Plotting Canadian Tires growth for the next five years

Sri Venkataramani December 15th, 2013

Executive Summary
Background: The Canadian Tire Group of Companies runs over 1,700 retail stores in automotive, home services & sports categories. Its strength comes from its core retail operations, excellent support services and continued product & store innovation. The total shareholder return over the past 10 years is a CAGR of 9.2%.

Complication: As the company grows through acquisition, it has stretched itself too thin with over a dozen brands and the revenues from its heritage brands have started to stagnate.
Question: How can Canadian Tire maintain a growth rate of 3% while keeping its margins above 10% over the next five years?

Recommendation: In order to do so, Canadian Tire has to:

Consolidate retail segment by products. Improve online sales through better relationships with delivery networks. Expand financial services & loyalty programs to all businesses.

BACKGROUND

BACKGROUND

Canadian Tire is the largest retailer in Canada

Founded in 1922, Canadian Tire has retail operations in automotive, home services, daily apparel, sports equipment, gas & financial services with a total of 12 brands in these categories. It runs 1,700 retail stores throughout Canada including 272 gas stations and 73 car washes which are a mix of company owned stores and dealer franchises. The companys growth has been through a mix of organic growth and through acquisitions, namely Marks in 2001 and Forzani Group Limited in 2012.
Canadian Retailer Revenue ($mm)
14000

12000

Canadian Tire

10000

8000 Home Depot Canada 6000 Rona 4000 Sears Canada

2000

HBC Canada

0 FY 2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013

Canadian Tires revenues & profits have consistently grown over the past six years
Canadian Tire Revenues (CAD $mm)
11,427

BACKGROUND

Canadian Tire EBIT (CAD $mm)

803

762

10,387

723

9,121

9,213

674 666

8,606 8,269

8,687 634

626

FY 2006

FY 2007

FY 2008

FY 2009

FY 2010

FY 2011

FY 2012

FY 2006

FY 2007

FY 2008

FY 2009

FY 2010

FY 2011

FY 2012

Canadian Tires stock has returned 9.24% CAGR over the past 10 years compared to 5% for the TSX

BACKGROUND

SOURCES OF CANADIAN TIRES LTSCDA

Canadian Tires LTSCDA comes from its core retail operations, support services and innovative culture

LTSCDA

Strong core retail operations through a good product mix, dealer network and strong brand recognition Excellent support services to the retail operations through financial services, real estate management and the use of traditional and online media
The company has an innovative culture and has pursued an aggressive expansion strategy

LTSCDA 1: Strong Core Retail Operations

Canadian Tire has a diverse retail mix through automotive, home services and apparel

LTSCDA

Canadian Tire sells products for everyday needs of Canadians such as home organization, pet care, kitchen and outdoor needs Marks is the largest retailer of mens apparel footwear in Canada FGL Sports is the largest sports retailer in Canada and owns retail banners including Sport Chek, Sports Experts, Atmosphere and National Sports

LTSCDA 1: Strong Core Retail Operations

Canadian Tire stores are a mix of dealer franchised and company owned stores

LTSCDA

Franchisees understand their local community better and so are able to tailor the products that are carried in store The franchise model allows Canadian Tire to have a national strategy while executing locally through the dealers The real estate team scouts and selects store locations where the dealer runs the day-to-day operations.

LTSCDA 1: Strong Core Retail Operations

Canadian Tires products have strong brand recognition

LTSCDA

The company owns some of the best-in-class privatelabels and carries premier national brands Marks has exclusive, private-label brands, including 60 apparel and footwear products FGL Sports has access to some of the best sports brands in the world

LTSCDA 2: Excellent support system to reinforce core retail operations

Canadian Tire has a strong in-house real estate management expertise

LTSCDA

Canadian Tires 1,700 store network is located within a 15 minute drive for 90% of Canadians The company holds one of the largest commercial real estate portfolios in Canada with 30 million retail square feet In 2013, it setup a REIT valued at $3.6bn to unlock the value of 70% of its real estate holdings

LTSCDA 2: Excellent support system to reinforce core retail operations

Financial Services provides a strong support to the retail brands

LTSCDA

Financial services provides instore financing equal payment capabilities which supports the sale of large ticket items Retail brands such as Sport Chek now issue their own credit cards Strong risk management practices and pricing keeps the write-off rates at a low 6% where industry average is about 11%

LTSCDA 2: Excellent support system to reinforce core retail operations

Canadian Tire extensively uses both online and traditional media for advertising Canadian Tires weekly flyers reach 11 million households on a weekly basis and is one of the most widely read advertising vehicles in Canada canadiantire.ca, marks.com and sportchek.ca are high traffic web properties Canadian Tires mobile apps top the Lifestyle categories in the app store The iPad app allows customers to track their automotive maintenance needs

LTSCDA

LTSCDA 3: Innovative culture & aggressive expansion

LTSCDA

Continuous innovation in product & store layouts

Canadian Tire has a strong track of introducing new products for everyday needs of customers in the home, automotive and apparel categories The Concept 20/20 initiative created Smart stores with racetrack floor plan, improved category adjacencies and better store signage Better customer interaction through retail labs for Sport Chek Marks stores carry walk-in freezers where customers can test cold weather products

LTSCDA 3: Innovative culture & aggressive expansion

Innovative loyalty program that generates customer insights Canadian Tire Money was launched 50 years ago as a traffic builder to their gas stations Enhanced loyalty management through Canadian Tire Money Advantage MasterCard which on average leads to a 30% higher basket size during checkout Canadian Tire uses the insights generated to understand shopping patterns and tailor a better customer experience

LTSCDA

LTSCDA 3: Innovative culture & aggressive expansion

Management has always had a keen eye on expansion

Canadian Tire Money Advantage (2012)

LTSCDA

Atheletes (2011)
Options MasterCard (1995)

Automotive DIY (1999)

Canadian Tire Money (1958)

Saskatchewan (1972)

Home services (1934)

Sheppard Ave. (1963)

New Geographies Hamilton, ON (1934)

Canadian Tire (1922)

New Distribution Centers

Montreal (2009)

Brampton (1973)
Gas Bar (1958)

Clerks on roller skates (1937)

New class-of store (1993) PartSource (1999)

Smart Stores (2008)

Financial Services (1968) Marks (2011)

FGL Sports (2011)

Next Generation Stores (2000)

COMPLICATIONS & POTENTIAL ISSUES

COMPLICATIONS & POTENTIAL ISSUES

CHANGE

Canadian Tires operations are stretched too thin

Products repeating under retail brands causing confusion to customers, more administrative costs and lowering bargaining power Each retail brand operates as its own business without many synergies across brands Canadian Tires operating margins have been shrinking for the past three years

Operating Margin (%)

[VALUE] %

[VALUE]%

[VALUE]%

FY 2010

FY 2011

FY 2012

COMPLICATIONS & POTENTIAL ISSUES

CHANGE

Revenues of heritage businesses are stagnating

Legacy businesses are growing at a much smaller pace at 0.8% The company is facing store saturation for its legacy businesses Retail ROIC is at 6.7% which is below the companys expectations of 10% Canadian Tires website does allow for online purchases

Canadian Tire store sales (CAD $mm)

5,772
5,669 5,676

5,780

5,552

FY 2008

FY 2009

FY 2010

FY 2011

FY 2012

COMPLICATIONS & POTENTIAL ISSUES

Competition from coalition loyalty programs, new market entrants & online retail Loyalty program rewards are limited to Canadian Tire New entrants such as Target have potential to take away market share
Loyalty / Card Program Subscribers in Canada ('000)
10,000

CHANGE

Threat of New Entrants: Low Threat of Suppliers: Moderate > Having few large suppliers bring with them bargaining power > High Capital Requirements > Large economies of scale making it difficult for smaller players > Existing players own their own distribution channels

> Supply chain disruption risk due to failures or geopolitical issues

Threat of Competitors: Low > Industry is generally consolidated > Competitors such as Rona & HBC are not faring well > Some players in the Fixing category such as Home Depot are growing steadily

Threat of Substitutes: Low

4,200 1,700 250 CANADIAN TIRE MONEY CANADIAN TIRE CREDIT ADVANTAGE CARDS AIR MILES AEROPLAN

Threat of Buyers: Moderate

> Low bargaining power for individuals > However there is low switching costs > Changing lifestyle preferences may hurt the company

> No pure substitute in retail categories > Online retail can be considered a threat to the heritage businesses such as Canadian Tire Retail

HOW CAN CANADIAN TIRE BRING BACK OPERATING MARGINS BACK TO 10% OVER THE NEXT 5 YEARS?

Canadian Tire can grow through consolidation, better online sales and by expanding loyalty programs

ACTION

Horizon 1: Consolidate retail segments by product categories

Horizon 2: Improve online sales through relationships with delivery networks

Horizon 3: Expand financial & loyalty programs into all Canadian Tire businesses

Profit

Time

Canadian Tires three pronged strategy will help it improve its margins
Increase online sales through better relationships with delivery networks
Current retail footprint is reaching saturation

ACTION

Consolidate retail segments by product categories

Expand financial & loyalty programs into all businesses

Smaller risk profile for Financial Services resulting in lower chargeoffs

Simplifies the brand structure for the end customer

Lowers administrative costs improving profitability

Higher revenues for legacy businesses through increased product categories

Better integration with Canadian Tires traditional, mobile & social marketing activities

Better supply chain management through increased bargaining power and alignment of distribution centers

Online Canadian sales are lower giving it better first mover advantage

Increased awareness and loyalty to all Canadian Tire brands

Consolidate retail brands into four categories and eliminate duplicate products across these categories

ACTION

Canadian Tire Retail Automotive

Apparel

Sport

Increase online sales through better relationships with postal services

Canadian online sales only accounts for 4% of total retail sales compared to 10% in the US Canadian Tire should negotiate preferred online shipping rates with Canada Post & UPS to capture the potential growth in this market which is currently hampered due to high shipping costs
Canadian Tire Retail Stores

ACTION

Invest / Grow

Increasing Business Strength

Sports Retail

Apparel Retail
Selectivity / Earnings

Sports / Apparel Retail Online

Canadian Tire Online (proposed)

Harvest / Divest

Increasing Industry Attractiveness

Convert Financial Services from a product to a platform

ACTION

Financial Services will support all of Canadian Tires retail businesses Canadian Tire Money should be acceptable across all businesses to increase loyalty

FINANCIALS

Based on our recommendations, we see CTR revenue grow by 8% annually overall EBIT growing by CAGR 12%
Canadian Tire Revenue Projection ($mm)
16,000

Total Revenue

14,000

12,000

10,000

CTR Revenue

8,000

6,000

4,000

2,000

EBIT

2013 2014 2015 2016 2017 2018

APPENDIX

Logic Summary

Background
Canadian Tire is the largest retailer in Canada Canadian Tires revenues & profits have consistently grown over the past six years Canadian Tires stock has returned 9.24% CAGR over the past 10 years compared to 5% for the TSX Canadian Tire has three sources of LTSCDA Strong core retail operations Excellent support services to reinforce their core retail operations Continued focus on store & product innovation

Audience : Board of Directors Assumptions : Formal; friendly; action bias

primary decision maker; limited knowledge- need reminding likely will agree Goal : Decision to go ahead with 3 point programme

Complications:
Company is stretching itself too thin. Stagnant revenue in Canadian Tire Retail Competition from other loyalty programs (Airmiles & Aeroplan)

Question : How can Canadian Tire get back to top line growth of 3% while
keeping its operating margins above 10% over the next 5 years?

Canadian Tire must take 3 steps to drive future growth

1. Consolidate retail segments by products Simplifies product structure for customers Lowers SG&A costs improving overall profitability Better supply chain relationships resulting in increased bargaining power

2. Improve online sales through better relationships with postal services Current retail footprint is saturated Higher revenue for legacy businesses Current online sales are low in Canada are low giving it a first mover advantage

3. Expand financial & loyalty programs into all businesses Lowers the risk profile for Financial Services giving it higher margins Better integration with Canadian Tires marketing activities Increased customer loyalty to all Canadian Tire brands

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