Mr. Greg Hicks reports

CANADIAN TIRE CORPORATION REPORTS SECOND QUARTER 2023 RESULTS

Canadian Tire Corp. Ltd. has released its second quarter results for the period ended July 1, 2023.

Highlights:

• Consolidated comparable sales were up 0.1 per cent, following strong growth of 5 per cent in Q2 2022;
• Normalized diluted earnings per share (EPS) were $3.08, compared with $3.11 in Q2 2022. Diluted EPS were $1.76, compared with $2.43 in Q2 2022;
• Loyalty sales as a percentage of retail sales up 80 bps (basis points) in the quarter.

"As inflation persisted and rate hikes continued, consumer demand for discretionary goods softened, particularly in the latter half of the quarter, and Canadians shifted to more essentials within our multicategory assortment," said Greg Hicks, president and chief executive officer, Canadian Tire. "Loyalty sales continue to outperform non-member spend, driving an increase in loyalty penetration. During this time of macroeconomic uncertainty, Triangle Rewards remains our most important driver in delivering value for our customers.

"Our ongoing commitment to our Better Connected strategy further positions us to deliver value over the long term," added Mr. Hicks. "The investments we are making to integrate our customers' digital and in-store experiences continue to deliver strong results."

Second quarter highlights:

• Consolidated comparable sales were up 0.1 per cent, following 5-per-cent growth in Q2 2022, as consumer spend softened in the latter part of the quarter, particularly in Ontario:
  • Canadian Tire retail (CTR) comparable sales were up 0.1 per cent, with a sales mix shift to more essential and value offerings. Automotive and living grew, offsetting declines in seasonal and gardening, playing, and fixing.
  • SportChek comparable sales were up 0.1 per cent. Team sports and lifestyle footwear grew, while athletic clothing and outerwear were down.
  • Mark's comparable sales were up 0.4 per cent, with industrial and casual footwear growing ahead of other categories, and offsetting casual wear declines against strong growth in Q2 2022.
• Loyalty sales as a percentage of retail sales was up 80 bps, as loyalty sales continued to outperform non-loyalty sales.
• Normalized diluted EPS of $3.08 was down 1 per cent on the prior year. Diluted EPS was down 67 cents to $1.76:
  • Normalizing items of $107.9-million in the quarter reflected $74.6-million of direct costs relating to the previously disclosed March, 2023, distribution centre fire (DC fire), recorded in the retail segment, and a $33.3-million GST/HST-related charge resulting from the recently enacted federal budget legislation, recorded in the financial services segment.
  • The previously disclosed change in accounting estimate related to one component of the company's margin sharing arrangement (MSA) with its dealers. The MSA change had an $86.5-million impact on revenue and income before income taxes, and 171 bps impact on retail gross margin rate, excluding petroleum, during the second quarter of 2023.
• Normalized consolidated income before income taxes (IBT) was $281.8-million, compared with $284.3-million in the prior year. Consolidated IBT was $173.9-million, compared with $238.1-million in the prior year:
  • Lower retail revenue, combined with strategic investments in the business, drove a decline in normalized retail earnings, despite faster-than-expected progress on the DC fire remediation and an 80 bps improvement in retail gross margin rate (excluding the impact of the previously disclosed MSA change). Normalized retail segment IBT was $160.2-million, compared with $170-million in Q2 of the prior year. Retail segment income before income taxes was $85.6-million, compared with $123.8-million in the prior year.
  • Normalized financial services IBT was down $1.3-million to $88.7-million. Financial services IBT was down $34.6-million to $55.4-million. Gross average accounts receivables (GAAR) growth of 8.2 per cent reflected more moderate growth in average account balances and average active accounts. Higher net impairment losses and financing costs contributed to lower gross margin, offsetting higher revenue. Portfolio performance metrics are trending to historic levels, in line with expectations.
• The company's Better Connected initiatives have already proven to drive incremental sales and enhance connections to customers through an offering that has greater relevance and value:
  • More relevant and personalized offers to the company's 11.5 million Triangle members to earn e-CTM (Canadian Tire money) are being activated. Sales driven by personalized offers accounted for 6 per cent of all sales in the last 12 months, with 1:1 offers on target to deliver more than $150-million of incremental sales in 2023.
  • More than 10 per cent of CTR stores, representing 13 per cent of the CTR footprint, have now been refreshed, expanded or replaced since March, 2022, driving incremental sales. Twenty-two store projects have been completed in 2023 to date.
  • The completion of the multiyear rollout of the company's digital platform across all banners enhances the on-line experience for customers -- e-commerce sales were $1.1-billion during the last 12 months.
  • Progress on owned brands penetration was driven by continuing growth in automotive categories, with Canadian Tire retail owned brand penetration up 20 bps, despite headwinds in discretionary categories.

Update on financial aspirations:

• The current macroeconomic environment and consumer demand differ significantly from the company's expectations when it set out its strategy and 2022 to 2025 financial aspirations (average annual comparable sales growth, retail return on invested capital and diluted EPS) at its investor day in March, 2022. Since early 2022, the cumulative effect of increasing inflationary pressure, and higher interest rates on consumer spend and financing costs, along with higher inventory costs, has significantly impacted the company's ability to deliver against its previous expectations. Given the slower pacing of growth, and the noticeable slowdown in retail sales during the second quarter of 2023, the company is withdrawing its previously disclosed financial aspirations at this time.
• Despite the near-term consumer demand environment, the company remains committed to pursuing the strategic objectives that demonstrate its long-term vision and build on its strong market position. The company also continues to invest in the strategic initiatives outlined in the Better Connected strategy to grow earnings, and continues to make progress on the key initiatives highlighted above, to solidify CTC's brand and competitive positioning in Canada over the long term.

Consolidated overview:

• Unless otherwise specified, consolidated results include the previously disclosed margin-sharing arrangement change, which was effective from the first quarter of 2023.
• Revenue was $4,255.8-million, down 3.4 per cent compared with $4,404-million in the same period last year. Revenue (excluding petroleum) was $3,706.8-million, a decrease of 0.5 per cent compared with the prior year.
• Consolidated income before income taxes was $173.9-million, a decrease of $64.2-million compared with the prior year, due in part to direct costs of $74.6-million relating to the DC fire and $33.3-million relating to the GST/HST-related charge. Normalized income before income taxes was $281.8-million, compared with $284.3-million in the prior year.
• Diluted EPS was $1.76 compared with $2.43 in the prior year. Normalized diluted EPS was $3.08, compared with $3.11 in the prior year.
• Refer to the company's Q2 2023 MD&A (management's discussion and analysis), Section 4.1.1, for information on normalizing items and the MSA change, and for additional details on events that have impacted the company in the quarter.

Retail segment overview:

• Unless otherwise specified, retail results include the previously disclosed margin-sharing arrangement change, which was effective from the first quarter of 2023.
• Retail sales were $5,214.9-million, down 2.8 per cent compared with the second quarter of 2022, with petroleum driving the decrease. Retail sales (excluding petroleum) and consolidated comparable sales were down 0.1 per cent and up 0.1 per cent, respectively, against strong comparatives in the prior year.
• CTR retail sales were down 0.1 per cent and comparable sales were up 0.1 per cent over the same period last year.
• SportChek retail sales decreased 0.2 per cent over the same period last year, and comparable sales were up 0.1 per cent.
• Mark's retail sales increased 0.1 per cent over the same period last year, and comparable sales were up 0.4 per cent.
• Helly Hansen revenue was down 2.9 per cent compared with the same period in 2022.
• Retail revenue was $3,896.1-million, a decrease of $171.1-million, or 4.2 per cent, compared with the prior year. Retail revenue (excluding petroleum) was down 1.2 per cent. Excluding the favourable impact of the MSA change, retail revenue (excluding petroleum) was down $127.1-million.
• Retail gross margin was $1,250.9-million, up 5.8 per cent compared with the second quarter of the prior year, or up 5.9 per cent excluding petroleum. Retail gross margin rate (excluding petroleum) increased 251 bps to 35.7 per cent. Excluding the favourable MSA change, retail gross margin rate (excluding petroleum) was up 80 bps.
• Normalized retail income before income taxes was $160.2-million in Q2 2023, compared with $170-million in the prior year. Retail income before income taxes was $85.6-million, compared with retail income before income taxes of $123.8-million in the prior year.
• Retail return on invested capital (ROIC) calculated on a trailing 12-month basis, was 11.2 per cent at the end of the second quarter of 2023, compared with 13.5 per cent at the end of the second quarter of 2022, due to the decrease in earnings and the increase in average retail invested capital over the prior period.
• Refer to the company's Q2 2023 MD&A, sections 4.1.1 and 4.2.1, for information on normalizing items and the MSA change, and for additional details on events that have impacted the retail segment in the quarter.

Financial services overview:

• GAAR was up 8.2 per cent relative to the prior year, due to growth in average active accounts and average account balances. Growth in average active accounts and average account balances moderated compared with the prior quarter and prior year, and were up 3.7 per cent and 4.3 per cent, respectively, in the quarter.
• Financial services gross margin was $179.5-million, down 4.5 per cent compared with the prior year. Higher net impairment losses and financing costs were partially offset by strong revenue growth.
• Financial services IBT was $55.4-million, down from $90-million compared with the prior year. Normalized financial services IBT, excluding the impact of the GST/HST-related charge, was $88.7-million, down 1.4 per cent.
• Refer to the company's Q2 2023 MD&A, sections 4.1.1 and 4.2.1, for information on normalizing items and sections 4.3.1 and 4.3.2 for additional details on events that have impacted the financial services segment in the quarter.

CT REIT (real estate investment trust) overview:

• Adjusted funds from operations (AFFO) per unit was up 7 per cent compared with Q2 2022. Diluted net income per unit was up 27 per cent.
• Announced three new investments totalling $22.4-million, which are expected to add approximately 53,000 square feet of incremental gross leasable area (GLA) upon completion.
• Completed lease renewals for over 1.3 million square feet of GLA, representing more than 4 per cent of total GLA.
• For further information, refer to the Q2 2023 CT REIT earnings release issued on Aug. 8, 2023.

Capital allocation

Capital expenditures:

• The company remains committed to its strategic direction and continues to invest in key priority areas, as outlined as part of the Better Connected strategy in March, 2022. Full-year operating capital expenditures are now expected to be at the lower end of the company's previously disclosed operating capital expenditures range of $750-million to $800-million, with the timing of some projects shifted to 2024.
• Operating capital expenditures were $138.4-million in the quarter, $30.4-million lower than Q2 2022, as a result of timing of spend.
• Total capital expenditures were $148.2-million, compared with $188.2-million in Q2 2022.

Quarterly dividend:

• The company declared dividends payable to holders of Class A non-voting shares and common shares at a rate of $1.725 per share, payable on Dec. 1, 2023, to shareholders of record as of Oct. 31, 2023. The dividend is considered an eligible dividend for tax purposes.

Share repurchases:

• On Nov. 10, 2022, the company announced its intention to repurchase an additional $500-million to $700-million of its Class A non-voting shares, in excess of the amount required for anti-dilutive purposes, by the end of 2023 as part of its capital management plan (the 2022 to 2023 share repurchase intention). As at July 1, 2023, the company had repurchased $420.8-million of its shares in partial fulfilment of its 2022 to 2023 share repurchase intention.

Conference call

Canadian Tire will conduct a conference call to discuss information included in this news release and related matters at 8 a.m. ET on Thursday, Aug. 10, 2023. The conference call will be available simultaneously, and in its entirety, to all interested investors and the news media through a webcast the company's website, and will be available through replay at this website for 12 months.

About Canadian Tire Corp. Ltd.

Canadian Tire is a group of companies that includes a retail segment, a financial service division and CT REIT. The company's retail business is led by Canadian Tire, which was founded in 1922 and provides Canadians with products for life in Canada across its living, playing, fixing, automotive, and seasonal and gardening divisions. Party City, PartSource and Gas+ are key parts of the Canadian Tire network. The retail segment also includes: Mark's, a leading source for casual and industrial wear; Pro Hockey Life, a hockey specialty store catering to elite players; and SportChek, Hockey Experts, Sports Experts and Atmosphere, which offer the best active wear brands. The company's 1,700 retail and gasoline outlets are supported and strengthened by Canadian Tire's financial service division and the tens of thousands of people employed across Canada and around the world by Canadian Tire and its local dealers, franchisees and petroleum retailers. In addition, Canadian Tire owns and operates Helly Hansen, a leading technical outdoor brand based in Oslo, Norway.

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