasonable performance for a clothing retailer in the face of an extremely weak economy and uncertain consumer behaviour and reflects the strength of the Mark's product offering, based on its CLOTHES THAT WORK(R) strategy.
Mark's ladies wear experienced a 5.5% corporate store sales increase (a 11.4% increase when adjusted for the calendar differences) in the quarter and were strongest in accessories, outerwear and knitwear. Men's wear and industrial wear corporate store sales decreased by 4.5% (0.1% decrease when adjusted for the calendar differences) and 8.7% (4.3% decrease when adjusted for the calendar differences), respectively in the quarter.
On a regional basis, the largest sales declines were experienced in the resource based provinces of Alberta and British Columbia, reflective of the weaknesses in the labour market conditions in those regions, which particularly impacted sales of Mark's industrial wear. Overall, Mark's continues to focus on introducing products into its CLOTHES THAT WORK assortment that are better designed and engineered, and which are expected to drive long-term growth across all categories.
Mark's pre-tax earnings decreased 11.4% in the fourth quarter of 2009 as a result of lower sales and a 132 basis point reduction in margins, reflecting lower inventory markups, currency effects and a small amount of markdown/clearance activity. Mark's partially compensated for this by effective cost management.
During the quarter, Mark's opened 5 new stores, 3 of which were CTR/Mark's combo stores, expanded 1 corporate store and 1 franchise store, relocated 1 franchise store and closed 1 corporate store to bring the total number of stores in the network to 378.
CANADIAN TIRE PETROLEUM (Petroleum)(1)
Q4 Q4
($ in millions) 2009 2008 Change 2009 2008 Change
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Sales volume
(millions of
litres) 431.3 469.1 (8.1)% 1,708.8 1,727.0 (1.1)%
Retail sales $ 433.5 $ 447.0 (3.0)% $1,653.7 $1,988.1 (16.8)%
Gross operating
revenue 398.8 414.3 (3.7)% 1,515.1 1,871.2 (19.0)%
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Earnings before
income taxes 1.9 6.1 (69.1)% 24.2 26.6 (9.1)%
Less adjustment
for:
Loss on
disposals of
property and
equipment(2) (0.3) (0.2) (0.7) (0.5)
-------------------------------------------------------------------------
Adjusted
earnings
before
income
taxes(3) $ 2.2 $ 6.3 (65.6)% $ 24.9 $ 27.1 (8.4)%
-------------------------------------------------------------------------
(1) Fiscal 2009 sales and earnings figures are based on a 13-week period
for the fourth quarter and a 52-week period for the year compared to
14 weeks for the fourth quarter in 2008 and 53 weeks for the year in
2008.
(2) Includes asset impairment losses.
(3) Non-GAAP measure. Please refer to section 18.0 in the 2008
Management's Discussion and Analysis.
Petroleum's revenue declined 3.7% in the fourth quarter of 2009 compared to the prior year, due to an additional 53rd trading week in the 2008 comparative. Gasoline margins declined late in the year compared to a year ago due to margin pressure in the market. Convenience store sales and car wash sales continued to show strong growth, up 15.0% and 8.5% respectively, when adjusted for the 53rd trading week.
In 2009, Petroleum built 3 new sites and refurbished/rebuilt 11 sites during the year to enhance the customer experience and better reflect the Canadian Tire brand. Petroleum now operates 272 gas bars, 267 convenience stores and kiosks, and 73 car washes.
2010 COMMENTARY
STRATEGIC PRIORITIES
The long-term growth and success of CTC will primarily be driven by a healthy core CTR business. During 2010, the company will focus on programs to increase the long-term return on the assets employed in the business. These will include programs to improve the overall customer experience and consistency in customer service between stores, leveraging industry-leading core assets in the automotive business, and positioning each Canadian Tire business unit to actively support and drive consumers to the core CTR business. This strategy will enable the corporation to optimize the significant investments already made in store and supply chain infrastructure and is expected to drive sustainable, long-term earnings growth.
Key areas of focus in 2010 will build on the momentum of programs and initiatives begun in 2009:
- Continued roll-out of capital-light CTR Smart stores (25 retrofits
completed in Q4 2009)
- Evolution of key productivity initiatives including CTR change
program and IT renewal designed to improve operating efficiencies,
and improved project execution
- Began development of a redesigned and enhanced loyalty program
providing deeper customer insights and greater rewards
- Significant staffing and process changes within CTR Marketing,
Merchandising and Store Operations to improve core processes and to
increase the resources available to drive an enhanced customer
experience at store level
- Refocused and aligned core automotive assets with a single focus on
gaining market share and strengthening the Canadian Tire brand
- Centralized key support functions designed to decrease operating
costs and improve operating efficiencies for business units
- Reduced operating expenses, lower CAPEX ($273 million in 2009 versus
an original budget of $390 million) and lower on-hand inventory
levels at CTR
- Development of enhanced supply chain and operations capabilities at
Mark's through new technology investments
- Ongoing focus on credit risk management at Financial Services;
mortgage business sold in Q4 to allow focus on optimizing credit card
operations in support of the core business
- Strong financial management resulting in improved liquidity, a strong
balance sheet and reconfirmed credit ratings
- Focused initiative on enhancing performance management across the
organization, including improved execution on key strategic
initiatives and better integrated operating and strategic planning
processes
All of these activities are expected to start delivering benefits in 2010/2011, including improvements in retail ROIC. However, the benefits will be partially offset by a number of expected headwinds in 2010 which will affect Financial Services, including $8-10 million impact on earnings due to new financial services regulations,
"Canadian Tire has a strong core retail business and among the best assets of any retailer in
The company will share more details on its strategic priorities at an Investor Conference and media day on
CAPITAL
Based on the Company's continued focus on optimizing investments and providing long-term improvements to retail ROIC, capital expenditures will continue to be below historic levels in 2010 and beyond. Total projected capital expenditures for 2010 will be in the range of
Going forward, capital expenditures will more closely match depreciation charges as the Company has reduced its capital expenditures requirements versus historic norms, principally because the Company is building less square footage than previously and the new CTR store formats are less capital-intensive than previous formats. Management will look for every opportunity to manage this capital in the most effective way.
FUNDING AND LIQUIDITY
Canadian Tire enters 2010 with one of its strongest financial positions in the last decade - with ready access to capital through diversified channels, including
Overall, Management remains confident that given the various sources of funding available, particularly for Financial Services, the Corporation has more than sufficient cost-effective funding to support its businesses for the foreseeable future.
DIVIDENDS
The Board of Directors has approved quarterly dividend payments during 2010 of
Canadian Tire's policy is to maintain dividend payments equal to approximately 15% to 20% of the prior year's normalized basic net earnings per share, after giving consideration to the period end cash position, future cash requirements, market conditions and investment opportunities. Normalized net earnings per share for this purpose exclude gains and losses on the sale of credit card and loans receivable and non-recurring items but include gains and losses on the ordinary course disposition of property and equipment.
NORMAL COURSE ISSUER BID
Canadian Tire also announced that it intends to make a normal course issuer bid (NCIB) to purchase, from
Canadian Tire has a policy of purchasing Class A Non-Voting Shares to offset the dilutive effects of the issuance of Class A Non-Voting Shares pursuant to the Company's employee profit sharing plan, stock option plan, share purchase plan and dividend reinvestment plan. Canadian Tire intends to continue that policy. In addition, Canadian Tire may purchase additional Class A Non-Voting Shares if the Board of Directors of Canadian Tire determines, after consideration of market conditions and Canadian Tire'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.
The number of Class A Non-Voting Shares purchased during 2009 pursuant to an NCIB was 742,198. The average price at which such purchases were made was
Any purchases made pursuant to the NCIB will be made in accordance with the rules of the TSX and will be made at the market price of the Class A Non-Voting Shares at the time of the acquisition. Canadian Tire will make no purchases of Class A Non-Voting Shares other than open market purchases which may be made during the period that the NCIB is outstanding. Subject to any block purchases made in accordance with the rules of the TSX, Canadian Tire will be subject to a daily repurchase restriction of 48,241 Class A Non-Voting Shares, which represent 25 percent of the average daily trading volume of Canadian Tire's Class A Non-Voting Shares on the TSX for the six months ended
Canadian Tire's NCIB is subject to regulatory approval.
FORWARD-LOOKING STATEMENTS
This press release contains forward-looking information. Forward-looking information includes, but is not limited to, statements concerning management's expectations relating to possible or assumed future results, our strategic goals and our priorities, and the economic and business outlook for us, for each of our business segments and for the economy generally. Often but not always, forward-looking information can be identified by the use of forward-looking terminology such as "may", "will", "expect", "believe", "estimate", "plan", "could", "should", "would", "outlook", "forecast", "anticipate", "foresee", "continue" or the negative of these terms or variations of them or similar terminology. Forward-looking information is based on the reasonable assumptions, estimates, analysis and opinions of management made in light of its experience and perception of trends, current conditions and expected developments, as well as other factors that management believes to be relevant and reasonable at the date that such statements are made. The forward-looking information contained in this press release is presented for the purpose of assisting the Company's security holders and financial analysts in understanding its financial position and results of operation as at and for the periods ended on the dates presented and the Company's strategic priorities and objectives, and may not be appropriate for other purposes. By its very nature, forward-looking information requires the Company to make assumptions and is subject to inherent risks and uncertainties, which give rise to the possibility that the Company's predictions, forecasts, projections, expectations or conclusions will not prove to be accurate, that the Company's assumptions may not be correct and that the Company's objectives, strategic goals and priorities will not be achieved.
Although the Company believes that the predictions, forecasts, projections, expectations or conclusions reflected in the forward-looking information are based on information and assumptions which are current, reasonable and complete, this information is necessarily subject to a number of factors that could cause actual results to differ materially from management's predictions, forecasts, projections, expectations or conclusions as set forth in such forward-looking information for a variety of reasons. These factors include (a) credit, market, operational, liquidity and funding risks, including changes in interest rates or tax rates; (b) the ability of Canadian Tire to attract and retain quality employees, Dealers, Canadian Tire Petroleum agents and PartSource and Mark's Work Wearhouse store operators and franchisees; (c) the willingness of customers to shop at our stores or acquire our financial products and services; (d) risks and uncertainties relating to information management, technology, product safety, competition, seasonality, commodity price and business disruption, consumer credit, securitization funding, and foreign currency; and (e) the risks and uncertainties that could cause actual results or the material factors and assumptions applied in preparing forward-looking information to differ materially from predictions, forecasts, projections, expectations or conclusions, which risks and uncertainties are discussed in the "Risk Factors" section of our Annual Information Form for fiscal 2008 and in our 2008 Management's Discussion and Analysis. For more information on the risks, uncertainties and assumptions that could cause the Company's actual results to differ from current expectations, please read the entire body of this press release and refer to the Company's public filings available at www.sedar.com and at www.canadiantire.ca.
We caution that the foregoing list of important factors is not exhaustive and other factors could also adversely affect our results. Investors and other readers are urged to consider the foregoing risks, uncertainties and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such forward-looking information. Statements that include forward-looking information do not take into account the effect that transactions or non-recurring or other special items announced or occurring after the statements are made have on the Company's business. For example, they do not include the effect of any dispositions, acquisitions, asset write-downs or other charges announced or occurring after such statements are made. The forward-looking information in this press release reflects the Company's expectations as of the date hereof and is subject to change after this date. The Company does not undertake to update any forward-looking information, whether written or oral, that may be made from time to time by it or on its behalf, to reflect new information, future events or otherwise, unless required by applicable securities laws.
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
Canadian Tire Corporation, Limited (TSX: CTC.a, CTC), is comprised of five business units: Canadian Tire Retail, one of Canada's most-shopped general merchandise retailers with 479 stores; PartSource, an automotive parts specialty chain with 87 stores; Canadian Tire Petroleum, one of the country's largest and most productive independent retailers of gasoline, operating 272 gas bars, 267 convenience stores and kiosks, and 73 car washes; Mark's Work Wearhouse, one of the country's leading apparel retailers operating 378 stores in
2009 FOURTH QUARTER
INTERIM REPORT FINANCIALS
Consolidated Statements of Earnings (Unaudited)
-------------------------------------------------------------------------
13 weeks 14 weeks 52 weeks 53 weeks
(Dollars in millions ended, ended, ended, ended,
except per share January 2, January 3, January 2, January 3,
amounts) 2010 2009 2010 2009
-------------------------------------------------------------------------
(Restated - (Restated -
Note 2) Note 2)
Gross operating
revenue $ 2,437.7 $ 2,587.8 $ 8,686.5 $ 9,121.3
-------------------------------------------------------------------------
Operating expenses
Cost of merchandise
sold and all other
operating expenses
except for the
undernoted items
(Note 13) 2,184.6 2,305.1 7,788.1 8,200.5
Net interest expense
(Note 8) 42.7 65.9 147.0 122.6
Depreciation and
amortization 64.6 61.1 247.5 226.2
Employee profit
sharing plan 4.4 5.9 24.7 29.0
-------------------------------------------------------------------------
Total operating
expenses 2,296.3 2,438.0 8,207.3 8,578.3
Earnings before income
taxes 141.4 149.8 479.2 543.0
Income taxes
Current 49.8 67.8 135.2 209.1
Future (4.6) (19.5) 9.0 (41.5)
-------------------------------------------------------------------------
Income taxes 45.2 48.3 144.2 167.6
-------------------------------------------------------------------------
Net earnings $ 96.2 $ 101.5 $ 335.0 $ 375.4
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-------------------------------------------------------------------------
Basic and diluted
earnings per share $ 1.18 $ 1.24 $ 4.10 $ 4.60
-------------------------------------------------------------------------
Weighted average
number of Common and
Class A Non-Voting
Shares outstanding 81,692,260 81,538,127 81,678,775 81,517,702
-------------------------------------------------------------------------
Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------------------------------------------
13 weeks 14 weeks 52 weeks 53 weeks
ended, ended, ended, ended,
January 2, January 3, January 2, January 3,
(Dollars in millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
(Restated - (Restated -
Note 2) Note 2)
Cash generated from
(used for):
Operating activities
Net earnings $ 96.2 $ 101.5 $ 335.0 $ 375.4
Items not affecting
cash
Depreciation 50.7 45.2 193.7 168.6
Net provision for
loans receivable
(Note 3) 52.3 32.0 181.2 87.3
Amortization of
intangible assets 13.9 15.8 53.8 57.6
Future income taxes (4.6) (19.5) 9.0 (41.5)
Employee future
benefits expense
(Note 5) 1.5 1.6 6.0 6.4
Other 7.7 9.4 4.0 7.9
Impairments on
property and
equipment 0.4 0.8 1.9 2.5
Loss on disposal
of mortgage
portfolio 0.6 - 0.6 -
Impairment of other
long-term
investments 0.6 1.0 1.1 2.0
Gain on disposals
of property and
equipment (2.2) (3.7) (1.6) (7.8)
Changes in fair
value of derivative
instruments 11.7 39.1 (11.4) 55.6
Gain on sales of
loans receivable
(Note 3) (7.4) (10.2) (39.2) (73.7)
Securitization loans
receivable (8.1) (11.6) (39.4) (51.9)
-------------------------------------------------------------------------
213.3 201.4 694.7 588.4
-------------------------------------------------------------------------
Changes in other working
capital components 145.0 252.7 (275.9) (406.9)
-------------------------------------------------------------------------
Cash generated from
operating activities 358.3 454.1 418.8 181.5
-------------------------------------------------------------------------
Investing activities
Net securitization
of loans receivable (111.6) (272.0) (532.3) (31.7)
Additions to property
and equipment (52.0) (34.4) (220.0) (359.5)
Investment in loans
receivable, net (125.7) (105.1) (208.5) (140.5)
Additions to
intangible assets (19.0) (26.3) (67.8) (76.5)
Other long-term
investments - (19.6) (50.7) (19.6)
Short-term
investments 130.0 - (38.0) -
Other (1.9) (0.7) (7.7) (4.2)
Purchases of stores (2.3) (8.0) (6.1) (36.5)
Long-term receivables
and other assets (1.5) (28.7) (3.1) (27.2)
Proceeds on
disposition of
property and
equipment 15.5 9.4 27.8 239.5
Proceeds on disposal
of mortgage
portfolio 162.2 - 162.2 -
Proceeds on
disposition of
intangible assets - 0.1 - 0.6
-------------------------------------------------------------------------
Cash used for investing
activities (6.3) (485.3) (944.2) (455.6)
-------------------------------------------------------------------------
Financing activities
Net change in
deposits (265.0) 838.4 917.3 1,024.1
Issuance of long-term
debt (Note 4) - - 200.1 0.2
Class A Non-Voting
Share transactions (7.8) 6.0 (0.9) 7.0
Repayment of
long-term
debt (Note 4) (151.9) (2.0) (165.4) (156.3)
Dividends (17.1) (17.1) (68.7) (66.4)
Commercial paper - (367.2) - -
-------------------------------------------------------------------------
Cash (used for)
generated from
financing activities (441.8) 458.1 882.4 808.6
-------------------------------------------------------------------------
Cash (used) generated
in the period (89.8) 426.9 357.0 534.5
Cash and cash
equivalents, beginning
of period 875.8 2.1 429.0 (105.5)
-------------------------------------------------------------------------
Cash and cash
equivalents, end of
period (Note 9) $ 786.0 $ 429.0 $ 786.0 $ 429.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income (Unaudited)
-------------------------------------------------------------------------
13 weeks 14 weeks 52 weeks 53 weeks
ended, ended, ended, ended,
January 2, January 3, January 2, January 3,
(Dollars in millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
(Restated - (Restated -
Note 2) Note 2)
Net earnings $ 96.2 $ 101.5 $ 335.0 $ 375.4
Other comprehensive
income (loss), net
of taxes
(Loss) gain on
derivatives
designated as
cash flow hedges,
net of tax of $10.2
and $33.7 (2008 -
$56.7 and $68.9),
respectively (23.6) 117.4 (80.7) 139.7
Reclassification to
non-financial asset
of (gain) loss on
derivatives
designated as cash
flow hedges, net of
tax of $7.9 and
$31.1 (2008 - $18.5
and $10.1),
respectively 16.5 (38.4) (58.5) (20.5)
Reclassification to
earnings of (gain)
loss on derivatives
designated as cash
flow hedges, net of
tax of $0.1 and
$0.9 (2008 - $9.2
and $12.0),
respectively 0.1 22.0 (1.9) 28.0
-------------------------------------------------------------------------
Other comprehensive
(loss) income (7.0) 101.0 (141.1) 147.2
-------------------------------------------------------------------------
Comprehensive income $ 89.2 $ 202.5 $ 193.9 $ 522.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
-------------------------------------------------------------------------
52 weeks 53 weeks
ended, ended,
January 2, January 3,
(Dollars in millions) 2010 2009
-------------------------------------------------------------------------
(Restated -
Note 2)
Share capital
Balance, beginning of period $ 715.4 $ 700.7
Transactions, net (Note 6) 5.0 14.7
-------------------------------------------------------------------------
Balance, end of period $ 720.4 $ 715.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contributed surplus -
Balance, beginning of period $ - $ 2.3
Transactions, net 0.2 (2.3)
-------------------------------------------------------------------------
Balance, end of period $ 0.2 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings
Balance, beginning of period as previously
reported $ 2,755.5 $ 2,455.1
Transitional adjustment on adoption of new
accounting policies - HB 1000/3064 (Note 2) (3.1) (4.3)
-------------------------------------------------------------------------
Balance, beginning of period as restated 2,752.4 2,450.8
Transitional adjustment on adoption of new
accounting policies - EIC 173 (Note 2) 1.1 -
Net earnings for the period 335.0 375.4
Dividends (68.7) (68.4)
Repurchase of Class A Non-Voting Shares (6.1) (5.4)
-------------------------------------------------------------------------
Balance, end of period $ 3,013.7 $ 2,752.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Balance, beginning of period $ 97.2 $ (50.0)
Transitional adjustment on adoption of new
accounting policies - EIC 173 (Note 2) (2.5) -
Other comprehensive (loss) income for the period (141.1) 147.2
-------------------------------------------------------------------------
Balance, end of period $ (46.4) $ 97.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings and accumulated other
comprehensive income (loss) $ 2,967.3 $ 2,849.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Balance Sheets (Unaudited)
-------------------------------------------------------------------------
(Dollars in millions) January 2, January 3,
As at 2010 2009
-------------------------------------------------------------------------
(Restated -
Note 2)
ASSETS
Current assets
Cash and cash equivalents (Note 9) $ 786.0 $ 429.0
Short-term investments (Note 9) 64.0 -
Accounts receivable 835.9 824.1
Loans receivable (Note 3) 2,274.8 1,683.4
Merchandise inventories 933.6 917.5
Income taxes recoverable 94.7 64.6
Prepaid expenses and deposits 40.7 40.2
Future income taxes 82.8 20.2
-------------------------------------------------------------------------
Total current assets 5,112.5 3,979.0
-------------------------------------------------------------------------
Long-term receivables and other assets (Note 3) 110.6 262.1
Other long-term investments, net 48.8 25.2
Goodwill 71.8 70.7
Intangible assets 265.4 247.9
Property and equipment, net 3,180.4 3,198.9
-------------------------------------------------------------------------
Total assets $ 8,789.5 $ 7,783.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Deposits (Note 10) $ 863.4 $ 540.7
Accounts payable and other 1,391.4 1,444.2
Current portion of long-term debt 309.3 14.8
-------------------------------------------------------------------------
Total current liabilities 2,564.1 1,999.7
-------------------------------------------------------------------------
Long-term debt 1,101.9 1,373.5
Future income taxes 49.8 44.7
Long-term deposits (Note 10) 1,196.9 598.7
Other long-term liabilities 188.9 202.2
-------------------------------------------------------------------------
Total liabilities 5,101.6 4,218.8
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 6) 720.4 715.4
Contributed surplus 0.2 -
Accumulated other comprehensive income (loss) (46.4) 97.2
Retained earnings 3,013.7 2,752.4
-------------------------------------------------------------------------
Total shareholders' equity 3,687.9 3,565.0
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 8,789.5 $ 7,783.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (Unaudited)
-------------------------------------------------------------------------
1. Basis of Presentation
These unaudited interim consolidated financial statements (the
financial statements) have been prepared by Management in accordance
with Canadian generally accepted accounting principles (GAAP) and
include the accounts of Canadian Tire Corporation, Limited and its
subsidiaries, collectively referred to as the "Company". These
financial statements do not contain all disclosures required by
Canadian GAAP for annual financial statements and accordingly, these
financial statements should be read in conjunction with the most
recently issued annual financial statements for the 53 weeks ended
January 3, 2009 contained in our 2008 Annual Report.
The preparation of the financial statements in conformity with
Canadian 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 a number of items
including, but not limited to, income taxes, impairment of assets
(including goodwill), employee benefits, product warranties,
inventory provisions, amortization, uncollectible loans,
environmental reserves, asset retirement obligations, financial
instruments, and the liability for the Company's loyalty programs.
2. Change in Accounting Policies
These financial statements follow the same accounting policies and
methods of their application as the most recently issued annual
financial statements for the 53 weeks ended January 3, 2009, except
as noted below.
Financial Statement Concepts
Effective, January 4, 2009 (the first day of the Company's 2009
fiscal year), the Company applied the amendments issued by the
Canadian Institute of Chartered Accountants (CICA) to HB 1000 -
Financial Statement Concepts, which clarify the criteria for
recognition of an asset and the timing of expense recognition,
specifically, deleting the guidance permitting the deferral of costs.
The new requirements are effective for interim and annual financial
statements for fiscal years beginning on or after October 1, 2008.
The Company applied the amendments to CICA HB 1000 in conjunction
with CICA HB 3064 - Goodwill and Intangible Assets.
Goodwill and Intangible Assets
Effective, January 4, 2009, the Company implemented, on a
retrospective basis with restatement, the CICA HB 3064 - Goodwill and
Intangible Assets, which was effective for interim and annual
financial statements for fiscal years beginning on or after
October 1, 2008.
This new standard provides guidance on the recognition, measurement,
presentation and disclosure of goodwill and intangible assets,
including internally developed intangibles, and is consistent with
the revised asset definition and recognition criteria in CICA HB
1000 - Financial Statement Concepts. Under the new standard, costs
related to development projects can be recorded as assets only if
they meet the definition of an intangible asset.
Additionally, internally developed computer software that is not an
integral part of the related hardware was previously included in
property and equipment. The new standard requires these costs to be
included in intangible assets. As these costs have a limited useful
life, they continue to be amortized over a 5 year period.
As a result of the retrospective implementation of these standards,
the cumulative impact on previously reported balances on the
following dates is as follows:
($ in millions) Increase / (Decrease)
-------------------------
January 3, December 29,
2009 2007
-------------------------
Retained earnings $ (3.1) $ (4.3)
Long-term receivables and other assets (3.3) (4.6)
Intangible assets 189.5 174.0
Property and equipment (190.9) (175.8)
Income taxes recoverable 0.4 0.4
Future income tax liabilities (1.2) (1.7)
In addition, the retrospective impact on depreciation and
amortization for the 14 weeks and 53 weeks ended January 3, 2009 was
a decrease of $0.8 million and $2.7 million, respectively. The
retrospective impact of the write-off of deferred development costs
on cost of merchandise sold and all other operating expenses for the
14 weeks and 53 weeks ended January 3, 2009 was an increase of $0.5
and $0.9 million, respectively. The retrospective impact on net
earnings for the 14 weeks ended January 3, 2009 was an increase of
$0.3 million, or $nil per share, and for the 53 weeks ended
January 3, 2009 was an increase of $1.2 million, or $0.01 per share.
Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities
Effective, January 4, 2009, the Company implemented, on a
retrospective basis without restatement of prior periods, the CICA
Emerging Issues Committee (EIC) 173 - Credit Risk and the Fair Value
of Financial Assets and Financial Liabilities, which is effective for
interim and annual financial statements for periods ending on or
after January 20, 2009.
This EIC clarifies that an entity's own credit risk and the credit
risk of the counterparty should be taken into account in determining
the fair value of financial assets and financial liabilities,
including derivative instruments, rather than using a risk free rate.
Entities are required to re-measure financial assets and liabilities,
including derivative instruments, as at the beginning of the period
of adoption (i.e. the beginning of fiscal 2009) to take into account
its own credit risk and the respective counterparty's credit risk.
Any resulting difference would be recorded as an adjustment to
retained earnings, except a) derivatives in a fair value hedging
relationship accounted for by the "shortcut method", in which case
the resulting difference would adjust the basis of the hedged item;
and b) derivatives in cash flow hedging relationships, in which case
the resulting difference would be recorded in accumulated other
comprehensive income (AOCI).
As a result of the retrospective implementation of this new standard,
opening accumulated other comprehensive income decreased by
$2.5 million and opening retained earnings increased by $1.1 million.
Future Accounting Changes
International Financial Reporting Standards
In February 2008, the CICA announced that Canadian GAAP for publicly
accountable enterprises will be replaced by International Financial
Reporting Standards (IFRS) for fiscal years beginning on or after
January 1, 2011. 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 2010
information will be prepared under IFRS. The Company expects the
transition to IFRS to impact accounting, financial reporting,
internal control over financial reporting, taxes, information systems
and processes as well as certain contractual arrangements. The
Company is currently assessing the impact of the transition to IFRS
in the above areas and has deployed additional trained resources and
formal project management practices and governance to ensure the
timely conversion to IFRS.
Business Combinations
In January 2009, the CICA issued CICA HB 1582 - Business
Combinations, which will replace CICA HB 1581 - Business
Combinations. The CICA also issued CICA HB 1601 - Consolidated
Financial Statements and CICA HB 1602 - Non-Controlling Interests,
which will replace CICA HB 1600 - Consolidated Financial Statements.
The objective of the new standards is to harmonize Canadian GAAP for
business combinations and consolidated financial statements with the
International and U.S. accounting standards. The new standards are to
be applied prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual
reporting period, commencing January 1, 2011, with earlier
application permitted. Assets and liabilities that arose from
business combinations whose acquisition dates preceded the
application of the new standards will not be adjusted upon
application of these new standards. The Company has elected not to
adopt the new standard prior to 2011.
Financial Instruments - Recognition and Measurement
In April 2009, the CICA amended CICA HB 3855 - Financial Instruments
- Recognition and Measurement. The amendment included a paragraph
relating to embedded prepayment options. This amendment is effective
for interim and annual financial statements relating to fiscal years
beginning on or after January 1, 2011 with early adoption permitted.
The new standard has no impact on the Company.
Financial Instruments - Disclosures
In June 2009, the CICA amended CICA HB 3862 - Financial Instruments -
Disclosures, which adopted the amendments recently issued by the
International Accounting Standards Boards (IASB) to IFRS 7 -
Financial Instruments: Disclosures, which was issued in March 2009.
These amendments are applicable to publicly accountable enterprises
and those private enterprises, co-operative business enterprises,
rate-regulated enterprises and not-for-profit organizations that
choose to apply Section 3862.
The amendments enhance disclosures about fair value measurements,
including the relative reliability of the inputs used in those
measurements, and about the liquidity risk of financial instruments.
Section 3862 now requires that all financial instruments measured at
fair value be categorized into one of three hierarchy levels,
described as follows, for disclosure purposes. Each level is based on
the transparency of the inputs used to measure the fair values of
assets and liabilities:
- Level 1 - inputs are unadjusted quoted prices of identical
instruments in active markets;
- Level 2 - inputs are other than quoted prices included in Level 1
that are observable for the asset or liability, either directly or
indirectly; and
- Level 3 - inputs are not based on observable market data.
The amendments are effective for annual financial statements for
fiscal years ending after September 30, 2009, with early adoption
permitted. To provide relief for financial statement preparers, and
consistent with IFRS 7, the CICA decided that an entity need not
provide comparative information for the disclosures required by the
amendments in the first year of application. The required disclosures
will be reflected in the Company's annual financial statements.
Financial Instruments - Impairment of Debt Instruments
In August 2009, the CICA amended CICA HB 3855 - Financial Instruments
- Recognition and Measurement and concurrently CICA HB 3025 -
Impaired Loans. These amendments affect the classifications that are
required or allowed for debt instruments, as well as the impairment
model for held-to-maturity financial assets. The amendments, which
are effective for annual financial statements relating to fiscal
years beginning on or after November 1, 2008, have no impact on the
Company.
Multiple Deliverable Revenue Arrangements
In December 2009, the EIC issued EIC-175 - Multiple Deliverable
Revenue Arrangements, which may be applied prospectively and should
be applied to revenue arrangements with multiple deliverables entered
into or materially modified in the first annual fiscal period
beginning on or after January 1, 2011. Early adoption is permitted.
This EIC requires a vendor to allocate arrangement consideration at
the inception of an arrangement to all deliverables using the
relative selling price method. It also provides guidance on the level
of evidence of the standalone selling price required to separate
deliverables when more objective evidence of the selling price is not
available. Given the requirement to use the relative selling price
method of allocating arrangement consideration, it prohibits the use
of the residual method. The Company will assess the potential impact
of this standard.
3. Loans Receivable
The Company sells co-ownership interests in a pool of credit card
receivables to a third party Trust (the Trust) in transactions known
as securitizations. The transactions are accounted for as sales in
accordance with CICA Accounting Guideline 12 (AcG-12), Transfers of
Receivables, and the receivables are removed from the Consolidated
Balance Sheets.
In accordance with AcG-12, an asset called an "Interest Only Strip"
is created to account for the difference between the market value of
the transfer and the proceeds received. It represents the present
value of the excess spread to be earned over the expected life of the
receivables, specifically the yield less the write offs and interest
expense of the Trust. Similarly, a servicing liability is established
representing an estimate of Canadian Tire Bank's cost to service the
receivables over the expected life.
The Trust's recourse to the Company is limited to customer payments
received on the portion of receivables in the pool that represent
over-collateralization. The proceeds of any sale are the sum of the
cash proceeds and the increase in the interest-only strip, less the
sum of any transaction costs and increase in the servicing liability.
The assets and liabilities of the Trust have not been consolidated in
these financial statements because the Trust meets the criteria for a
qualified special purpose entity and therefore is exempt from
consolidation.
Quantitative information about loans managed and securitized by the
Company is as follows:
Average balances
Total principal amount for the 52 for the 53
($ in millions) of receivables as at(1) weeks ended weeks ended
------------------------- -------------------------
January 2, January 3, January 2, January 3,
2010 2009 2010 2009
------------ ------------ ------------ ------------
Total net managed
credit card
loans $ 3,932.8 $ 3,780.4 $ 3,742.4 $ 3,601.5
Credit card loans
sold (1,693.4) (2,216.0) (2,044.1) (2,592.9)
------------ ------------ ------------ ------------
Credit card loans
held 2,239.4 1,564.4 1,698.3 1,008.6
Total net managed
personal loans(2) 34.0 83.8 56.2 114.2
Personal loans
sold - - - (17.8)
------------ ------------ ------------ ------------
Personal loans
held 34.0 83.8 56.2 96.4
Total net managed
mortgage loans(3) - 138.8 141.0 76.0
------------ ------------ ------------ ------------
Total net managed
line of credit
loans 15.6 20.6 18.1 23.7
------------ ------------ ------------ ------------
Total loans
receivable 2,289.0 1,807.6 $ 1,913.6 $ 1,204.7
------------ ------------
------------ ------------
Less: long-term
portion(4) (14.2) (124.2)
------------ ------------
Current portion
of loans
receivable $ 2,274.8 $ 1,683.4
------------ ------------
------------ ------------
(1) Amounts shown are net of allowance for credit losses.
(2) Personal loans are unsecured loans that are provided to qualified
existing credit card holders 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. During the
quarter, the Company sold its mortgage portfolio, totaling
approximately $162 million, resulting in a pre-tax loss of
$0.6 million.
(4) The long-term portion of loans is included in long-term
receivables and other assets.
Net credit losses for the owned portfolio for the 13 weeks and 52
weeks ended January 2, 2010 were $52.3 million (2008 - $32.0 million)
and $181.2 million (2008 - $87.3 million), respectively. Net credit
losses for the total managed portfolio for the 13 weeks and 52 weeks
ended January 2, 2010 were $86.2 million (2008 - $67.6 million) and
$337.7 million (2008 - $249.2 million), respectively. Net credit
losses consist of total write-offs (including regular and bankruptcy
write-offs and consumer proposals), net of recoveries and any changes
in allowances.
4. Long-Term Debt
On June 1, 2009, the Company issued $200.0 million of 7 year medium
term notes, which mature and are repayable on June 1, 2016, and bear
interest at 5.65 percent, payable semi-annually.
On October 22, 2009, the Company redeemed $150 million of debentures,
which were to mature on May 10, 2010, and bore interest at 12.10%. As
a result of this redemption, the Company paid a redemption premium of
$9.4 million on the redemption date. The debentures were hedged by
interest rate swaps that were to mature on May 10, 2010 but were
terminated early in connection with the redemption. Hedge accounting
for these swaps ceased upon the redemption announcement. As a result,
for the 13 weeks and 52 weeks ended January 2, 2010, $1.7 million and
$3.3 million respectively of benefit was amortized to earnings. For
the 13 weeks and 52 weeks ended January 2, 2010, $7.7 million and
$6.1 million pre-tax losses were recorded, respectively. These
amounts were included in long-term interest expense.
5. Employee Future Benefits
The net employee future benefit expense for the 13 weeks and 52 weeks
ended January 2, 2010 was $1.5 million (2008 - $1.6 million) and
$6.0 million (2008 - $6.4 million), respectively.
6. Share Capital
($ in millions) January 2, January 3,
2010 2009
------------ ------------
Authorized
3,423,366 Common Shares
100,000,000 Class A Non-Voting Shares
Issued
3,423,366 Common Shares (January 3, 2009
- 3,423,366) $ 0.2 $ 0.2
78,178,066 Class A Non-Voting Shares
(January 3, 2009 - 78,178,066) 720.2 715.2
------------ ------------
$ 720.4 $ 715.4
------------ ------------
------------ ------------
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, if any, with
any remainder allocated to retained earnings.
The following transactions occurred with respect to Class A Non-
Voting Shares:
52 weeks ended 53 weeks ended
($ in millions) January 2, 2010 January 3, 2009
------------------------- -------------------------
Number $ Number $
------------ ------------ ------------ ------------
Shares outstanding
at the beginning
of the period 78,178,066 715.2 78,048,062 700.5
Issued 742,198 36.6 649,804 36.9
Repurchased (742,198) (37.5) (519,800) (29.9)
Excess of
repurchase price
over issue price - 5.9 - 7.7
------------ ------------ ------------ ------------
Shares outstanding
at the end of the
period 78,178,066 720.2 78,178,066 715.2
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
7. Stock-based Compensation Plans
All stock-based compensation plans are as disclosed in the most
recently issued annual financial statements for the 53 weeks ended
January 3, 2009, except as follows:
2009 Performance Share Unit Plan
The Company has granted 2009 Performance Share Units (2009 PSUs) to
certain employees. Each 2009 PSU entitles the participant to receive
a cash payment in an amount equal to the weighted average closing
price of Class A Non-Voting Shares traded on the Toronto Stock
Exchange for the 20-day period prior to and including the last day of
the performance period, multiplied by an applicable multiplier
determined by specific performance-based criteria. Compensation
expense related to 2009 PSUs is accrued over the performance period
based on the expected total compensation to be paid out at the end of
the performance period. For the 13 weeks and 52 weeks ended
January 2, 2010, $1.6 million and $5.3 million of compensation
expense was recorded for the 2009 PSUs, respectively.
8. Segmented Information - Statement of Earnings
---------------------------------------------------------------------
14 weeks 53 weeks
ended ended
13 weeks January 3, 52 weeks January 3,
ended 2009 ended 2009
January 2, (Restated - January 2, (Restated -
($ in millions) 2010 Note 2) 2010 Note 2)
---------------------------------------------------------------------
Gross operating
revenue
CTR $ 1,494.4 $ 1,636.4 $ 5,552.2 $ 5,669.1
Financial
Services 237.7 212.4 909.9 820.4
Petroleum 398.8 414.3 1,515.1 1,871.2
Mark's 340.3 355.7 833.8 872.4
Eliminations (33.5) (31.0) (124.5) (111.8)
---------------------------------------------------------------------
Total gross
operating
revenue $ 2,437.7 $ 2,587.8 $ 8,686.5 $ 9,121.3
---------------------------------------------------------------------
---------------------------------------------------------------------
Earnings before
income taxes
CTR $ 38.0 $ 26.7 $ 261.6 $ 249.4
Financial
Services 38.4 45.8 131.9 192.0
Petroleum 1.9 6.1 24.2 26.6
Mark's 63.1 71.2 61.5 75.0
---------------------------------------------------------------------
Total earnings
before income
taxes 141.4 149.8 479.2 543.0
Income taxes 45.2 48.3 144.2 167.6
---------------------------------------------------------------------
Net earnings $ 96.2 $ 101.5 $ 335.0 $ 375.4
---------------------------------------------------------------------
---------------------------------------------------------------------
Net Interest
expense(1)
CTR $ 26.2 $ 55.5 $ 82.9 $ 103.2
Financial
Services 16.2 9.3 62.4 15.1
Mark's 0.3 1.1 1.7 4.3
---------------------------------------------------------------------
Total interest
expense $ 42.7 $ 65.9 $ 147.0 $ 122.6
---------------------------------------------------------------------
---------------------------------------------------------------------
Depreciation and
amortization
expense
CTR $ 50.4 $ 46.9 $ 191.2 $ 174.4
Financial
Services 2.4 2.8 11.0 11.0
Petroleum 4.7 4.9 18.0 17.2
Mark's 7.1 6.5 27.3 23.6
---------------------------------------------------------------------
Total
depreciation
and
amortization
expense $ 64.6 $ 61.1 $ 247.5 $ 226.2
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Net interest expense includes interest on short-term and long-
term debts, offset by passive interest income (includes interest
income earned on bank deposits, ancillary investments and all
inter-company interest income). Interest on long-term debt for
the 13 weeks and 52 weeks ended January 2, 2010 was $39.5 million
(2008 - $60.3 million) and $130.0 million (2008 -
$117.9 million), respectively.
Segmented Information - Total Assets
---------------------------------------------------------------------
January 3,
2009
January 2, (Restated -
($ in millions) 2010 Note 2)
---------------------------------------------------------------------
CTR $ 5,810.7 $ 5,801.8
Financial Services 3,319.0 2,550.6
Petroleum 279.7 352.9
Mark's 493.3 509.0
Eliminations (1,113.2) (1,430.5)
---------------------------------------------------------------------
Total $ 8,789.5 $ 7,783.8
---------------------------------------------------------------------
---------------------------------------------------------------------
9. Cash and Cash Equivalents
The components of cash and cash equivalents are:
January 2, January 3,
($ in millions) 2010 2009
------------ ------------
Cash (bank overdraft) $ (48.5) $ 59.2
Cash equivalents 834.5 369.8
------------ ------------
Cash and cash equivalents $ 786.0 $ 429.0
------------ ------------
------------ ------------
Cash equivalents are highly liquid and rated certificates of deposit
or commercial paper with an original term to maturity of 3 months or
less.
Investments in highly liquid and rated certificates of deposits,
commercial paper or other securities with an original term to
maturity of more than 3 months and a remaining term to maturity of
less than one year are classified as short-term investments.
10. Deposits
Deposits consist of broker deposits and retail deposits.
Cash from broker deposits is raised through sales of guaranteed
investment certificates (GICs) through brokers rather than directly
to the retail customer. Individual balances up to $100,000 are Canada
Deposit Insurance Corporation (CDIC) insured. Broker deposits are
offered for varying terms ranging from 30 days to five years, and all
issued GICs are non-redeemable prior to maturity (except in certain
rare circumstances). Total short-term and long-term broker deposits
outstanding at January 2, 2010 were $1,514.8 million (2008 -
$926.8 million).
Retail deposits consist of high interest savings deposits, retail
GICs and tax-free savings deposits. Total retail deposits outstanding
at January 2, 2010 were $545.5 million (2008 - $212.6 million).
11. Capital Management Disclosures
The Company's objectives when managing capital are:
- minimizing the after-tax cost of capital;
- maintaining healthy liquidity reserves and access to capital; and
- maintaining flexibility in capital structure to ensure the ongoing
ability to execute the Strategic Plan.
The current economic environment has not changed the Company's
objectives in managing capital.
Management includes the following items in its definition of capital:
January 2, January 3,
($ in millions) 2010 % of total 2009 % of total
------------------------- -------------------------
Current portion of
long-term debt $ 309.3 4.9% $ 14.8 0.3%
Long-term debt 1,101.9 17.4% 1,373.5 25.2%
Long-term deposits 1,196.9 18.9% 598.7 11.0%
Other long-term
liabilities(1) 1.3 - % 3.2 0.1%
Share capital 720.4 11.4% 715.4 13.1%
Contributed surplus 0.2 - % - - %
Retained earnings 3,013.7 47.4% 2,752.4 50.3%
------------------------- -------------------------
Net capital under
management $ 6,343.7 100.0% $ 5,458.0 100.0%
------------------------- -------------------------
------------------------- -------------------------
(1) Long-term liabilities that are derivative or hedge instruments
relating to capital items only.
The Company has in place various policies which it uses to manage
capital, including a leverage and liquidity policy and a securities
and derivatives policy. As part of the overall management of capital,
Management's Financial Risk Management Committee and the Audit
Committee of the Board 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
historically monitored certain key ratios to ensure they are within
targeted ranges. As a result of growth in our Financial Services
business, changes in how Financial Services is funded and the pending
impact of IFRS, these previously disclosed ratios are no longer
considered relevant by Management. Management is currently
undertaking a review to identify the most relevant key ratios.
Under the existing debt agreements, key financial covenants are
monitored on an on-going basis by Management to ensure compliance
with the agreements. The key covenants are as follows:
- maintaining a specified minimum net tangible assets coverage,
which is 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
whereby 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 key 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; and
- 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 three tiers of capital approved
under OSFI's current regulatory capital guidelines. As at
December 31, 2009 (the Bank's fiscal quarter end), 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 or Tier 3 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 for Tier 1 and
Total capital ratios. The Bank is within its internal maximum target
for the assets to capital multiple. OSFI's minimum Tier 1 and Total
capital ratios for Canadian banks are 7 percent and 10 percent,
respectively. During the 3 months ended December 31, 2009 and the
comparative period, 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).
12. Financial Instruments Disclosures
Allowance for credit losses
The Company's allowances for receivables are maintained at levels
which are considered adequate to absorb future credit losses. A
continuity of the Company's allowances for credit losses is as
follows:
Credit card loans Other loans(1)
---------------------------------------------------
January 2, January 3, January 2, January 3,
($ in millions) 2010 2009 2010 2009
---------------------------------------------------
Balance, beginning
of year $ 51.8 $ 51.5 $ 3.5 $ 2.7
Provision for
credit losses 175.6 78.0 5.6 9.3
Recoveries 19.8 15.0 0.8 0.7
Write-offs (163.3) (92.7) (7.8) (9.2)
---------------------------------------------------
Balance, end of
period $ 83.9 $ 51.8 $ 2.1 $ 3.5
---------------------------------------------------
---------------------------------------------------
Accounts receivable Total
---------------------------------------------------
January 2, January 3, January 2, January 3,
($ in millions) 2010 2009 2010 2009
---------------------------------------------------
Balance, beginning
of year $ 3.3 $ 5.0 $ 58.6 $ 59.2
Provision for
credit losses 3.0 1.0 184.2 88.3
Recoveries 0.2 0.3 20.8 16.0
Write-offs (3.0) (3.0) (174.1) (104.9)
---------------------------------------------------
Balance, end of
period $ 3.5 $ 3.3 $ 89.5 $ 58.6
---------------------------------------------------
---------------------------------------------------
(1) Other Loans include personal loans, mortgage loans and line of
credit loans.
Foreign currency risk
The Company has significant demand for foreign currencies, primarily
United States dollars, due to global sourcing. However, it manages
its exposure to foreign exchange rate risk through a comprehensive
Foreign Exchange Risk Management Policy that sets forth specific
guidelines and parameters, including monthly hedge percentage
guidelines, for entering into foreign exchange hedge transactions for
anticipated U.S. dollar-denominated purchases. The Company's
exposure, however, to a sustained movement in the currency markets,
is impacted by competitive forces and future prevailing market
conditions.
Liquidity risk
The following table summarizes the Company's contractual maturity for
its financial liabilities. The table includes both interest and
principal cash flows.
($ in millions) 1 year 2 years 3 years 4 years
---------------------------------------------------
Deposits $ 872.2 $ 160.5 $ 239.9 $ 470.1
Accounts payable
and other 1,339.8 - - -
Long-term debt 309.3 21.2 8.5 6.7
Interest payment(1) 120.5 97.6 95.5 112.3
Other - 0.9 - 5.1
---------------------------------------------------
Total $ 2,641.8 $ 280.2 $ 343.9 $ 594.2
---------------------------------------------------
---------------------------------------------------
($ in millions) 5 years Thereafter Total
--------------------------------------
Deposits $ 326.4 $ - $ 2,069.1
Accounts payable
and other - - 1,339.8
Long-term debt 3.6 1,058.5 1,407.8
Interest payment(1) 88.6 633.5 1,148.0
Other 1.3 - 7.3
--------------------------------------
Total $ 419.9 $ 1,692.0 $ 5,972.0
--------------------------------------
--------------------------------------
(1) Includes interest payments on deposits and long-term debt.
Interest rate risk
The Company is exposed to interest rate risk, which it manages
through the use of interest rate swaps. The Company has a policy in
place whereby a minimum of 75 percent of its long-term debt (term
greater than one year) and lease obligations must be at fixed versus
floating interest rates. The Company is in compliance with this
policy.
13. Merchandise Inventory
Included in "cost of merchandise sold and all other operating
expenses except for the undernoted items" for the 13 weeks and 52
weeks ended January 2, 2010 is $1,670.9 million (2008 -
$1,811.9 million) and $5,856.0 million (2008 - $6,422.0 million),
respectively, of inventory recognized as an expense, which included
$14.3 million (2008 - $19.3 million) and $55.7 million (2008 -
$68.2 million), respectively, of write-downs of inventory as a result
of net realizable value being lower than cost. Inventory write-downs
recognized in previous years and reversed in the current quarter and
the comparative quarter were insignificant.
14. Supplementary Cash Flow Information
The Company paid income taxes during the 13 weeks ended January 2,
2010 of $28.6 million (2008 - $49.5 million) and made interest
payments of $63.1 million (2008 - $35.5 million). For the 52 weeks
ended January 2, 2010, the Company paid income taxes of
$165.2 million (2008 - $220.1 million) and made interest payments of
$173.9 million (2008 - $108.7 million), including $31.8 million
related to the settlement of delayed start swaps and $9.4 million
related to the early redemption of debentures.
During the 13 weeks and 52 weeks ended January 2, 2010, property and
equipment were acquired at an aggregate cost of $62.6 million (2008 -
$107.8 million) and $202.8 million (2008 - $394.5 million),
respectively. The amount of property and equipment acquired that is
included in accounts payable and other at January 2, 2010 was
$22.7 million (2008 - $101.2 million).
During the 13 weeks and 52 weeks ended January 2, 2010, intangible
software was acquired at an aggregate cost of $18.6 million (2008 -
$27.1 million) and $70.3 million (2008 - $77.4 million),
respectively. The amount of intangible software acquired that is
included in accounts payable and other at January 2, 2010 was
$2.6 million (2008 - $0.9 million).
15. 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 its consolidated
earnings, cash flows, or financial position.
In October 2004, a motion for authorization to proceed with a class
action against the Company's wholly-owned subsidiary, Canadian Tire
Bank (the Bank), and a number of other banks was filed by a Quebec-
based consumers' group. The class action alleges that the cash
advance transaction fees charged by the Bank are not permitted under
the Consumer Protection Act (Quebec). The claim seeks a return of all
fees assessed against cardholders for cash advances, plus interest
and punitive damages per class member. The class action was certified
against the Bank on November 1, 2006. The class is comprised of all
persons in Quebec who have a credit card agreement with the Bank and
who have paid fees for cash advances in Canada or abroad since
October 1, 2001. The Company believes it has a solid defense to the
claim on the basis that banks are not required to comply with
provincial legislation because banking and cost of borrowing
disclosure is a matter of exclusive federal jurisdiction.
Accordingly, no provision has been made for amounts, if any, that
would be payable in the event of an adverse outcome. If adversely
decided, the present total aggregate exposure to the Bank is expected
to be approximately $16 million.
In June 2009, a similar lawsuit against another financial institution
was heard by the Quebec Supreme Court questioning the legality of
foreign exchange fees on credit cards transactions. The Court ruled
in favour of the plaintiff, although the decision is being appealed
to the Quebec Court of Appeal. One consequence of this decision is
that it may affect other outstanding lawsuits, including the action
filed against the Bank noted in the preceding paragraph.
16. Tax Matters
In the ordinary course of business, the Company is subject to ongoing
audits by tax authorities. While the Company believes that its tax
filing positions are appropriate and supportable, from time to time,
certain matters are reviewed and challenged by the tax authorities.
The main issues challenged by the Canada Revenue Agency (CRA) relate
to the tax treatment of commissions paid to foreign subsidiaries of
the Company (covering periods from 1995 to 2007), and dividends
received on an investment made by a wholly-owned subsidiary of the
Company related to reinsurance (covering periods from 1999 to 2003).
The applicable provincial tax authorities have reassessed and are
also expected to issue further reassessments on these matters for the
corresponding periods.
The Company has agreed with the CRA to settle the commissions issue
for the period 1995-2003, although the determination of the final tax
liability pursuant to the settlement is subject to the verification
by the CRA of certain information provided by the Company. The
Company believes the provincial tax authorities will also reassess on
the same basis. The Company does not have a significant exposure on
this issue subsequent to the 2003 taxation year.
The reassessments with respect to the dividends received issue are
based on multiple grounds, some of which are highly unusual. The
Company has appealed the reassessments and the matter is currently
pending before the Tax Court of Canada. If the CRA (and applicable
provincial tax authorities) were entirely successful in their
reassessments - an outcome that the Company and its tax advisors
believe to be unlikely - it is estimated that the total liability of
the Company for additional taxes, interest and penalties could be
approximately $193 million. Although the Company has appealed these
reassessments, current tax legislation requires the Company to remit
to the CRA and its provincial counterparts approximately $120 million
related to this matter, all of which has been remitted.
The Company regularly reviews the potential for adverse outcomes in
respect of tax matters. The Company believes that the ultimate
disposition of the settlements, finalization of the commissions
issue, resolution of the dividends received issue and other tax
matters, will not have a material adverse effect on its liquidity,
consolidated financial position or results of operations because the
Company believes that it has adequate provision for these tax
matters. Should the ultimate tax liability materially differ from the
provision, the Company's effective tax rate and its earnings could be
affected positively or negatively in the period in which the matters
are resolved.
The full year provision has been reduced by $9.1 million due to the
retroactive change in legislation relating to the taxation of gains
realized from the disposition of shares during 2006 and 2007 and a
revision to the prior year's estimated tax expense.
Interest Coverage Exhibit to the Consolidated Financial Statements
(unaudited)
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The Company's long-term interest requirements for the 52 weeks ended
January 2, 2010, after annualizing interest on long-term debt issued
and retired during this period, amounted to $111.5 million. The
Company's earnings before interest on long-term debt and income taxes
for the 52 weeks ended January 2, 2010 were $608.2 million, which is
5.5 times the Company's long-term interest requirements for this
period.
%SEDAR: 00000534EF
For further information: Media: Amy Cole, (416) 544-7655, [email protected]; Investors: Karen Meagher, (416) 480-8058, [email protected]
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