Putting Rubber to the Road

03/29/2013 9:45 am EST


Patrick McKeough

Editor, Successful Investor

This company familiar to every Canadian has seen a rebound in sales and earnings, and its financial division is booming, writes Pat McKeough of TSI Network.

Canadian Tire (Toronto: CTC.A) operates 490 eponymous stores, which specialize in automotive, household, and sporting goods.

The company owns these stores, but franchisees operate most of them. Canadian Tire also operates 299 gas stations and 87 PartSource auto parts stores.
In the past few years, the company has diversified its product lines by purchasing retailers with specialized products. These include Mark’s, which sells casual clothing though 386 stores, and Forzani Group, which sells sporting goods through 495 outlets, mainly under the SportChek banner. As well, Canadian Tire will soon complete its $85 million purchase of Pro Hockey Life, which sells hockey equipment through 23 stores.
The recession and low gasoline prices cut Canadian Tire’s sales by 4.8%, from $9.1 billion in 2008 to $8.7 billion in 2009. However, sales quickly turned around and rose 31.6% to $11.4 billion in 2012.
Due to the lower sales, earnings fell 10.9%, from $4.60 a share (or a total of $375.4 million) in 2008 to $4.10 a share (or $335 million) in 2009. Earnings rebounded with sales and jumped 48.8%, to $6.10 a share (or $499.2 million) in 2012.
Besides acquisitions, Canadian Tire continues to upgrade its older stores. These improvements make it easier for store managers to move faster-selling seasonal merchandise to high-traffic areas of the store. Other upgrades, such as better signage, wider aisles, and brighter lighting, have also attracted more customers.

Another area of growth is the company’s financial services division, which issues credit cards, offers no-fee savings accounts, and sells insurance. This division supplied just 9% of Canadian Tire’s overall revenue in 2012, but accounted for a high 41% of its pre-tax earnings.
This business continues to benefit as more shoppers use credit cards to pay for their purchases. As well, more cardholders are paying their bills on time: Canadian Tire wrote off 6.58% of its credit card receivables in the fourth quarter of 2012, down from 7.32% a year earlier.
The stock trades at 10.4 times the $6.76 a share that Canadian Tire will probably earn in 2013. The $1.40 dividend yields 2%.

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