Canadian Tire Releases Positive Second Quarter Earnings
Adjusted net earnings up 14.8%
Consolidated gross operating revenue up 3.8%
TORONTO, Aug. 12 /CNW/ - Canadian Tire Corporation, Limited (CTC, CTC.a) today released positive second quarter results reflecting a 14.8% increase in adjusted net earnings. Consolidated gross operating revenue for the quarter increased 3.8% from the prior year with gross operating revenue up 3.0% in Canadian Tire Retail.
"The continued strong recovery of Financial Services has contributed to our earnings growth in the quarter," said Stephen Wetmore, President and CEO, Canadian Tire Corporation. "I am pleased with our retail performance this quarter with strong growth in key categories."
Adjusted net earnings increased 14.8% from the prior year due to increased operating revenue combined with reduced provisioning requirements at Financial Services, lower interest expense at Canadian Tire Retail and cost containment efforts across all of our businesses.
Optimizing cash flow generation continues to be a long-term priority for the Company. For the year to date, cash generated from operating activities has increased by approximately $470 million due to improved operating performance and improvements in working capital. The 2010 capital expenditure plan continues to be within the range of $280 million to $300 million.
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Consolidated 2010 2009
Highlights(1): Second Quarter Second Quarter Change
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CTC retail sales $2.86 billion $2.79 billion 2.5%
Gross operating revenue $2.41 billion $2.32 billion 3.8%
Adjusted earnings before income
taxes (excludes non-operating
gains and losses)(2) $171.5 million $151.5 million 13.2%
Net earnings $119.9 million $103.7 million 15.6%
Adjusted net earnings (excludes
non-operating gains and losses) $118.4 million $103.0 million 14.8%
Basic earnings per share $1.47 $1.27 15.7%
Adjusted basic earnings per
share (excludes non-operating
gains and losses)(2) $1.45 $1.26 14.9%
(1) All dollar figures in this table are rounded.
(2) Non-GAAP measure. Please refer to section 15.0 of Management's
Discussion and Analysis.
Canadian Tire Retail
Total retail sales in the second quarter increased 1.3% and same store sales were up 0.8% in comparison to the second quarter of 2009. Sales increased in key categories, such as gardening and backyard living, due to a strong marketing campaign that showcased how outdoor elements can be integrated to create a complete backyard space. Kitchen and household cleaning also saw year-over-year increases in sales.
Strong growth in these categories was partially offset by soft performance in the automotive business, which was negatively impacted by weakness in the overall market that is expected to continue throughout 2010. Canadian Tire did see market share growth in a number of key automotive categories this quarter; however, results were masked by offsetting price declines caused by increased competitive pressure.
Strong sales of seasonal products continued into the third quarter, particularly in key Ontario and Quebec markets.
Gross operating revenue increased 3.0% in the quarter over the prior year as Dealers responded to increased retail demand for summer seasonal merchandise. Adjusted net earnings before taxes increased 9.5% due to the increase in gross operating revenue noted above and lower interest costs due to more effectively managed inventory levels and reduced debt.
Canadian Tire Retail retrofitted 39 Smart stores in the quarter, which puts it on track to open approximately 59 Smart store retrofits for the full year. Also this quarter, CTR opened two new Smart stores and is on track to deliver six additional Smart store projects over the balance of the year. Two Small market stores were opened in Q2 with one more planned by year end. The two new store formats have been well received by customers and early sales results have been positive.
Mark's
Mark's total retail sales increased by 6.2% in the second quarter of 2010 compared to the same quarter in 2009. Corporate store sales in industrial wear grew by 11.4% with the men's industrial footwear showing the largest dollar increase. Men's wear posted a corporate store sales increase of 3.3% and women's wear corporate store sales grew 1.1%.
Gross operating revenue increased 7.2% in the quarter due to higher retail sales. Mark's earnings before taxes for the quarter were lower than the prior year principally due to increased inventory shrink expense identified as a result of the annual inventory count conducted during the second quarter. Excluding this factor, the gross margin rate would be comparable with the prior year.
In addition, operating expenses increased during the second quarter due to higher depreciation and higher store operating expenses due to the expansion of the Mark's store network from 375 stores to 383 stores over the past 12 months.
Financial Services
Financial Services' gross operating revenue increased by 2.1% over the second quarter of 2009 largely as a result of an increase in credit card interest earned from higher average credit card receivables balances. This was partially offset by the loss of the revenue stream associated with the mortgage portfolio, which was sold in Q4 2009.
Gross average credit card loans receivable grew 5.6% to $4.0 billion at the end of the second quarter primarily due to a 9.1% increase in the average account balance compared to the previous year. This growth in average balance more than offset the impact of a lower average number of accounts with a balance. The increase in the average account balance reflected the increased sales activity on our cards and the impact of selective limit increases.
Adjusted pre-tax net earnings for the quarter were $55.5 million, 36.5% higher than the second quarter of 2009 reflecting higher credit card interest as noted above and reduced loan loss provisioning. The aging of the portfolio has improved, negating the need to grow allowance for future losses during the quarter versus a year ago.
Financial Services' earnings will be negatively impacted in 2010 due to sales tax changes, migration to chip and PIN card technology and the implementation process to ensure compliance with new government regulations. As previously disclosed, the net earnings impact of these items is expected to be $21MM to $23MM with the majority of the impact occurring in the second half of the year.
FINANCIAL CHARTS
CANADIAN TIRE RETAIL
($ in millions) Q2 2010 Q2 2009 Change 2010 YTD 2009 YTD Change
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Retail sales(1) $2,182.0 $2,153.2 1.3% $3,476.9 $3,421.1 1.6%
Same store
sales(2) (year-
over-year
% change) 0.8% (2.7)% 1.2% (0.8)%
Gross operating
revenue $1,597.2 $1,550.0 3.0% $2,689.4 $2,649.3 1.5%
Net shipments
(year-over-year
% change) 3.1% (1.4)% 1.6% (0.1)%
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Earnings before
income taxes $107.2 $95.2 12.6% $134.1 $128.0 4.8%
Less adjustment
for:
Gain (loss) on
disposals of
property and
equipment(3) 2.9 (0.3) 1.4 (0.7)
Former CEO
retirement
obligation - - 0.2 0.5
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Adjusted earnings
before income
taxes(4) $104.3 $95.5 9.5% $132.5 $128.2 3.5%
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(1) Includes sales from Canadian Tire Retail stores, PartSource stores,
and the labour portion of CTR's auto service sales.
(2) Same store sales include sales from all stores that have been open
for more than 53 weeks.
(3) Includes fair market value adjustments and impairments on property
and equipment.
(4) Non-GAAP measure. Please refer to section 15.0 in Management's
Discussion and Analysis.
PETROLEUM
($ in millions) Q2 2010 Q2 2009 Change 2010 YTD 2009 YTD Change
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Sales volume
(millions of
litres) 430.8 435.1 (1.0)% 837.2 843.9 (0.8)%
Retail sales $454.8 $425.7 6.8% $877.0 $779.1 12.6%
Gross operating
revenue $413.9 $390.8 5.9% $800.8 $712.7 12.4%
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Earnings before
income taxes $7.6 $7.8 (2.9)% $13.0 $13.8 (6.3)%
Less adjustment
for:
Loss on disposals
of property and
equipment(1) (0.2) (0.3) (0.3) (0.3)
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Adjusted earnings
before income
taxes(2) $7.8 $8.1 (5.1)% $13.3 $14.1 (6.6)%
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(1) Includes asset impairment losses.
(2) Non-GAAP measure. Please refer to section 15.0 in Management's
Discussion and Analysis.
MARK'S
($ in millions) Q2 2010 Q2 2009 Change 2010 YTD 2009 YTD Change
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Retail sales(1) $223.2 $210.2 6.2% $398.2 $378.7 5.1%
Same store
sales(2) (year-
over-year
% change) 4.0% (11.3)% 2.9% (8.2)%
Gross operating
revenue(3) 195.4 182.2 7.2% 349.2 329.3 6.0%
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Earnings (loss)
before income
taxes 3.8 7.1 (47.1)% (0.9) 2.2 (141.0)%
Less adjustment
for:
Loss on disposals
of property and
equipment (0.1) (0.1) (0.3) (0.3)
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Adjusted earnings
(loss) before income
taxes(4) $3.9 $7.2 (47.4)% $(0.6) $2.5 (125.6)%
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(1) Includes retail sales from corporate and franchise stores.
(2) Mark's same store sales exclude new stores, stores not open for the
full period in each year and store closures.
(3) Gross operating revenue includes retail sales at corporate stores
only
(4) Non-GAAP measure. Please refer to section 15.0 in Management's
Discussion and Analysis.
FINANCIAL SERVICES
($ in millions) Q2 2010 Q2 2009 Change 2010 YTD 2009 YTD Change
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Total managed
credit card
portfolio (end
of period) $4,028.4 $3,866.6 4.2%
Gross operating
revenue $237.9 $232.9 2.1% $463.3 $450.2 2.9%
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Earnings before
income taxes 55.0 42.3 30.2% 99.1 74.8 32.6%
Less adjustment
for:
Loss on disposals
of property and
equipment - (0.1) - (0.2)
Net effect of
securitization
activities(1) (0.5) 1.7 (1.9) 2.2
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Adjusted earnings
before income
taxes(2) $55.5 $40.7 36.5% $101.0 $72.8 38.8%
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(1) Includes initial gain/loss on the sale of loans receivable,
amortization of servicing liability and gain/loss on reinvestment.
(2) Non-GAAP measure. Please refer to section 15.0 in Management's
Discussion and Analysis.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking information that reflects management's current expectations related to matters such as future financial performance and operating results of the Company. Forward-looking statements are provided for the purposes of providing information about management's current expectations and plans and allowing investors and others to get a better understanding of our financial position, results of operation and operating environment. Readers are cautioned that such information may not be appropriate for other circumstances.
All statements other than statements of historical facts included in this document may constitute forward-looking information, including but not limited to, statements concerning management's expectations relating to possible or assumed future prospects and results, our strategic goals and priorities, our actions and the results of those actions and the economic and business outlook for us. 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.
By its very nature, forward-looking information requires us to make assumptions and is subject to inherent risks and uncertainties, which give rise to the possibility that the Company's assumptions may not be correct and that the Company's expectations and plans will not be achieved. Although the Company believes that the forward-looking information in this document is 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 expectations and plans as set forth in such forward-looking information for a variety of reasons. Some of the factors - many of which are beyond our control and the effects of which can be difficult to predict - include (a) credit, market, currency, operational, liquidity and funding risks, including changes in economic conditions, 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, as well as our financial arrangements with such parties; (c) the growth of certain business categories and market segments and the willingness of customers to shop at our stores or acquire our financial products and services; (d) our margins and sales and those of our competitors; (e) risks and uncertainties relating to information management, technology, supply chain, product safety, changes in law, competition, seasonality, commodity price and business disruption, our relationships with suppliers and manufacturers, changes to existing accounting pronouncements, the risk of damage to the reputation of brands promoted by Canadian Tire and the cost of store network expansion and retrofits and (f) our capital structure, funding strategy, cost management programs and share price. We caution that the foregoing list of important factors and assumptions is not exhaustive and other factors could also adversely affect our results. Investors and other readers are urged to consider the foregoing risks, uncertainties, factors and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such forward-looking information.
For more information on the risks, uncertainties and assumptions that could cause the Company's actual results to differ from current expectations, please refer to the "Risk Factors" section of our Annual Information Form for fiscal 2009 and our 2009 Management's Discussion and Analysis, as well as Canadian Tire's other public filings, available at www.sedar.com and at www.corp.canadiantire.ca.
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 statements and information contained herein are based on certain factors and assumptions as of the date hereof. 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 4:30 p.m. EST on August 12, 2010. The conference call will be available simultaneously and in its entirety to all interested investors and the news media through a webcast at http://corp.canadiantire.ca/EN/investors, and will be available through replay at this website for 12 months.
ABOUT CANADIAN TIRE
Canadian Tire Corporation, Limited (TSX: CTC.a, CTC) is one of Canada's most shopped general retailers with 482 Canadian Tire stores across the country. Our core retail and automotive operation is strengthened by PartSource, an automotive parts speciality chain; Canadian Tire Petroleum, one of the country's largest independent retailers of gasoline; Mark's, under the banner "Clothes That Work," a leading retailer of men's, women's and work apparel; and Canadian Tire Financial Services, which has issued approximately five million Canadian Tire MasterCard credit cards. More than 58,000 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)
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Introduction
This Management's Discussion and Analysis (MD&A) provides management's perspective on our Company, our performance and our strategy for the future.
Definitions
In this document, the terms "we", "us", "our", "Company" and "Canadian Tire" refer to Canadian Tire Corporation, Limited and its business units and subsidiaries. For commonly used terminology (such as retail sales and same store sales), see section 5.3 (Business segment performance) and the Glossary of Terms (pages 105 to 107) in our 2009 Financial Report, which can be found online on the SEDAR website at www.sedar.com and on our Canadian Tire website in the Investor Relations section at corp.canadiantire.ca/en/investors.
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 August 12, 2010.
Quarterly and annual comparisons in this MD&A
Unless otherwise indicated, all comparisons of results for the second quarter (13 weeks ended July 3, 2010) are against results for the second quarter of 2009 (13 weeks ended July 4, 2009).
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. See section 12.0 in this MD&A for further information.
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. See section 19.0 in this MD&A for additional important information and a caution on the use of forward-looking information.
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 88 years, offering everyday products and services to Canadians. Canadian Tire, our Dealers, store operators, franchisees and Petroleum agents operate more than 1,200 general merchandise and apparel retail stores and gas bars. Canadian Tire Financial Services Limited and Canadian Tire Bank also offer a variety of financial services to Canadians, including the Canadian Tire Options(R) MasterCard(R), personal loans, lines of credit, insurance and warranty products, guaranteed investment certificates (GICs) offered through third-party brokers and directly to the public, and high-interest and tax-free savings accounts.
Canadian Tire's four main businesses are described below.
Canadian Tire Retail (CTR) is one of Canada's most shopped general merchandise retailers, with a network of 482 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 includes PartSource. PartSource is a chain of 87 specialty automotive hard parts stores that cater to serious "do-it-yourselfers" and professional installers of automotive parts. The PartSource network consists of 26 franchise stores and 61 corporate stores.
Canadian Tire Petroleum (Petroleum) is one of Canada's largest independent retailers of gasoline with a network of 273 gas bars, including 268 convenience stores and kiosks, 73 car washes, 10 Pit Stops and 90 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. All of Petroleum's sites are operated by agents.
As previously announced and highlighted at our recent Investor Conference and Media day on April 7, 2010, the Company has renewed its focus on the core automotive business and is in the process of aligning the organization and reporting to support this focus. The Automotive business comprises PartSource, Petroleum and the automotive segment of CTR and these businesses have been aligned under one corporate officer to oversee a coordinated strategy for the Company's automotive business.
Mark's Work Wearhouse (Mark's) is one of Canada's leading clothing and footwear retailers, operating 383 stores nationwide, including 340 corporate and 43 franchise stores, that offer men's wear, women's wear and industrial wear. Mark's operates under the banners "Mark's", "Mark's Work Wearhouse" and in Quebec, "L'Équipeur(R)". Mark's also conducts a business-to-business operation under the name "Imagewear, a Division of Mark's Work Wearhouse(TM)".
Canadian Tire Financial Services Limited (Financial Services) markets a range of Canadian Tire-branded credit cards, including the Canadian Tire Options(R) MasterCard(R) and Gas Advantage(R) MasterCard(R). Financial Services also markets personal loans, lines of credit, insurance and warranty products and an emergency roadside assistance service called Canadian Tire Roadside Assistance(R). Canadian Tire Bank (CTB), a wholly-owned subsidiary of Financial Services, is a federally regulated bank that manages and finances Canadian Tire's consumer MasterCard, Visa and retail credit card portfolios, as well as the personal loan and line of credit portfolios, and is the issuer of GICs offered through third-party brokers. CTB also offers high-interest and tax-free savings accounts and retail GICs in all provinces except Quebec. CTB is a member of Canada Deposit Insurance Corporation (CDIC) and eligible deposit products issued by CTB qualify for CDIC insurance coverage.
1.2 Store network at a glance
July 3, July 4,
Number of stores and retail square footage 2010 2009
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Consolidated store count
CTR retail stores(1) 482 475
PartSource stores 87 88
Mark's retail stores(1) 383 375
Petroleum gas bar locations 273 273
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Total stores 1,225 1,211
Consolidated retail square footage (in millions)
CTR 19.1 18.9
PartSource 0.3 0.3
Mark's 3.3 3.2
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Total retail square footage(2) (in millions) 22.7 22.4
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(1) Store count numbers reflect individual selling locations; therefore,
both CTR and Mark's totals include stores that are co-located.
(2) The average retail square footage for Petroleum's convenience stores
was 458 square feet per store in Q2 2010. It has not been included
in the total above.
2.0 Our Strategic Plan
2.1 Strategic Plan
The Strategic Plan outlines our strategy to build the Canadian Tire brand through a renewed focus on growth and productivity throughout the five-year plan period. Details of our Strategic Plan were announced at our investor conference and media day on April 7, 2010 and have been posted online on our website (under the Investor section) at http://corp.canadiantire.ca.
Specific objectives related to the Strategic Plan are included in section 4.0 of the MD&A contained in the 2009 Financial Report and on page 17 of the 2009 Annual Report.
2.2 Financial aspirations
The Strategic Plan includes financial aspirations for the Company for the five-year period ending in December 2014. These aspirations are not to be construed as guidance or forecasts for any individual year within the five-year period, but rather as long-term, rolling targets that we aspire to achieve over the life of the Strategic Plan, based on the successful execution of our various initiatives.
Financial measure Aspiration
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CTR Retail sales (POS) 3% to 5%
Consolidated adjusted EPS(1) 8% to 10%
Retail return on invested capital (ROIC) 10%+
Financial Services return on receivables (ROR) 4.5% to 5.0%
Total Return to Shareholders (TRS), including dividends 10% to 12%
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(1) Excludes non-operating gains and losses on capital and intangible
assets, the net effect of securitization activities and other unusual
and/or non-recurring items not central to the Company's business.
We will report on our progress against these financial aspirations on an annual basis in our year-end Financial Report.
3.0 Our performance in 2010
3.1 Consolidated financial results
($ in millions
except per share
amounts) Q2 2010 Q2 2009 Change 2010 YTD 2009 YTD Change
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Retail sales(1) $2,860.1 $2,789.1 2.5% $4,752.1 $4,578.9 3.8%
Gross operating
revenue 2,414.1 2,324.8 3.8% 4,244.2 4,082.9 3.9%
EBITDA(2) 264.1 250.1 5.6% 427.5 406.2 5.2%
Retail
EBITDA(2),(3) 192.4 189.2 1.6% 295.1 298.6 (1.2)%
Earnings before
income taxes 173.6 152.4 13.9% 245.3 218.8 12.1%
Effective tax
rate 31.0% 32.0% 31.0% 29.9%
Net earnings $ 119.9 $ 103.7 15.6% $ 169.3 $ 153.4 10.3%
Basic earnings
per share $ 1.47 $ 1.27 15.7% $ 2.07 $ 1.88 10.4%
Adjusted basic
earnings per
share(2) $ 1.45 $ 1.26 14.9% $ 2.08 $ 1.87 11.4%
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(1) Represents retail sales at CTR (which includes PartSource), Mark's
corporate and franchise stores and ancillary revenue and Petroleum's
sites.
(2) See section 15.0 for non-GAAP measures.
(3) Retail EBITDA excludes Financial Services and has been reported in
this table, as EBITDA is not the most relevant measure for Financial
Services.
Consolidated gross operating revenue
Consolidated gross operating revenue for the quarter increased 3.8 per cent from the prior year due to increased sales across our retail businesses with gross operating revenues up 3.0 percent in CTR, 5.9 percent in Petroleum and 7.2 percent at Mark's. Gradually improving economic conditions and effective merchandising and promotional programs contributed to these results.
Consolidated net earnings
Consolidated net earnings for the quarter increased 15.6 per cent from the prior year due to increased operating revenues as noted above combined with reduced loan loss provisioning at Financial Services, reduced supply chain handling and carrying costs at CTR, lower interest expense and cost containment efforts across all of our businesses.
Impact of non-operating items
The following table shows our adjusted consolidated earnings on a pre-tax and after-tax basis, after taking into account certain non-operating and/or non-recurring and unusual items.
Adjusted consolidated earnings before and after income taxes(1)
($ in millions
except per share
amounts) Q2 2010 Q2 2009 Change 2010 YTD 2009 YTD Change
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Earnings before
income taxes $ 173.6 $ 152.4 13.9% $ 245.3 $ 218.8 12.1%
Less pre-tax
adjustment for:
Former CEO
retirement
obligation(2) - - 0.2 0.5
Net effect of
securitization
activities(3) (0.5) 1.7 (1.9) 2.2
Gain (loss) on
disposals of
property and
equipment 2.6 (0.8) 0.8 (1.5)
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Adjusted earnings
before income
taxes(1) $ 171.5 $ 151.5 13.2% $ 246.2 $ 217.6 13.1%
Income taxes 53.1 48.5 76.3 65.0
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Adjusted earnings
after income
taxes(1) $ 118.4 $ 103.0 14.8% 169.9 $ 152.6 11.3%
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Basic earnings
per share $ 1.47 $ 1.27 15.7% $ 2.07 $ 1.88 10.4%
Adjusted basic
earnings per
share(1) $ 1.45 $ 1.26 14.9% $ 2.08 $ 1.87 11.4%
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(1) See section 15.0 on non-GAAP measures.
(2) The former CEO retirement obligation has been recorded in CTR. See
section 3.3.1.2.
(3) Includes initial gain/loss on the sale of loans receivable,
amortization of servicing liability and gain/loss on reinvestment.
Seasonal trend analysis
The second and fourth quarters of each year are typically when we experience stronger revenues and earnings in our retail businesses 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
share amounts) Q2 2010 Q1 2010 Q4 2009 Q3 2009
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Gross operating revenue $2,414.1 $1,830.1 $2,437.7 $2,165.9
Net earnings 119.9 49.4 96.2 85.4
Adjusted net earnings(2) 118.4 51.5 104.4 91.0
Basic and diluted earnings per
share 1.47 0.61 1.18 1.04
Adjusted basic and diluted
earnings per share(2) 1.45 0.63 1.28 1.11
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($ in millions except per
share amounts) Q2 2009 Q1 2009 Q4 2008 Q3 2008
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Gross operating revenue $2,324.8 $1,758.1 $2,587.8 $2,257.5
Net earnings 103.7 49.7 101.5 109.1
Adjusted net earnings(2) 103.0 49.6 130.1 116.0
Basic and diluted earnings per
share 1.27 0.61 1.24 1.34
Adjusted basic and diluted
earnings per share(2) 1.26 0.61 1.60 1.42
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(1) 2008 quarterly results have been restated for the implementation, on
a retrospective basis, of CICA HB 3064 - Goodwill and Intangible
Assets and the amendments to CICA HB 1000 - Financial Statement
Concepts. See sections 17.1 and 17.2 in the 2009 Financial Report for
additional information.
(2) See section 15.0 on non-GAAP measures.
- An item that affected the usual seasonal pattern noted above that was
not reflected in adjusted earnings was that Q3 2008 was positively
impacted by an $8.6 million reduction in the tax provision, most of
which related to the impact of the sale-leaseback transactions
entered into since 2005.
3.2 Q2 2010 performance overview
Our Strategic agenda and/or business profitability were advanced during the second quarter of 2010 by the following;
- CTR expanded its network of the latest store formats, retrofitting 39
Smart stores and building one new store as well as building an
additional Small Market store during the second quarter. The Company
is on track to open 4 new Smart stores, 3 new Small Market stores and
complete 60 Smart store retrofits during 2010.
- Financial Services increased its rate of return on receivables 37
basis points since Q1 due to reduced provisioning resulting from the
improvement in economic conditions and ongoing credit risk management
initiatives.
- Petroleum entered into an agreement in the second quarter to jointly
construct and operate service stations along some of the 400 series
highways in Ontario, amongst the busiest arteries in the country.
A summary of our key performance metrics for the second quarter follows. Commentary to help explain second quarter performance may be found in individual Business Segment performance sections.
Key operating performance measures
(year-over-year percentage change,
$ in millions or metric in millions,
except where noted) Q2 2010 Q2 2009 Change
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CTR retail sales growth(1) 1.3% (1.0)%
CTR same store sales growth(2) 0.8% (2.7)%
Retail square footage(3) (in millions of
square feet) 19.1 18.9 1.3%
Sales per square foot(3),(4) (updated/
expanded & traditional) $ 373 $ 380 (1.8)%
CTR gross operating revenue $1,597.2 $1,550.0 3.0%
CTR net shipments growth 3.1% (1.4)%
CTR EBITDA(5) $ 168.5 $ 163.1 3.4%
CTR adjusted earnings before income
taxes(5) $ 104.3 $ 95.5 9.5%
Mark's retail sales growth(6) 6.2% (9.8)%
Mark's same store sales growth(7) 4.0% (11.3)%
Mark's total retail square footage (in
millions of square feet) 3.3 3.2 3.1%
Average sales per square foot(14) $ 287 $ 302 (5.0)%
Mark's gross operating revenue(13) $ 195.4 $ 182.2 7.2%
Mark's EBITDA(5) $ 11.9 $ 14.0 (16.4)%
Mark's adjusted earnings before income
taxes(5) $ 3.9 $ 7.2 (47.4)%
Petroleum retail sales growth 6.8% (21.4)%
Petroleum gasoline volume (litres) growth (1.0)% 1.3%
Petroleum gross operating revenue $ 413.9 $ 390.8 5.9%
Petroleum EBITDA5 12.0 $ 12.1 (1.7)%
Petroleum adjusted earnings before income
taxes(5) $ 7.8 $ 8.1 (5.1)%
Financial Services' credit card sales
growth 3.6% 1.1%
Financial Services' gross average credit
card receivables growth 5.6% 4.5%
Average number of accounts with a
balance(8) (thousands) 1,716 1,772 (3.2)%
Average account balance(8) (whole $) $ 2,339 $ 2,144 9.1%
Net credit card write-off rate(8) 7.99% 7.04%
Allowance rate(9) 2.90% 2.76%
Operating expenses(10) (as a % of GAR) 6.77% 7.00%
Return on average total managed
portfolio(10),(11),(12) 4.26% 4.65%
Financial Services' gross operating
revenue $ 237.9 $ 232.9 2.1%
Financial Services' adjusted earnings
before income taxes(5) $ 55.5 $ 40.7 36.5%
-------------------------------------------------------------------------
(1) Includes sales from Canadian Tire stores, PartSource stores and the
labour portion of CTR's auto service sales.
(2) Includes sales from Canadian Tire and PartSource stores, but exclude
sales from the labour portion of CTR's auto service sales.
(3) Excludes PartSource stores. Retail space does not include warehouse,
garden centre and auto service areas.
(4) Retail sales are shown on a 52-week basis in each year for those
stores that had been open for a minimum of two years as at the end
of the current quarter. Sales from PartSource stores and the labour
portion of CTR's auto service sales are excluded.
(5) See section 15.0 on non-GAAP measures.
(6) Includes retail sales from Mark's corporate and franchise stores and
in Q2 2010 ancillary revenue Mark's sales increase would have been
5.6% on a more comparable basis. See Section 3.3.3.1 for more
details.
(7) Mark's same store sales exclude new stores, stores not open for the
full period in each year, store closures and ancillary revenue.
(8) Credit card portfolio only.
(9) The allowance rate was calculated on the total managed portfolio of
loans receivable.
(10) Figures are calculated on a rolling 12-month basis and comprise the
total managed portfolio of loans receivable.
(11) Excludes the net effect of securitization activities, costs
associated with the sale of the mortgage portfolio in Q4 2009 and
gain/loss on disposal of assets.
(12) Return is calculated as adjusted earnings before taxes as a
percentage of GAR.
(13) Includes retail sales from Mark's corporate stores and in Q2 2010
ancillary revenue. Mark's sales increase would have been 5.7% on a
more comparable basis. See section 3.3.3.2.
(14) Average retail sales per square foot are based on sales from
corporate stores. Mark's has prorated square footage for corporate
stores that have been open for less than 12 months.
3.3 Business segment performance
3.3.1 Canadian Tire Retail
3.3.1.1 Key performance indicators
The following are key measures of CTR's sales productivity:
- total same store sales growth;
- average sales per square foot of retail space
CTR total retail and same store sales
(year-over-year percentage
change) Q2 2010 Q2 2009 YTD 2010 YTD 2009
-------------------------------------------------------------------------
Total retail sales(1) 1.3% (1.0)% 1.6% 0.8%
Same store sales(2) 0.8% (2.7)% 1.2% (0.8)%
-------------------------------------------------------------------------
(1) Includes sales from Canadian Tire and PartSource stores and the
labour portion of CTR's auto service sales.
(2) Includes sales from Canadian Tire and PartSource stores, but exclude
sales from the labour portion of CTR's auto service sales.
CTR retail sales
Second quarter
Total retail sales in the second quarter increased 1.3 per cent in comparison to the second quarter of 2009. Sales increased in our outdoor categories, such as backyard living and gardening, as a result of the execution of an integrated go to market strategy for the outdoor category combined with warm weather enjoyed across much of the country throughout most of the quarter. Kitchen and household cleaning also experienced an increase in sales in comparison to last year, although this was partially offset by a decrease in automotive segment sales, which resulted from market declines and increased competition in this category. Same store sales increased 0.8% compared to the second quarter of 2009.
CTR store network definitions
Our store network has evolved as we have introduced new store formats into our store categories, which we define in section 5.3.1.2 of the 2009 Financial Report.
CTR store count
Q2 2010 2009 2008 2007 2006
-------------------------------------------------------------------------
Updated and expanded
stores 326 363 393 381 363
Smart stores 77 36 2 - -
Traditional stores 68 71 76 92 105
Small Market stores 11 9 4 - -
-------------------------------------------------------------------------
Total updated and
expanded, traditional,
Small Market and Smart
stores 482 479 475 473 468
PartSource stores 87 87 86 71 63
-------------------------------------------------------------------------
CTR continues to retrofit its store network with a focus on converting selected traditional and "updated and expanded" existing stores to the latest formats. Customer reaction to the two new formats (Small Market and Smart store) has been especially well received and early sales results have been very positive. As a result the Company has continued to ramp up its build/conversion program with 43 real estate projects completed to date in 2010.
Average sales per square foot of CTR retail space(1),(2),(3)
For the 12 For the 12
months ended, months ended,
July 3, 2010 July 4, 2009
-------------------------------------------------------------------------
Retail square footage(1),(3) (millions of
square feet) 19.1 18.9
Sales per square foot(2),(3) ($ sales per
square foot) $ 373 $ 380
-------------------------------------------------------------------------
(1) Retail square footage is based on the total retail square footage
including stores that had not been open for a minimum of two years.
It represents a point in time (instead of a rolling 12-month period)
as at the end of the year.
(2) Retail sales are shown on a 52-week basis in each year for those
stores that had been open for a minimum of two years as at the end of
the current quarter. Sales from PartSource stores and the labour
portion of CTR's auto service sales are excluded.
(3) Excludes PartSource stores. Retail space does not include warehouse,
garden centre and auto service areas.
Retail square footage increased by approximately 0.2 million square feet year-over-year due to the network expansion and retrofit activities noted above.
3.3.1.2 CTR's financial results
($ in millions) Q2 2010 Q2 2009 Change 2010 YTD 2009 YTD Change
-------------------------------------------------------------------------
Retail sales $2,182.0 $2,153.2 1.3% $3,476.9 $3,421.1 1.6%
Net shipments
(year-over-year
% change) 3.1% (1.4)% 1.6% (0.1)%
Gross operating
revenue 1,597.2 1,550.0 3.0% 2,689.4 2,649.3 1.5%
EBITDA(1) 168.5 163.1 3.4% 258.4 259.9 (0.5)%
-------------------------------------------------------------------------
Earnings before
income taxes 107.2 95.2 12.6% 134.1 128.0 4.8%
Less adjustment
for:
Gain (loss) on
disposals of
property and
equipment 2.9 (0.3) 1.4 (0.7)
Former CEO
retirement
obligation - - 0.2 0.5
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(1) $ 104.3 $ 95.5 9.5% $ 132.5 $ 128.2 3.5%
-------------------------------------------------------------------------
(1) See section 15.0 on non-GAAP measures.
Explanation of CTR's financial results
Second quarter
Gross Operating Revenue increased 3.0 percent in the quarter over the prior year due to higher shipment volume as Dealers began to rebuild inventory in response to a strong promotional program for the summer season and slowly improving consumer demand.
Earnings before taxes increased 12.6% due to the increase in gross operating revenue noted above, combined with a slight improvement in product margins, partially due to lower freight costs, reductions in supply chain handling and interest costs due to more effectively managed inventory levels.
3.3.1.3 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. These include, but are not limited to, supply chain disruption, seasonality and environmental risks. Please see section 5.3.1.5 of our 2009 Financial Report for an explanation of these business-specific risks. See also section 11.0 of this MD&A for a discussion on Enterprise risk management and section 14.0 of the MD&A contained in our 2009 Financial Report for a discussion of some other industry-wide and Company-wide risks affecting the business.
3.3.2 Canadian Tire Petroleum
3.3.2.1 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
Q2 2010 Q2 2009 Change 2010 YTD 2009 YTD Change
-------------------------------------------------------------------------
Sales volume
(millions of
litres) 430.8 435.1 (1.0)% 837.2 843.9 (0.8)%
-------------------------------------------------------------------------
Petroleum has continued to hold its market share in a mature market, largely due to our loyalty program, customer service experience at our gas bars and strong penetration of our Canadian Tire Options MasterCard and Gas Advantage MasterCard. Gasoline sales volumes during the second quarter were down slightly due to pump prices being up by over 7 per cent year-over-year.
Petroleum's convenience and car wash sales
(year-over-year percentage
change) Q2 2010 Q2 2009 2010 YTD 2009 YTD
-------------------------------------------------------------------------
Total retail sales
Convenience store sales 17.1% 19.1% 14.9% 18.0%
Car wash sales 1.1% 0.8% 17.0% 8.6%
Same store sales
Convenience store sales(1) 16.6% 15.6% 14.2% 14.9%
Car wash sales 1.9% 1.0% 17.8% 8.6%
-------------------------------------------------------------------------
(1) Convenience same store sales excludes three "Q" convenience stores.
Convenience store sales were strong in the second quarter of 2010, mainly due to sales increases in the tobacco and lottery categories and continued steady growth in the confectionary category. Car wash sales leveled off in the second quarter but have shown strong growth year to date. Car wash results are heavily correlated to weather conditions.
3.3.2.2 Petroleum's financial results
($ in millions) Q2 2010 Q2 2009 Change 2010 YTD 2009 YTD Change
-------------------------------------------------------------------------
Retail sales $ 454.8 $ 425.7 6.8% $ 877.0 $ 779.1 12.6%
Gross operating
revenue 413.9 390.8 5.9% 800.8 712.7 12.4%
EBITDA(1) 12.0 12.1 (1.7)% 21.7 22.5 (4.0)%
-------------------------------------------------------------------------
Earnings before
income taxes 7.6 7.8 (2.9)% 13.0 13.8 (6.3)%
Less adjustment
for:
Loss on disposals
of property and
equipment (0.2) (0.3) (0.3) (0.3)
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(1) $ 7.8 $ 8.1 (5.1)% $ 13.3 $ 14.1 (6.6)%
-------------------------------------------------------------------------
(1) See section 15.0 on non-GAAP measures.
Explanation of Petroleum's financial results
Second quarter
Petroleum's gross operating revenue increased 5.9 per cent in the second quarter of 2010 compared to the prior year, primarily due to an increase in pump prices and strong convenience store sales.
Petroleum's pre-tax earnings, however, were down 2.9 per cent, due to costs associated with the establishment of a business arrangement to construct and operate the 400 series highway service centres referred to below. Operating expenses were well managed despite increasing credit card fees, which are a function of higher gasoline prices. Environmental costs were lower than the prior year.
During the second quarter, Petroleum entered into an agreement to build and operate 23 state-of-the-art service centres along busy Ontario highways (Highway 401 and Highway 400). These service centres will feature a Canadian Tire gas bar and an associated convenience store. The results of these locations will begin to be reflected in the Company's results in the third quarter. There are 78 Canadian Tire Retail stores serving communities in close proximity to the planned new service centres.
3.3.2.3 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. These include, but are not limited to, environmental and commodity price and disruption risks. Please see section 5.3.3.5 of our 2009 Financial Report for an explanation of these business-specific risks. See also section 11.0 of this MD&A for a discussion on Enterprise risk management and section 14.0 of the MD&A contained in our 2009 Financial Report for a discussion of some other industry-wide and Company-wide risks affecting the business.
3.3.3 Mark's Work Wearhouse
3.3.3.1 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) Q2 2010 Q2 2009 2010 YTD 2009 YTD
-------------------------------------------------------------------------
Total retail sales(1) 6.2% (9.8)% 5.1% (6.6)%
Same store sales(2) 4.0% (11.3)% 2.9% (8.2)%
-------------------------------------------------------------------------
(1) Includes retail sales from corporate and franchise stores and in 2010
ancillary revenue
(2) Mark's same store sales exclude new stores, stores not open for the
full period in each year, store closures and in 2010 ancillary
revenue.
Second quarter
Mark's total retail sales increased by 6.2 per cent in the second quarter of 2010 compared to the same quarter in 2009. Note that retail sales for 2010 now include some ancillary items such as new embroidery and alteration revenue (part of the Imagewear business), etc. If the prior year retail sales were compiled on the same basis, retail sales would have increased by 5.6 per cent. Corporate store POS sales in industrial wear showed the fastest recovery coming out of the recession, growing by 11.4 per cent with the men's industrial footwear and workwear showing the largest dollar increase. This is reflective of the improving economy and employment market, especially in the commodity-driven western provinces of Alberta and Saskatchewan. Men's wear posted a corporate store sales increase of 3.3 per cent. The largest dollar increases were in men's shorts and knit tops and casual bottoms. Women's wear corporate store sales grew a modest 1.1 per cent with the largest dollar increases occurring in women's casual and dress bottoms and healthwear.
Average Corporate Store Sales(1)
For the 12 For the 12
months months
ended, ended,
July 3, 2010 July 4, 2009
-------------------------------------------------------------------------
Corporate Store Retail Square Footage
(thousands)(4) 2,987 2,895
Average retail sales per store
($ thousands)(2) $ 2,520 $ 2,619
Average sales per square foot ($)(3) 287 302
-------------------------------------------------------------------------
(1) Calculated on a rolling 12 month basis.
(2) Average retail sales per corporate store includes stores that have
been open for 12 months or more.
(3) Average retail sales per square foot are based on sales from
corporate stores. Mark's has prorated square footage for corporate
stores that have been open for less than 12 months.
(4) End of period values.
Mark's average retail sales per store and average sales per square foot had been declining since the end of the second quarter of 2007, primarily due to the economic slowdown which began then, combined with the fact that Mark's has, through new stores, store relocations, store expansions and franchise repatriations, increased its corporate store retail square footage by 24.4 per cent over that time frame.
In spite of the recent recession, Mark's believes that, with its continued network expansion and product innovation, it is well positioned to increase its market share and resume improving its average retail sales per store and average sales per square foot.
3.3.3.2 Mark's financial results
($ in millions) Q2 2010 Q2 2009 Change 2010 YTD 2009 YTD Change
-------------------------------------------------------------------------
Retail sales(1) $ 223.2 $ 210.2 6.2% $ 398.2 $ 378.7 5.1%
Gross operating
revenue(2) 195.4 182.2 7.2% 349.2 329.3 6.0%
EBITDA(3) 11.9 14.0 (16.4)% 15.0 16.2 (8.5)%
-------------------------------------------------------------------------
Earnings (loss)
before income
taxes 3.8 7.1 (47.1)% (0.9) 2.2 (141.0)%
Less adjustment
for:
Loss on disposals
of property and
equipment (0.1) (0.1) (0.3) (0.3)
-------------------------------------------------------------------------
Adjusted earnings
(loss) before
income taxes(3) $ 3.9 $ 7.2 (47.4)% $ (0.6) $ 2.5 (125.6)%
-------------------------------------------------------------------------
(1) Includes retail sales from corporate and franchise stores and in 2010
total system ancillary revenue.
(2) Gross operating revenue includes retail sales at corporate stores and
in 2010 ancillary revenue.
(3) See section 15.0 on non-GAAP measures.
Explanation of Mark's financial results
Second quarter
As noted above, gross operating revenue increased 7.2 percent in the quarter and was driven, to a large extent, by the increase in industrial wear sales in corporate stores.
Mark's earnings before taxes for the quarter, however, declined 47.1% due to a 260 basis point reduction in gross margins primarily attributable to increased inventory shrink expense resulting from the annual inventory count results. While the shrink was higher than recent experience, it was still within industry norms. In addition, operating expenses increased during the second quarter due to higher depreciation and increased store payroll and store occupancy costs due to the expansion of the Mark's store network from 375 stores to 383 stores over the past 12 months.
3.3.3.3 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. These include, but are not limited to, seasonality and market obsolescence risks. Please see section 5.3.2.5 of our 2009 Financial Report for an explanation of these business-specific risks. See also section 11.0 of this MD&A for a discussion on Enterprise risk management and section 14.0 of the MD&A contained in our 2009 Financial Report for a discussion of some other industry-wide and Company-wide risks affecting the business.
3.3.4 Canadian Tire Financial Services
3.3.4.1 Key performance indicators
Financial Services' profitability measures are tracked as a percentage of total gross average receivables (GAR), and key portfolio quality metrics are shown in the table below.
Key metrics
Q2 2010 Q2 2009 Q2 2008 Q2 2007 Q2 2006
-------------------------------------------------------------------------
Total gross average
receivables(1),(2) $4,051.1 $4,047.9 $3,844.9 $3,599.6 $3,376.6
Total revenue as a %
of GAR(2),(3),(4) 25.18% 24.93% 24.42% 24.88% 25.10%
Variable expenses as a
% of GAR(3),(4) 14.15% 13.28% 11.93% 11.76% 11.93%
Operating expenses as a
% of GAR(3) 6.77% 7.00% 7.83% 7.81% 8.19%
Return on average total
managed
portfolio(3),(4),(5) 4.26% 4.65% 4.65% 5.32% 4.97%
Adjusted earnings
before income
taxes(1),(4),(6) $ 55.5 $ 40.7 $ 40.5 $ 44.9 $ 39.6
Net credit card write-
off rate(7) 7.99% 7.04% 5.96% 5.79% 6.02%
Credit card account
balances less than 30
days overdue at the end
of the period 96.34% 95.86% 96.35% 96.60% 96.35%
-------------------------------------------------------------------------
(1) $ in millions
(2) Represents the gross average receivables of credit card, personal
loan, line of credit and mortgage portfolios.
(3) Figures are calculated on a rolling 12-month basis and comprise the
total managed portfolio of loans receivable.
(4) Excludes the net effect of securitization activities, gain on
disposal/redemption of investment, costs associated with the sale of
the mortgage portfolio and gain/loss on disposal of assets.
(5) Return is calculated as adjusted earnings before taxes as a
percentage of GAR.
(6) See section 15.0 on non-GAAP measures.
(7) Figures are calculated on a rolling 12-month basis and comprise the
total managed portfolio of credit card receivables
Business Performance
In 2009, the Canadian economy was challenged with an increase in unemployment resulting in rising consumer bankruptcies, a deterioration of the aging of receivables and increased write-offs. The return on Financial Services's total managed portfolio has decreased in comparison to 2009, however, the rolling 12 month rate improved 37 basis points from Q1 2010. Improvements in revenues from selective pricing changes, ongoing targeted credit limit increases and balance transfer offers and control of operating expenses more than offset the effects of a challenged economy. Operating expenses are expected to increase throughout the second half of the fiscal year due to tax changes, migration to chip and PIN card technology and the implementation of processes to ensure compliance with new government regulations.
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 per cent. Management believes the pre-tax return on the average total managed portfolio will return to the target range as unemployment levels and consumer spending behaviour return to historical norms.
Portfolio Quality
The 2010 rolling 12-month net write-off rate on the credit card loans portfolio was negatively impacted by an increase in write-offs and consumer bankruptcies as a result of a significantly more challenging economic environment and rising unemployment levels over that period.
As of Q2 2010, aging of credit card receivables had improved and has begun to return to normal levels. As a result, net write-offs and variable expenses are expected to improve throughout the remainder of 2010.
3.3.4.2 Financial Services' financial results
($ in millions) Q2 2010 Q2 2009 Change 2010 YTD 2009 YTD Change
-------------------------------------------------------------------------
Gross operating
revenue $ 237.9 $ 232.9 2.1% $ 463.3 $ 450.2 2.9%
EBITDA(1) 71.7 60.9 18.1% 132.4 107.6 23.2%
-------------------------------------------------------------------------
Earnings before
income taxes 55.0 42.3 30.2% 99.1 74.8 32.6%
Less adjustment
for:
Loss on disposals
of property and
equipment - (0.1) - (0.2)
Net effect of
securitization
activities(2) (0.5) 1.7 (1.9) 2.2
-------------------------------------------------------------------------
Adjusted earnings
before income
taxes(1) $ 55.5 $ 40.7 36.5% $ 101.0 $ 72.8 38.8%
-------------------------------------------------------------------------
(1) See section 15.0 on non-GAAP measures.
(2) Includes initial gain/loss on the sale of loans receivable,
amortization of servicing liability and gain/loss on reinvestment.
Explanation of Financial Services' financial results
Second quarter
Financial Services' gross operating revenue increased by 2.1 per cent over the second quarter of 2009 largely as a result of an increase in credit card interest earned from higher average credit card receivables balances. This was partially offset by the loss of the revenue stream associated with the mortgage portfolio, which was sold in Q4 2009.
Pre-tax earnings for the quarter were $55 million, 30.2% higher than the second quarter of 2009, reflecting higher credit card interest as noted above, reduced loan loss provisioning and lower interest due to the reduction in excess liquidity that was carried in the prior year. The aging of the credit card portfolio improved in the quarter which favourably impacted loan loss provisioning versus a year ago.
3.3.4.3 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. These include, but are not limited to, consumer credit, securitization funding, interest rate and regulatory risk. Please see section 5.3.4.8 of our 2009 Financial Report for an explanation of these business-specific risks as well as section 5.1.4 of this MD&A for a description of the securitization program and Canadian Tire's liquidity and capital market activity. Also see section 11.0 of this MD&A for a discussion on Enterprise risk management and section 14.0 of the MD&A contained in our 2009 Financial Report for a discussion of some other industry-wide and Company-wide risks affecting the business.
4.0 Capital management
In order to support our growth agenda and meet the objectives enumerated in our Strategic Plan, the Company actively manages its capital. The Company's objectives are:
- ensuring sufficient liquidity to support its financial obligations
and execute its operating and strategic plans;
- maintaining healthy liquidity reserves and access to capital; and
- minimizing the after-tax cost of capital while taking into
consideration current and future industry, market and economic risks
and conditions.
The current economic environment has not changed the Company's objectives in managing capital, although the Company did place greater emphasis on the second of these objectives when credit markets were constrained in 2008 and much of 2009.
The definition of capital varies from company to company and from industry to industry. Our definition of capital includes the current-portion of long-term debt, long-term debt, long-term deposits, long-term liabilities that are derivative or hedge instruments related to capital items only, share capital, contributed surplus, components of accumulated other comprehensive income (loss) related to capital items only, and retained earnings.
Under the existing debt agreements, key financial covenants are monitored on an ongoing basis by Management to ensure compliance with the agreements. The Company was in compliance with these covenants during the second quarter of 2010.
The Company's wholly-owned subsidiary, CTB, 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, an internal capital adequacy assessment process 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.
During the second quarter of 2010 and for the comparative period, 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 further information on capital management, see section 7.0 (Capital Management) of the MD&A contained in our 2009 Financial Report.
5.0 Financing
Credit markets have shown consistent improvement from mid-2009 onwards and Canadian Tire's financing capabilities remain strong. A number of alternative financing sources are available to the Company and CTB to ensure that the appropriate level of liquidity is available to meet our strategic objectives. These sources are identified in section 8.0 of the MD&A contained in our 2009 Financial Report.
As of July 3, 2010, the Company had $1.17 billion in committed bank lines of credit, $800 million of which is available under a two-year syndicated credit facility. The syndicated facility is available to the Company until June 2012 and can be extended for an additional 364-day period annually. The balance of credit lines has been established pursuant to bilateral credit facility agreements that are available to the Company until March 2011. Each quarter, the company has the ability to request an extension of each of the bilateral credit facilities for an additional 90-day period.
As of July 3, 2010, the Glacier Credit Card Trust (Glacier) commercial paper program has access of up to $800 million of the total Canadian Tire committed credit lines. Glacier has achieved compliance with Dominion Bond Rating Service (DBRS(R)) Global Liquidity Standards.
Debt market conditions
Credit markets have shown signs of marked improvement over the course of 2009 and 2010 to date as evidenced by reduced credit spreads and higher investor demand and general oversubscription of bond transactions. Similarly, credit spreads in the asset-backed securities market have tightened and investor demand is improving.
The Company has a $300 million medium-term note with an interest rate of 5.22 per cent that will mature in October 2010. Based on available liquidity and funding requirements, the Company does not plan to refinance this debt.
Canadian Tire participates in the asset-backed security markets through the issuance of commercial paper and issuance of MTNs out of Glacier. As of July 3, 2010, Glacier had $100 million of commercial paper outstanding ($63 million of commercial paper outstanding as of July 4, 2009). In November 2010, a five-year $365 million Glacier-issued MTN series matures. As per the Series Purchase Agreement, Glacier is required to accumulate the principal liquidation amounts for these notes from credit card collections over the two or three months preceding maturity in the Liquidation Principal Funding account. The Company has access to other sufficient sources of financing, including broker deposits and retail deposits to fund the maturity should the Company not seek to complete a credit card securitization transaction in the near to medium term.
In December 2009, Canadian Tire received confirmation from Standard & Poor's on its various funding programs, all of which had a stable outlook, and the DBRS rating remains stable. As at July 3, 2010 there has been no change in the ratings.
For information related to our broker and retail deposits, see section 8.0 of the MD&A contained in our 2009 Financial Report.
5.1 Funding program
5.1.1 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 Normal Course Issuer Bid (NCIB), from a combination of sources. In the second quarter of 2010, the primary source of funding was the $489 million of cash generated from operating activities.
5.1.2 Cash and cash equivalents
The table below shows the cash and cash equivalents at the end of the second quarter of 2010 compared to the second quarter of 2009.
July 3, July 4,
($ in millions) 2010 2009(1)
-------------------------------------------------------------------------
Cash and cash equivalents(1) $ 1,049.7 $ 1,435.9
-------------------------------------------------------------------------
(1) Certain prior year cash and cash equivalents has been reclassified to
correspond with the current year presentation. See section 14.2 for
further information.
During the second quarter of 2010, we used cash primarily for the following:
- $91 million for the investment in loans receivable;
- $63 million for the net reduction in securitization of loans
receivable;
- $34 million for the purchase of short-term investments;
- $28 million for the additions to property and equipment;
- $25 million for the purchase of other long-term investments;
- $17 million in dividends paid; and
- $15 million for additions to intangible assets, primarily computer
software.
5.1.3 Working capital
Optimizing our working capital continues to be a long-term priority in order to maximize cash flow for use in the operations of the Company. The table below shows the change in the value of our working capital components at the end of the second quarter of 2010 from the second quarter of 2009.
Comparable working capital components
Increase/
(decrease)
July 3, July 4, working in
($ in millions) 2010 2009 capital
-------------------------------------------------------------------------
Short-term investments $ 156.5 $ 171.6 $ (15.1)
Accounts receivable 397.3 478.7 (81.4)
Merchandise inventories 934.6 991.2 (56.6)
Income taxes recoverable 76.3 111.5 (35.2)
Prepaid expenses and deposits 79.7 72.8 6.9
Accounts payable and other (1,134.1) (1,160.0) 25.9
-------------------------------------------------------------------------
$ (155.5)
-------------------------------------------------------------------------
Accounts receivable declined due to the prior year comparative number reflecting the impact of the extended payment terms offered under the Dealer incentive program at that time.
Inventories declined from the prior year due to promotional activity to reduce excess seasonal inventory and better management of stock levels.
5.1.4 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:
Financial Services' net managed portfolio of loans receivable
July 3, July 4,
($ in millions) 2010 2009
-------------------------------------------------------------------------
Securitized $ 1,631.3 $ 2,208.1
Non-securitized 2,313.3 1,788.5
-------------------------------------------------------------------------
Net managed loans receivable $ 3,944.6 $ 3,996.6
-------------------------------------------------------------------------
At the end of the second quarter of 2010, net managed loans receivable were relatively flat in comparison to the end of the second quarter of 2009 as loan growth during the period was offset by the sale of the mortgage receivable portfolio in Q4 2009.
For more information related to our loans receivable portfolio, see Note 3 in the Notes to the Consolidated Financial Statements as well as section 8.1.5 of the MD&A contained in our 2009 Financial Report.
6.0 Equity
The book value of Common and Class A Non-Voting Shares at the end of the second quarter of 2010 was $47.51 per share compared to $43.92 at the end of the second quarter of 2009.
For information related to the number of shares outstanding for the Class A Non-Voting Shares (CTC.A) and the Common Shares (CTC), see Note 3 in the Notes to the Consolidated Financial Statements.
For information related to our policy of repurchasing Class A Non-Voting Shares and our dividend policy, see section 9.0 of the MD&A contained in our 2009 Financial Report.
Dividends
Dividends declared on Common and Class A Non-Voting Shares in the second quarter of 2010 remained consistent with the second quarter of 2009 at $0.21 per share, reflecting the Board of Directors' decision in February 2010 to maintain the quarterly dividend rate at $0.21 per share.
The following chart summarizes our quarterly dividend distribution in 2010 payable to the shareholders as of the record date:
Amount
payable
Quarterly Date of per
dividend declaration Record date Date payable share
-------------------------------------------------------------------------
First Quarter March 11, 2010 April 30, 2010 June 1, 2010 $ 0.21
Second Quarter May 13, 2010 July 31, 2010 September 1, 2010 $ 0.21
-------------------------------------------------------------------------
7.0 Investing activities
7.1 Q2 2010 Capital expenditures
Canadian Tire's capital expenditures, on an accrual basis, totaled $51 million in the second quarter of 2010 (including intangible assets such as software acquisitions), approximately 6.0 per cent higher than the $48 million spent in the second quarter of 2009. These capital expenditures were comprised of:
- $25 million for real estate projects, including projects associated
with the rollout of CTR's new store formats;
- $ 8 million for other information technology initiatives;
- $ 4 million for Mark's new inventory management system ("R6");
- $ 4 million for Automotive Infrastructure (including IT elements);
- $ 4 million for CTR supply chain and distribution centres; and
- $ 6 million for other purposes.
7.2 2010 Capital expenditures plan
We continue to invest in our retail store network by converting older format stores to the new Smart and Small Market stores. In addition, we plan to invest in productivity and efficiency initiatives such as the Automotive Infrastructure program. Our 2010 capital plan is in the range of $280 million to $300 million and consists of:
- $161 million for real estate projects, including $122 million
associated with the rollout of CTR's new store formats;
- $63 million for information technology;
- $28 million for CTR distribution centres;
- $15 million for Automotive Infrastructure;
- $11 million for CTR change program; and
- up to $22 million for other purposes.
8.0 Foreign operations
The Company has established operations outside of Canada including offshore activities in Bermuda and the Pacific Rim. For an overview of our foreign operations, see section 11.0 of the MD&A contained in the 2009 Financial Report.
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 Company regularly reviews the potential for adverse outcomes in respect of tax matters. The Company believes that the ultimate disposition of any tax matters in dispute with tax authorities 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.
There have been no substantial changes in the status of ongoing audits by tax authorities as disclosed in Note 14 of the most recently issued annual financial statements for the 52 weeks ended January 2, 2010 contained in our 2009 Annual Report.
The Company implemented the new Harmonized Sales Tax (HST) change effective July 1. It is not expected to have a material impact on our overall business.
10.0 Off-balance sheet arrangements
10.1 Glacier Credit Card Trust
Glacier was formed to buy co-ownership interests in our credit card loans, and it issues debt to third-party investors to fund its purchases. Refer to sections 8.1.5 and 13.1 of the MD&A contained in our 2009 Financial Report for additional information on Glacier.
10.2 Trust financing for Dealers
A financing program is in place to provide an efficient and cost-effective way for Dealers to access the majority of the financing they require for their store operations. The agreement with the Trust and the participating banks for the Trust financing program for Dealers has been amended and extended until December 31, 2010.
Please see section 13.2 of the MD&A contained in our 2009 Financial Report for additional information on this program.
10.3 Bank financing for Dealers
We have guaranteed the bank debt of some Dealers. The total is approximately $39 million. Refer to MD&A section 13.3 of our 2009 Financial Report for additional information on this program.
11.0 Enterprise risk management
The Company approaches the management of risk strategically through its Enterprise Risk Management (ERM) framework in order to mitigate the impact of principal risks on its business and operations. The ERM framework sets out principles and tools for identifying, evaluating, prioritizing, monitoring and managing risk effectively and consistently across the Company.
The ERM framework and the principal risks that the Company manages on an ongoing basis are described in detail in sections 14.0 and 14.2, respectively, in the MD&A contained in our 2009 Financial Report.
Management reviews risks on an ongoing basis and did not identify any new principal risks during the second quarter of 2010.
12.0 Critical accounting estimates
The Company estimates certain amounts reflected in its financial statements 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, the accounting policies and estimates detailed in Note 1 of the Notes to the Consolidated Financial Statements for the year ended January 2, 2010 do not require us to make assumptions about matters that are highly uncertain and accordingly none of the estimates is considered a "critical accounting estimate" as defined in Form 51-102F1 published by the Ontario Securities Commission, except as noted below.
In view of the recent turmoil in credit markets and economic recession experienced in Canada, the Company reviewed the allowance for credit losses at Financial Services and considers it to be a "critical accounting estimate". The allowance for credit losses adjusts the value of the Financial Services loan portfolio to reflect its estimated realizable value. Financial Services' allowance for impaired loans receivable for each of credit card, personal and line of credit loans 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 receivables. A robust model is used and is based on economic conditions and trends specific to Financial Services. The allowance for impaired credit card loans (the largest portfolio) is comprised of general, bankruptcy and fraud risk components. Changes in circumstances including, but not limited to, changes in the aging of accounts and changes in the bankruptcies experienced may cause future assessments of credit risk to be materially different from current assessments, which could require an increase or decrease in the allowance for credit losses. The impairment provisions for personal loans and line of credit loans operate in similar fashion.
Further details on consumer credit risk may be found in section 5.3.4.8 (Financial Services' business risk) of the MD&A contained in our 2009 Financial Report.
13.0 Contractual obligations
The Company has a number of obligations related to long-term debt, capital lease obligations, operating leases, purchase obligations, Financial Services' deposits and other obligations. For a complete description of amounts outstanding for the year-ended January 2, 2010, see section 16.0 of the MD&A contained in our 2009 Financial Report.
At the end of the second quarter of 2010, there have been no material changes since the year-ended January 2, 2010.
14.0 Changes in accounting policies
The numbers reflected in this MD&A have been calculated using the same accounting policies and methods of their application as the most recently issued annual financial statements for the 52 weeks ended January 2, 2010 (contained in our 2009 Financial Report).
14.1 International Financial Reporting Standards (IFRS)
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 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.
For details of our conversion plan to IFRS as well as the expected impact of IFRS on the 2011 Consolidated Financial Statements, please see sections 17.9 and 17.10, respectively, of the MD&A contained in our 2009 Financial Report.
Progress made in Q2 2010 continues to track our enunciated plan and the key focus in Q3 will be the completion of the verification of our opening IFRS Balance Sheet and 2010 quarterly comparatives and ongoing training and systems changes.
We will also continue to actively monitor changes in the IFRS environment and adapt our implementation strategy accordingly.
14.2 Comparative Figures
Certain of the prior period's figures have been reclassified to correspond to the current year presentation, including debt issuance costs netted against long-term debt and bank overdrafts now included in current liabilities. As a result, total assets have been restated by $89.2 million at July 4, 2009 and $83.0 million at January 2, 2010, with a corresponding increase in total liabilities.
15.0 Non-GAAP measures
The following measures included in this MD&A do not have a standardized meaning under Canadian generally accepted accounting principles (GAAP) and may not be comparable to similar measures presented by other companies:
- EBITDA (earnings before interest, income taxes, depreciation and
amortization);
- adjusted earnings; and
- same store sales
EBITDA
With the exception of Financial Services, we consider EBITDA to be an effective measure of the contribution of each of our businesses to our profitability on an operational basis, before allocating the cost of income taxes and capital investments. EBITDA is also commonly regarded as an indirect measure of operating cash flow, a significant indicator of success for many businesses.
A reconciliation of EBITDA to the most comparable GAAP measure (earnings before income taxes) is provided as follows:
Reconciliation of EBITDA to GAAP measures(1)
($ in millions) Q2 2010 Q2 2009 2010 YTD 2009 YTD
-------------------------------------------------------------------------
EBITDA(2)
CTR $ 168.5 $ 163.1 $ 258.4 $ 259.9
Petroleum 12.0 12.1 21.7 22.5
Mark's 11.9 14.0 15.0 16.2
Financial Services 71.7 60.9 132.4 107.6
-------------------------------------------------------------------------
Total EBITDA $ 264.1 $ 250.1 $ 427.5 $ 406.2
-------------------------------------------------------------------------
Less: Depreciation and
amortization expense
CTR $ 47.3 $ 47.1 $ 93.6 $ 93.0
Petroleum 4.4 4.3 8.7 8.7
Mark's 7.9 6.6 15.6 13.1
Financial Services 1.5 3.1 2.9 5.6
-------------------------------------------------------------------------
Total depreciation and
amortization expense $ 61.1 $ 61.1 $ 120.8 $ 120.4
-------------------------------------------------------------------------
Interest expense(2)
CTR $ 14.0 $ 20.8 $ 30.7 $ 38.9
Mark's 0.2 0.3 0.3 0.9
Financial Services 15.2 15.5 30.4 27.2
-------------------------------------------------------------------------
Total interest expense $ 29.4 $ 36.6 $ 61.4 $ 67.0
-------------------------------------------------------------------------
Earnings (loss) before income
taxes
CTR $ 107.2 $ 95.2 $ 134.1 $ 128.0
Petroleum 7.6 7.8 13.0 13.8
Mark's 3.8 7.1 (0.9) 2.2
Financial Services 55.0 42.3 99.1 74.8
-------------------------------------------------------------------------
Total earnings before income
taxes $ 173.6 $ 152.4 $ 245.3 $ 218.8
-------------------------------------------------------------------------
(1) Differences may occur due to rounding.
(2) Eliminations of inter-company transactions (e.g. a loan of funds from
one business unit to another), previously disclosed as a separate
line item, are now presented net of these transactions.
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.
From time to time adjusted earnings may also contain additional unusual and/or non-recurring items which are explained in detail at that time.
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 CTR and PartSource 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. CTR's same store sales exclude the sales from the labour portion of CTR's auto service sales.
16.0 Controls and procedures
Changes in internal control over financial reporting
During the second quarter of 2010, there have been no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
17.0 Environmental sustainability
The Company continues to make business sustainability a focus of its corporate strategy.
In February, 2010, we published our first Community and Business Sustainability Report on our website at http://corp.canadiantire.ca/EN/CSR/Pages/default.aspx.
For a comprehensive overview of our business sustainability program, refer to section 20.0 of the MD&A contained in our 2009 Financial Report.
18.0 Community Activities - Jumpstart
Canadian Tire's charitable efforts are reflected in the work of Canadian Tire Jumpstart Charities. The Jumpstart organization, formerly the Canadian Tire Foundation for Families, underwent a name change in 2009 to reflect the success of the Jumpstart program, which helps financially disadvantaged children gain the life benefits that are associated with participating in organized sports and recreation activities. National in scope but local in focus, Canadian Tire Jumpstart has delivered support since 2005 to children through a Canada-wide network of local chapters. To date, 301 Jumpstart chapters have been created in communities across the country and have contributed to help over 250,000 children.
During the first six months of 2010, Jumpstart has raised over $3.9 million across Canada ($5.4 million during the first six months of 2009), helping over 37,000 children participate in sports and recreation programs (25,408 children helped during 2009). Jumpstart continues to grow and help more children. In 2010, Jumpstart Charities has a target to help over 95,000 children by covering registration, equipment and transportation costs for sport and recreation activities.
19.0 Other Investor Communication
Caution regarding forward-looking information
This document contains forward-looking information that reflects management's current expectations related to matters such as future financial performance and operating results of the Company. Specific forward-looking statements included or incorporated by reference in this document include, but are not limited to, statements with respect to:
- financial aspirations listed in section 2.2
- the Company's Strategic Plan objectives for 2010, listed throughout
section 3.3 (Business segment performance); and
- capital expenditures plan listed in section 7.2.
In addition, long-term financial metrics and aspirations have not been adjusted for IFRS.
Forward-looking statements are provided for the purposes of providing information about management's current expectations and plans and allowing investors and others to get a better understanding of our financial position, results of operations and operating environment. Readers are cautioned that such information may not be appropriate for other circumstances.
All statements other than statements of historical facts included in this document may constitute forward-looking information, including but not limited to, statements concerning management's expectations relating to possible or assumed future prospects and results, our strategic goals and priorities, our actions and the results of those actions and the economic and business outlook for us. 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.
By its very nature, forward-looking information requires us to make assumptions and is subject to inherent risks and uncertainties, which give rise to the possibility that the Company's assumptions may not be correct and that the Company's expectations and plans will not be achieved. Although the Company believes that the forward-looking information in this document is 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 expectations and plans as set forth in such forward-looking information for a variety of reasons. Some of the factors - many of which are beyond our control and the effects of which can be difficult to predict - include (a) credit, market, currency, operational, liquidity and funding risks, including changes in economic conditions, 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, as well as our financial arrangements with such parties; (c) the growth of certain business categories and market segments and the willingness of customers to shop at our stores or acquire our financial products and services; (d) our margins and sales and those of our competitors; (e) risks and uncertainties relating to information management, technology, supply chain, product safety, changes in law, competition, seasonality, commodity price and business disruption, our relationships with suppliers and manufacturers, changes to existing accounting pronouncements, the risk of damage to the reputation of brands promoted by Canadian Tire and the cost of store network expansion and retrofits and (f) our capital structure, funding strategy, cost management programs and share price. We caution that the foregoing list of important factors and assumptions is not exhaustive and other factors could also adversely affect our results. Investors and other readers are urged to consider the foregoing risks, uncertainties, factors and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such forward-looking information.
For more information on the risks, uncertainties and assumptions that could cause the Company's actual results to differ from current expectations, please refer to sections 3.3.1.3 (CTR's business risks), 3.3.2.3 (Petroleum's business risks), 3.3.3.3 (Mark's business risks), 3.3.4.3 (Financial Services' business risks) and 11.0 (Enterprise risk management) and all subsections there under of this MD&A. Please also refer to the "Risk Factors" section of our Annual Information Form for fiscal 2009 and our 2009 Management's Discussion and Analysis, as well as Canadian Tire's other public filings, available at www.sedar.com and at www.corp.canadiantire.ca.
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 statements and information contained herein are based on certain factors and assumptions as of the date hereof. 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.
Information contained in or otherwise accessible through the websites referenced in this MD&A does not form part of this MD&A and all references in this MD&A to websites are inactive textual references and are for your information only.
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. Reflecting our commitment to full and transparent disclosure, the Investor Relations section of the Company's website (corp.canadiantire.ca/en/investors)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) website at www.sedar.com.
If you would like to contact the Investor Relations department directly, call Karen Meagher at (416) 480-8058 or email [email protected].
Consolidated Statements of Earnings (Unaudited)
-------------------------------------------------------------------------
(Dollars in millions 13 weeks ended, 26 weeks ended,
except per July 3, July 4, July 3, July 4,
share amounts) 2010 2009 2010 2009
-------------------------------------------------------------------------
Gross operating
revenue $ 2,414.1 $ 2,324.8 $ 4,244.2 $ 4,082.9
-------------------------------------------------------------------------
Operating expenses
Cost of merchandise
sold and all other
operating expenses
except for the
undernoted items
(Note 7) 2,139.7 2,065.9 3,801.9 3,663.7
Net interest expense
(Note 5) 29.4 36.6 61.4 67.0
Depreciation and
amortization 61.1 61.1 120.8 120.4
Employee Profit
Sharing Plan 10.3 8.8 14.8 13.0
-------------------------------------------------------------------------
Total operating
expenses 2,240.5 2,172.4 3,998.9 3,864.1
Earnings before
income taxes 173.6 152.4 245.3 218.8
Income taxes
Current 53.7 48.7 76.0 56.1
Future - - - 9.3
-------------------------------------------------------------------------
Income taxes 53.7 48.7 76.0 65.4
-------------------------------------------------------------------------
Net earnings $ 119.9 $ 103.7 $ 169.3 $ 153.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted
earnings per share $ 1.47 $ 1.27 $ 2.07 $ 1.88
-------------------------------------------------------------------------
Weighted average
number of Common
and Class A Non-
Voting Shares
outstanding 81,618,011 81,685,799 81,618,280 81,658,284
-------------------------------------------------------------------------
Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------------------------------------------
13 weeks ended, 26 weeks ended,
July 3, July 4, July 3, July 4,
(Dollars in millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
Cash generated
from (used for):
Operating activities
Net earnings $ 119.9 $ 103.7 $ 169.3 $ 153.4
Items not
affecting cash
Depreciation 48.3 47.8 95.8 94.5
Net provision for
loans receivable
(Note 2) 41.0 35.1 88.3 73.4
Amortization of
intangible assets 12.8 13.3 25.0 25.9
Employee future
benefits expense 1.6 1.5 3.2 3.0
Impairments on
property and
equipment 0.2 0.1 1.5 0.8
Future income
taxes - - - 9.3
Other (0.1) (7.6) (0.3) 1.0
Changes in fair
value of
derivative
instruments (2.4) (4.4) (0.4) (4.4)
(Recovery)
impairment loss
of other long-term
investments - - (0.6) 0.5
(Gain) Loss on
disposals of
property and
equipment (2.8) 0.7 (2.3) 0.6
Gain on sales of
loans receivable
(Note 2) (8.8) (9.8) (15.8) (23.1)
Securitization loans
receivable (7.9) (10.3) (16.0) (21.1)
-------------------------------------------------------------------------
201.8 170.1 347.7 313.8
-------------------------------------------------------------------------
Changes in other working
capital components 287.1 299.4 243.7 (193.3)
-------------------------------------------------------------------------
Cash generated from
operating activities 488.9 469.5 591.4 120.5
-------------------------------------------------------------------------
Investing activities
Additions to
property and
equipment (Note 8) (27.8) (42.5) (87.7) (118.6)
Short-term
investments (34.0) (171.6) (76.6) (171.6)
Net securitization
of loans receivable (63.0) 1.2 (60.4) 1.5
Additions to
intangible assets
(Note 8) (14.9) (18.3) (26.3) (37.6)
Other long-term
investments (24.5) (0.3) (24.4) (50.4)
Investment in loans
receivable, net (91.2) (145.5) (20.6) (7.7)
Long-term receivables
and other assets (1.8) 5.6 (2.8) (2.7)
Other (1.5) (0.8) (2.3) (1.7)
Purchases of stores - (2.1) (0.2) (2.7)
Proceeds on
disposition of
property and
equipment 4.1 2.5 4.1 3.2
-------------------------------------------------------------------------
Cash used for investing
activities (254.6) (371.8) (297.2) (388.3)
-------------------------------------------------------------------------
Financing activities
Class A Non-Voting
Share transactions 0.1 2.4 0.3 2.5
Issuance of long-term
debt - 200.0 - 200.1
Repayment of long-term
debt (2.1) (1.9) (5.0) (7.1)
Dividends (17.2) (17.3) (34.3) (34.4)
Net change in
deposits (9.5) 627.5 (90.2) 1,023.7
Commercial paper - (81.9) - -
-------------------------------------------------------------------------
Cash (used for) generated
from financing activities (28.7) 728.8 (129.2) 1,184.8
-------------------------------------------------------------------------
Cash generated in
the period 205.6 826.5 165.0 917.0
Cash and cash
equivalents, net of
bank indebtedness,
beginning of period 745.4 519.5 786.0 429.0
-------------------------------------------------------------------------
Cash and cash
equivalents, net of
bank indebtedness,
end of period $ 951.0 $ 1,346.0 $ 951.0 $ 1,346.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income (Unaudited)
-------------------------------------------------------------------------
13 weeks ended, 26 weeks ended,
July 3, July 4, July 3, July 4,
(Dollars in millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
Net earnings $ 119.9 $ 103.7 $ 169.3 $ 153.4
Other comprehensive
income (loss),
net of taxes
Gain (loss) on
derivatives
designated as cash
flow hedges, net of
tax of $17.0 and
$5.4 (2009 - $12.5
and $5.1),
respectively 38.9 (33.5) 13.3 (18.0)
Reclassification to
non-financial asset
of loss (gain) on
derivatives
designated as cash
flow hedges, net of
tax of $8.0 and
$16.8 (2009 - $15.7
and $41.0),
respectively 17.7 (25.7) 37.8 (79.1)
Reclassification to
earnings of loss
(gain) on derivatives
designated as cash
flow hedges, net of
tax of $0.6 and $1.2
(2009 - $0.6 and $0.7),
respectively 1.4 (1.3) 2.8 (1.3)
-------------------------------------------------------------------------
Other comprehensive
income (loss) 58.0 (60.5) 53.9 (98.4)
-------------------------------------------------------------------------
Comprehensive income $ 177.9 $ 43.2 $ 223.2 $ 55.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
26 weeks ended,
July 3, July 4,
(Dollars in millions) 2010 2009
-------------------------------------------------------------------------
Share capital
Balance, beginning of period $ 720.4 $ 715.4
Transactions, net (Note 3) 0.3 8.5
-------------------------------------------------------------------------
Balance, end of period $ 720.7 $ 723.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contributed surplus
Balance, beginning of period $ 0.2 $ -
Transactions, net - -
-------------------------------------------------------------------------
Balance, end of period $ 0.2 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings
Balance, beginning of period $ 3,013.7 $ 2,752.4
Transitional adjustment on adoption of new
accounting policies - EIC 173 - 1.1
Net earnings for the period 169.3 153.4
Dividends (34.3) (34.4)
Repurchase of Class A Non-Voting Shares - (6.0)
-------------------------------------------------------------------------
Balance, end of period $ 3,148.7 $ 2,866.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Balance, beginning of period $ (46.4) $ 97.2
Transitional adjustment on adoption of new
accounting policies - EIC 173 - (2.5)
Other comprehensive income (loss) for the
period 53.9 (98.4)
-------------------------------------------------------------------------
Balance, end of period $ 7.5 $ (3.7)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings and accumulated other
comprehensive income (loss) $ 3,156.2 $ 2,862.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Balance Sheets (Unaudited)
-------------------------------------------------------------------------
(Dollars in millions) July 3, July 4, January 2,
As at 2010 2009 2010
-------------------------------------------------------------------------
(Restated - (Restated -
Note 11) Note 11)
ASSETS
Current assets
Cash and cash
equivalents $ 1,049.7 $ 1,435.9 $ 869.7
Short-term investments 156.5 171.6 64.0
Accounts receivable 397.3 478.7 835.9
Loans receivable (Note 2) 2,306.0 1,688.0 2,274.8
Merchandise inventories 934.6 991.2 933.6
Income taxes recoverable 76.3 111.5 94.7
Prepaid expenses and deposits 79.7 72.8 40.7
Future income taxes 59.4 58.9 82.8
Total current assets 5,059.5 5,008.6 5,196.2
Long-term receivables and other
assets 107.8 210.9 109.9
Other long-term investments, net 57.9 75.1 48.8
Goodwill 71.9 71.3 71.8
Intangible assets 268.5 262.7 265.4
Property and equipment, net 3,159.0 3,190.4 3,180.4
-------------------------------------------------------------------------
Total assets $ 8,724.6 $ 8,819.0 $ 8,872.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Bank indebtedness $ 98.7 $ 89.9 $ 83.7
Deposits 703.5 979.7 863.4
Accounts payable and other 1,134.1 1,160.0 1,391.4
Current portion of long-term
debt 305.9 159.5 309.3
-------------------------------------------------------------------------
Total current liabilities 2,242.2 2,389.1 2,647.8
-------------------------------------------------------------------------
Long-term debt 1,098.6 1,422.2 1,101.2
Future income taxes 49.8 45.2 49.8
Long-term deposits 1,268.2 1,185.3 1,196.9
Other long-term liabilities 188.7 190.5 188.9
-------------------------------------------------------------------------
Total liabilities 4,847.5 5,232.3 5,184.6
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 3) 720.7 723.9 720.4
Contributed surplus 0.2 - 0.2
Accumulated other comprehensive
income (loss) 7.5 (3.7) (46.4)
Retained earnings 3,148.7 2,866.5 3,013.7
-------------------------------------------------------------------------
Total shareholders' equity 3,877.1 3,586.7 3,687.9
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 8,724.6 $ 8,819.0 $ 8,872.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 follow the same accounting policies and methods
of their application as the most recently issued annual financial
statements for the 52 weeks ended January 2, 2010. 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 52 weeks ended January 2,
2010 contained in our 2009 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.
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.
2. 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.
For additional information on Loans Receivable, see Note 1 of the
most recently issued annual financial statements for the 52 weeks
ended January 2, 2010 contained in our 2009 Annual Report.
Quantitative information about loans managed and securitized by the
Company is as follows:
Total principal amount
($ in millions) of receivables as at(1)
--------------------------------------
July 3, June 4, January 2,
2010 2009 2010
------------ ------------ ------------
Total net managed credit card
loans $ 3,912.2 $ 3,756.8 $ 3,932.8
Credit card loans sold (1,631.3) (2,208.1) (1,693.4)
------------ ------------ ------------
Credit card loans held 2,280.9 1,548.7 2,239.4
Total net personal loans(2) 19.6 54.8 34.0
------------ ------------ ------------
Total net mortgage loans(3) - 167.1 -
------------ ------------ ------------
Total net line of credit loans 12.8 17.9 15.6
------------ ------------ ------------
Total loans receivable 2,313.3 1,788.5 2,289.0
Less: long-term portion(4) (7.3) (100.5) (14.2)
------------ ------------ ------------
Current portion of loans
receivable $ 2,306.0 $ 1,688.0 $ 2,274.8
------------ ------------ ------------
------------ ------------ ------------
Average balances
($ in millions) for the 26 weeks ended
-------------------------
July 3, June 4,
2010 2009
------------ ------------
Total net managed credit card
loans $ 3,873.6 $ 3,675.8
Credit card loans sold (1,670.6) (2,213.7)
------------ ------------
Credit card loans held 2,203.0 1,462.1
Total net personal loans(2) 26.1 68.5
------------ ------------
Total net mortgage loans(3) - 157.7
------------ ------------
Total net line of credit loans 14.1 19.3
------------ ------------
Total loans receivable $ 2,243.2 $ 1,707.6
------------ ------------
------------ ------------
(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. The Company
sold its mortgage portfolio in 2009.
(4) The long-term portion of loans is included in long-term
receivables and other assets.
Provision for net credit losses for the owned portfolio for the
13 weeks and 26 weeks ended July 3, 2010 were $41.0 million (2009
- $35.1 million) and $88.3 million (2009 - $73.4 million),
respectively. Provision for net credit losses for the total
managed portfolio for the 13 weeks and 26 weeks ended July 3,
2010 were $71.5 million (2009 - $82.4 million) and $151.0 million
(2009 - $161.6 million), respectively. Provision for net credit
losses consist of total write-offs (including regular and
bankruptcy write-offs and consumer proposals), net of recoveries
and any changes in allowances.
3. Share Capital
($ in millions) July 3, July 4, January 2,
2010 2009 2010
------------ ------------ ------------
Authorized
3,423,366 Common Shares
100,000,000 Class A Non-Voting
Shares
Issued
3,423,366 Common Shares
(July 4, 2009 - 3,423,366) $ 0.2 $ 0.2 $ 0.2
78,178,095 Class A Non-Voting
Shares (July 4, 2009 -
78,238,348)
$ 720.5 723.7 720.2
------------ ------------ ------------
$ 720.7 $ 723.9 $ 720.4
------------ ------------ ------------
------------ ------------ ------------
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 shares:
26 weeks ended 26 weeks ended
($ in millions) July 3, 2010 July 4, 2009
------------------------- -------------------------
Number $ Number $
------------ ------------ ------------ ------------
Class A Non-Voting
Shares
Shares outstanding
at the beginning
of the period 78,178,066 720.2 78,178,066 715.2
Issued 268,529 14.8 500,482 23.1
Repurchased (268,500) (14.5) (440,200) (20.6)
Excess of
repurchase
price over
issue price - (0.0) - 6.0
------------ ------------ ------------ ------------
Shares outstanding
at the end of the
period 78,178,095 720.5 78,238,348 723.7
------------ ------------ ------------ ------------
Common Shares
Shares outstanding
at the beginning
and end of the
period 3,423,366 0.2 3,423,366 0.2
------------ ------------ ------------ ------------
4. Stock-based Compensation Plans
All stock-based compensation plans are as disclosed in the most
recently issued annual financial statements for the 52 weeks ended
January 2, 2010 except as follows:
2010 Performance Share Unit Plan
The Company has granted 2010 Performance Share Units (2010 PSUs) to
certain employees. Each 2010 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 commencing the day after the last day
of the performance period, multiplied by an applicable multiplier
determined by specific performance-based criteria. Compensation
expense related to 2010 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 26 weeks ended July 3,
2010, $1.3 million and $1.6 million of compensation expense was
recorded for the 2010 PSUs, respectively.
5. Segmented Information - Statement of Earnings
---------------------------------------------------------------------
13 weeks 13 weeks 26 weeks 26 weeks
ended ended ended ended
July 3, July 4, July 3, July 4,
2010 2009 2010 2009
($ in millions)
---------------------------------------------------------------------
Gross operating
revenue
CTR $ 1,597.2 $ 1,550.0 $ 2,689.4 $ 2,649.3
Petroleum 413.9 390.8 800.8 712.7
Mark's 195.4 182.2 349.2 329.3
Financial Services 237.9 232.9 463.3 450.2
Eliminations (30.3) (31.1) (58.5) (58.6)
---------------------------------------------------------------------
Total gross
operating revenue $ 2,414.1 $ 2,324.8 $ 4,244.2 $ 4,082.9
---------------------------------------------------------------------
Earnings (loss)
before income taxes
CTR $ 107.2 $ 95.2 $ 134.1 $ 128.0
Petroleum 7.6 7.8 13.0 13.8
Mark's 3.8 7.1 (0.9) 2.2
Financial Services 55.0 42.3 99.1 74.8
---------------------------------------------------------------------
Total earnings before
income taxes 173.6 152.4 245.3 218.8
Income taxes 53.7 48.7 76.0 65.4
---------------------------------------------------------------------
Net earnings $ 119.9 $ 103.7 $ 169.3 $ 153.4
---------------------------------------------------------------------
Net Interest
expense(1)
CTR $ 14.0 $ 20.8 $ 30.7 $ 38.9
Mark's 0.2 0.3 0.3 0.9
Financial Services 15.2 15.5 30.4 27.2
---------------------------------------------------------------------
Total interest
expense $ 29.4 $ 36.6 $ 61.4 $ 67.0
---------------------------------------------------------------------
Depreciation and
amortization
expense
CTR $ 47.3 $ 47.1 $ 93.6 $ 93.0
Petroleum 4.4 4.3 8.7 8.7
Mark's 7.9 6.6 15.6 13.1
Financial Services 1.5 3.1 2.9 5.6
---------------------------------------------------------------------
Total depreciation
and amortization
expense $ 61.1 $ 61.1 $ 120.8 $ 120.4
---------------------------------------------------------------------
(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 26 weeks ended July 3, 2010 was $27.0 million
(2009 - $31.1 million) and $55.5 million (2009 - $58.5 million),
respectively.
Segmented Information - Total Assets
---------------------------------------------------------------------
July 4, January 2,
2009 2010
July 3, (Restated - (Restated -
($ in millions) 2010 Note 11) Note 11)
---------------------------------------------------------------------
CTR $ 6,236.9 $ 6,137.7 $ 5,888.3
Petroleum 291.0 274.8 279.7
Mark's 503.5 520.1 498.7
Financial Services 3,559.9 3,631.8 3,319.0
Eliminations (1,866.7) (1,745.4) (1,113.2)
---------------------------------------------------------------------
Total $ 8,724.6 $ 8,819.0 $ 8,872.5
---------------------------------------------------------------------
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6. Capital Management
The Company's objectives when managing capital and the definition of
capital are the same as described in Note18 of the most recently
issued annual financial statements for the 52 weeks ended January 2,
2010 contained in our 2009 Annual Report.
The Company is in compliance with key covenants under its existing
debt agreements during the quarter. Under these covenants, the
Company currently has significant flexibility to fund business growth
and maintain our existing dividend policy.
The Company is in compliance with regulatory requirements associated
with the operations of Canadian Tire Bank (the Bank), its federally
chartered bank, and other regulatory requirements that impact its
business operations.
The Bank's ratios are above internal minimum targets for Tier 1 and
Total capital ratios and below its internal maximum targets for the
assets to capital multiple. OSFI's minimum Tier 1 and Total capital
ratios for Canadian banks are 7 per cent and 10 per cent,
respectively. During the 6 months ended July 3, 2010 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).
7. Merchandise Inventory
Included in "cost of merchandise sold and all other operating
expenses except for the undernoted items" for the 13 weeks and 26
weeks ended July 3, 2010 is $1,648.5 million (2009 - $1,573.8
million) and $2,845.5 million (2009 - $2,711.5 million),
respectively, of inventory recognized as an expense, which included
$11.0 million (2009 - $11.8 million) and $25.0 million (2009 - $25.4
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.
8. Supplementary Cash Flow Information
The Company paid income taxes during the 13 weeks ended July 3, 2010
of $32.2 million (2009 - $52.1 million) and made interest payments of
$27.6 million (2009 - $26.2 million). For the 26 weeks ended July 3,
2010, the Company paid income taxes of $59.3 million (2009 - $104.2
million) and made interest payments of $58.8 million (2009 - $82.4
million).
During the 13 weeks and 26 weeks ended July 3, 2010, property and
equipment were acquired at an aggregate cost of $34.0 million (2009 -
$30.2 million) and $74.6 million (2009 - $89.7 million),
respectively. The amount of property and equipment acquired that is
included in accounts payable and other at July 3, 2010 was $11.2
million (2009 - $9.9 million).
During the 13 weeks and 26 weeks ended July 3, 2010, intangible
software was acquired at an aggregate cost of $16.8 million (2009 -
$18.1 million) and $27.5 million (2009 - $38.0 million),
respectively. The amount of intangible software acquired that is
included in accounts payable and other at July 3, 2010 was $3.8
million (2009 - $0.5 million).
9. 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.
There have been no material changes in any legal matters disclosed in
Note 21 of the most recently issued annual financial statements for
the 52 weeks ended January 2, 2010 contained in our 2009 Annual
Report.
10. 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.
There have been no material changes in ongoing audits by tax
authorities as disclosed in Note 14 of the most recently issued
annual financial statements for the 52 weeks ended January 2, 2010
contained in our 2009 Annual Report.
The Company regularly reviews the potential for adverse outcomes in
respect of tax matters. The Company believes that the ultimate
disposition of any tax matters in dispute with tax authorities 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.
11. Comparative Figures
Certain of the prior period's figures have been reclassified to
correspond to the current year presentation. Debt issuance costs
previously included in long-term receivables and other assets is
presented with long-term debt. Bank overdrafts previously included in
cash and cash equivalents is now presented as current liabilities. As
a result, total assets have been restated by $89.2 million at July 4,
2009 and $83.0 million at January 2, 2010, with a corresponding
increase in total liabilities.
Interest Coverage Exhibit to the Consolidated Financial Statements
(unaudited)
-------------------------------------------------------------------------
The Company's long-term interest requirements for the 52 weeks ended
July 3, 2010, after annualizing interest on long-term debt issued and
retired during this period, amounted to $113.3 million. The Company's
earnings before interest on long-term debt and income taxes for the
52 weeks ended July 3, 2010 were $632.6 million, which is 5.6 times
the Company's long-term interest requirements for this period.
For further information: Media: Amy Cole, 416-544-7655, (m) 416-997-9825, [email protected]; Investors: Karen Meagher, 416-480-8058 [email protected]
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