Canadian Tire Corp., Ltd. reported comparable-store sales at its SportChek segment climbed 11.2 percent in the third quarter and 7 percent compared to 2019, boosted by the return of hockey and organized sports.
Gregory Craig, EVP and CFO, told analysts on a call that the gains were fueled by athletic footwear, athletic clothing as well as hockey. He said, “We also saw a strong comeback in our back-to-school categories, which grew 20 percent in the quarter.”
SportChek’s comp gain of 11.2 percent in the third quarter builds on gains of 28.6 percent in the second quarter and 18.7 percent in the 2021 first quarter. In 2020, comps were down 3 percent in the fourth quarter and 1.4 percent in the third quarter after overall sales dropped 24.9 percent in the 2020 second quarter.
At the SportChek segment, total sales, including the contribution from franchises, were Canadian $560.6 million against C$533 million a year ago, representing a gain of 5.2 percent. The segment includes SportChek, Hockey Experts, Pro Hockey Life, Sports Experts, National Sports, Intersport, and Atmosphere.
Helly Hansen, which Canadian Tire acquired in 2018, achieved revenue of C$157.6 million in the period, up 1.5 percent, or 3 percent on a constant-currency basis. Craig said Helly Hansen was supported by strong growth from Continental Europe and the U.S. From a category perspective, workwear and direct-to-consumer had the largest increases for Helly Hansen, up 21 percent and 17 percent, respectively.
Companywide, Retail segment revenue was C$3.61 billion, a decline of 2.1 percent. Excluding Petroleum, Retail segment revenue decreased 6.2 percent, due to a decline in shipments to dealers at Canadian Tire. Retail revenue was up 9.4 percent compared to 2019 and excluding Petroleum, up 11.1 percent. Consolidated comparable sales were up 3.3 percent vs 2020 and up 21 percent vs 2019
Canadian Tire, its flagship chain, delivered retail sales in the quarter that were relatively flat to last year, down 0.6 percent, and comparable sales were up 1.4 percent. Canadian Tire revenue is up 14.1 percent compared to 2019.
At Mark’s, its workwear chain, comparable sales were up 7.9 percent vs last year, with strong growth in men’s casual wear, footwear, and industrial apparel.
Diluted EPS was C$3.97 in the quarter, down C$0.87 per share, or 18 percent, compared to the prior year; normalized diluted EPS in the quarter was C$4.20, a decrease of C$0.73 per share or 14.8 percent
On the conference call, Greg Hicks, president and CEO, said the revenue decline was expected, led by lower shipments to dealers after significant revenue increases in both Q1 and Q2. E-commerce penetration of 6.5 percent was down in the quarter, with more visits to brick and mortar stores, but double 2019 levels.
Gross Margins Improve 155 Basis Points
Retail gross margin rate, excluding petroleum, was up 155 basis points compared to the prior year, driven by increases across retail banners. The rate improvement at the Canadian Tire chain was attributable to a favorable pricing mix despite freight cost headwinds building in the quarter. Margin rates at Mark’s and SportChek benefited from higher sales contributions from brick and mortar channels and lower promotional activity in the quarter.
Normalized consolidated operating expense ratio as a percentage of revenue came in at 24.6 percent, down 367 basis points compared to 2020. The decrease in revenue in the quarter as well as an increase in year-over-year operating expense contributed to the decline in the operating expense ratio.
The operating expense increase reflected a mark-to-market loss on equity hedges related to share-based compensation that resulted from a drop in Candian Tire’s share price in the quarter as well as higher marketing and supply chain costs.
Hicks elaborated on the progress the company is making on customer engagement and supply chain capabilities.
The heightened customer engagement comes from the success of its Triangle awards program that now has 10.7 million active members, adding 1.7 million new members year-to-date. The gains put the company on track to exceed the 1.8 million members joining in 2020. Said Hicks, “In looking at our 2020 and 2021 cohorts, it’s clear that our Triangle program is attracting younger, more digitally engaged customers.”
Supply Chain Mitigation
On the supply chain, Hicks noted that in contrast to last year’s supply chain challenges related to manufacturing supply, the challenges this quarter were primarily related to ocean freight capacity.
He outlined how Canadian Tire’s supply chain capabilities are enabling the company to navigate challenges, including higher commodity prices, factory shutdowns, port closures and shipping container shortages.
“I’ll start with the fact that we’re the country’s largest retailer of general merchandise and apparel. And while we’re very focused on inventory turns, the fact that we are neither a grocer nor a fast-fashion retailer means that in times like these, we can be very flexible when it comes to holding inventory from quarter to quarter with a significantly lower risk of aging.”
He said the non-perishable nature of its products provides flexibility around lead times and commercial terms and as the owner of significant distribution and storage capacity through its store network, corporate-owned real estate and the REIT, Canadian Tire has “can easily hold excess inventory in Canada.”
In addition, Hicks said more than one-third of its revenue comes from its “Owned Brands,” or private labels, and its direct line to the producers of products such as NOMA Christmas sites, Mastercraft tools and Denver Hayes apparel “means we are in control of when and where goods are produced.”
Hicks said, “We also have a line of sight into the shipping from factories and a clear understanding where input shortages may require longer lead times, where cost inflation might lead to higher product costs or in cases of longer-term shortages or inflation, of product redesign. And as one of the largest distributors for national brand products, such as Nespresso and Nike, we are quite confident that among Canadian retailers, we are getting our fair share of the products that we expect to be in high demand this holiday season.”
With respect to the inflationary pressures, he said Canadian Tire has been able to offset most of these headwinds in the quarter. He said, “We have generated gross margin rate expansion by leveraging data and analytics capabilities related to promo and price management.”
He particularly called out SportChek and Mark’s ability to preserve margins amid the cost pressures. Hicks said, “The merchant teams in these two businesses are focused on increasing sell-through at regular prices, and we are seeing great progress towards this objective. Looking ahead, we will continue to pull the multiple levers at our disposal to mitigate gross margin and cost pressures, although we recognize these pressures are not insignificant.”
On capital allocation plans, Canadian Tire announced a 10.6 percent increase in the annual dividend, which marks its 12th consecutive dividend increase. The company also restarted its share repurchase program after having paused it during the pandemic with a commitment to repurchase up to C$400 million in share buybacks by the end of 2022.
Looking ahead, Hicks said quarter-to-date, “healthy demand signals” are continuing to be seen across its businesses. Hicks said, “We’ll continue to prioritize our supply chain and maximize the value of investments made in both Triangle and digital.”
Photo courtesy SportChek
