CANADIAN TIRE CORPORATION, LTD. Q4 and 2016 FULL-YEAR EARNINGS CONFERENCE CALL Thursday, February 16, 2017 – 1:00 P.M. ET Page 1 DISCLAIMER The information contained in this transcript is a textual representation of the Canadian Tire Corporation, Limited (the “Company”) Q4 and 2016 full year earnings conference call and while efforts are made to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. The information set out in this transcript is current only as of the date of the webcast and may be replaced by more current information. The Company does not undertake to update the information, whether as a result of new information, future events or otherwise. In no way does the Company assume any responsibility for any investment or other decisions made based upon the information provided on the Company’s web site or in this transcript. Users are advised to review the webcast (available at http://investors.canadiantire.ca) itself and the Company’s regulatory filings before making any investment or other decisions. FORWARD LOOKING INFORMATION This document contains forward-looking statements that reflect management’s current expectations relating to matters such as future financial performance and operating results of the Company. Forward-looking statements provide information about Management’s current expectations and plans, and allow investors and others to better understand the Company’s anticipated financial position, results of operations and operating environment. Readers are cautioned that such information may not be appropriate for other purposes. Certain statements other than statements of historical facts included in this document may constitute forward-looking statements, including, but not limited to, statements concerning Management’s current expectations relating to possible or assumed future prospects and results, the Company’s strategic goals and priorities, its actions and the results of those actions and the economic and business outlook for the Company. Often, but not always, forward-looking statements can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “intend”, “believe”, “estimate”, “plan”, “can”, “could”, “should”, “would”, “outlook”, “forecast”, “anticipate”, “aspire”, “foresee”, “continue”, “ongoing” or the negative of these terms or variations of them or similar terminology. Forward- looking statements are based on the reasonable assumptions, estimates, analyses, beliefs 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 their very nature, forward-looking statements require Management to make assumptions and are subject to inherent risks and uncertainties, which give rise to the possibility that the Company’s assumptions, estimates, analyses, beliefs and opinions may not be correct and that the Company’s expectations and plans will not be achieved. Examples of material assumptions and Management’s beliefs, which may prove to be incorrect, include, but are not limited to, the effectiveness of certain performance measures, current and future competitive conditions and the Company’s position in the competitive environment, the Company’s core capabilities, and expectations around the availability of sufficient liquidity to meet the Company’s contractual obligations. Although the Company believes that the forward-looking information in this document is based on information, assumptions and beliefs that are current, reasonable and complete, such 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 statements. Some of the factors, many of which are beyond the Company’s 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 the Company to attract and retain high- quality employees for all of its businesses, Dealers, Canadian Tire Petroleum retailers, and Mark’s and FGL Sports franchisees, as well as the Company’s financial arrangements with such parties; (c) the growth of certain business categories and market segments and the willingness of customers to shop at its stores or acquire its financial products and services; (d) the Company’s margins and sales and those of its competitors; (e) the changing consumer preferences toward eCommerce, online retailing and the introduction of new technologies; (f) risks and uncertainties relating to information management, technology, cyber threats, property management and development, environmental liabilities, supply chain management, product safety, changes in law, regulation, competition, seasonality, weather patterns, commodity prices and business disruption, the Company’s relationships with suppliers, manufacturers, partners and other third parties, changes to existing accounting pronouncements, the risk of damage to the reputation of brands promoted by the Company and the cost of store network expansion and retrofits; (g) the Company’s capital structure, funding strategy, cost management programs, and share price and (h) the Company’s ability to obtain all necessary regulatory approvals. Management cautions that the foregoing list of important factors and assumptions is not exhaustive and other factors could also adversely affect the Company’s results. Investors and other readers are urged to consider the foregoing risks, uncertainties, factors and assumptions carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. 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 2016 and our 2016 Management's Discussion and Analysis, as well as Canadian Tire's other public filings, available at www.sedar.com and at investors.canadiantire.ca. The forward-looking information contained herein is based on certain factors and assumptions as of the date hereof and does 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. The Company does not undertake to update any forward-looking statements, 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, except as required by applicable securities laws.
Transcript
CANADIAN TIRE CORPORATION, LTD. Q4 and 2016 FULL-YEAR EARNINGS CONFERENCE CALL
Thursday, February 16, 2017 – 1:00 P.M. ET
Page 1
DISCLAIMER
The information contained in this transcript is a textual representation of the Canadian Tire Corporation, Limited (the “Company”) Q4 and 2016 full year earnings conference call and while efforts are made to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. The information set out in this transcript is current only as of the date of the webcast and may be replaced by more current information. The Company does not undertake to update the information, whether as a result of new information, future events or otherwise. In no way does the Company assume any responsibility for any investment or other decisions made based upon the information provided on the Company’s web site or in this transcript. Users are advised to review the webcast (available at http://investors.canadiantire.ca) itself and the Company’s regulatory filings before making any investment or other decisions. FORWARD LOOKING INFORMATION
This document contains forward-looking statements that reflect management’s current expectations relating to matters such as future financial performance and operating results of the Company. Forward-looking statements provide information about Management’s current expectations and plans, and allow investors and others to better understand the Company’s anticipated financial position, results of operations and operating environment. Readers are cautioned that such information may not be appropriate for other purposes. Certain statements other than statements of historical facts included in this document may constitute forward-looking statements, including, but not limited to, statements concerning Management’s current expectations relating to possible or assumed future prospects and results, the Company’s strategic goals and priorities, its actions and the results of those actions and the economic and business outlook for the Company. Often, but not always, forward-looking statements can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “intend”, “believe”, “estimate”, “plan”, “can”, “could”, “should”, “would”, “outlook”, “forecast”, “anticipate”, “aspire”, “foresee”, “continue”, “ongoing” or the negative of these terms or variations of them or similar terminology. Forward-looking statements are based on the reasonable assumptions, estimates, analyses, beliefs 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 their very nature, forward-looking statements require Management to make assumptions and are subject to inherent risks and uncertainties, which give rise to the possibility that the Company’s assumptions, estimates, analyses, beliefs and opinions may not be correct and that the Company’s expectations and plans will not be achieved. Examples of material assumptions and Management’s beliefs, which may prove to be incorrect, include, but are not limited to, the effectiveness of certain performance measures, current and future competitive conditions and the Company’s position in the competitive environment, the Company’s core capabilities, and expectations around the availability of sufficient liquidity to meet the Company’s contractual obligations. Although the Company believes that the forward-looking information in this document is based on information, assumptions and beliefs that are current, reasonable and complete, such 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 statements. Some of the factors, many of which are beyond the Company’s 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 the Company to attract and retain high-quality employees for all of its businesses, Dealers, Canadian Tire Petroleum retailers, and Mark’s and FGL Sports franchisees, as well as the Company’s financial arrangements with such parties; (c) the growth of certain business categories and market segments and the willingness of customers to shop at its stores or acquire its financial products and services; (d) the Company’s margins and sales and those of its competitors; (e) the changing consumer preferences toward eCommerce, online retailing and the introduction of new technologies; (f) risks and uncertainties relating to information management, technology, cyber threats, property management and development, environmental liabilities, supply chain management, product safety, changes in law, regulation, competition, seasonality, weather patterns, commodity prices and business disruption, the Company’s relationships with suppliers, manufacturers, partners and other third parties, changes to existing accounting pronouncements, the risk of damage to the reputation of brands promoted by the Company and the cost of store network expansion and retrofits; (g) the Company’s capital structure, funding strategy, cost management programs, and share price and (h) the Company’s ability to obtain all necessary regulatory approvals. Management cautions that the foregoing list of important factors and assumptions is not exhaustive and other factors could also adversely affect the Company’s results. Investors and other readers are urged to consider the foregoing risks, uncertainties, factors and assumptions carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. 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 2016 and our 2016 Management's Discussion and Analysis, as well as Canadian Tire's other public filings, available at www.sedar.com and at investors.canadiantire.ca. The forward-looking information contained herein is based on certain factors and assumptions as of the date hereof and does 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. The Company does not undertake to update any forward-looking statements, 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, except as required by applicable securities laws.
CANADIAN TIRE CORPORATION, LTD. Q4 and 2016 FULL-YEAR EARNINGS CONFERENCE CALL
Thursday, February 16, 2017 – 1:00 P.M. ET
Page 2
C O R P O R A T E P A R T I C I P A N T S
Stephen Wetmore President and Chief Executive Officer, Canadian Tire Corporation Limited Dean McCann Chief Financial Officer and Executive Vice President, Canadian Tire Corporation Limited Allan MacDonald President, Canadian Tire Retail, Canadian Tire Corporation Limited Rick White President, Mark’s Gregory Craig Gregory Craig, President and Chief Executive Officer, Canadian Tire Financial Services and Canadian Tire Bank
C O N F E R E N C E C A L L P A R T I C I P A N T S
Kenric Tyghe Raymond James Mark Petrie CIBC Irene Nattel RBC Capital Markets Patricia Baker Scotia Capital Derek Dley Canaccord Genuity Jim Durran Barclays Brian Morrison TD Securities
Peter Sklar BMO Capital Markets
P R E S E N T A T I O N
Operator Good afternoon. My name is Donna and I will be your conference Operator today. At this time, I would like to welcome everyone to the Canadian Tire Corporation Limited Fourth Quarter and 2016 Year-End Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. We ask that you limit your time to one question plus a follow-up question before cycling back into the queue. Earlier today, Canadian Tire Corporation Limited released their financial results for the fourth quarter of 2016 as well as the full year. A copy of the earnings disclosure is available on their website and includes cautionary language about forward-looking statements, risks and uncertainties, which also apply to the discussion during today's conference call. I would like to turn the call over to Stephen Wetmore, President and Chief Executive Officer. Stephen?
Stephen Wetmore, President and Chief Executive Officer, Canadian Tire Corporation Limited Thank you Operator, and good afternoon everyone. Our fourth quarter of 2016 was another very good quarter for our Company. While I'd love to take credit for the performance, it is without a doubt the product of the years of effort by the team here in the room with me, as well as being a clear demonstration of the fundamental strength that they have been building. I think our team would also agree that we still have a long ways to go but there is tremendous upside and the opportunities ahead in the fourth quarter demonstrated our ability to achieve them. As Dean will highlight in more detail, 2016 overall was a strong year for the Company and our fourth quarter posted some impressive top line and margin performance. More margin could have dropped to the bottom line, as we made some investments for the future which affected our operating expense ratio in the fourth quarter. However, overall it was a very good year, both from a balance sheet and P&L point of view, and our earnings per share was in line with our expectations.
CANADIAN TIRE CORPORATION, LTD. Q4 and 2016 FULL-YEAR EARNINGS CONFERENCE CALL
Thursday, February 16, 2017 – 1:00 P.M. ET
Page 3
Our Canadian Tire Retail operation is by far the largest retail business unit, and CTR again delivered impressive top line and margin growth in the fourth quarter. I don't think CTR same-store sales growth was a record, but it came very close. A great selection of products, coupled with some sophisticated data analytics to optimize pricing and promo and product purchases, are the primary factors supporting our growth this quarter. CTR had an excellent performance across the business but just let me highlight two areas as examples. At Canadian Tire Retail, this quarter, private brands represented roughly one third of total sales across all categories. We have certainly earned the branding of being Canada's Christmas store and 88 percent of our Christmas offering is made up of private brands we own or that are exclusive to Canadian Tire. The categories and assortments were extremely well received by both our dealers and our customers and it demonstrated the benefits of product design and control. Our Automotive business is another example of how our product innovation is driving performance. Renewed assortments in terms of quality, breadth and depth and new products from our Simoniz and MotoMaster brands have positively affected both top line and margins. Some of the best data analytics and execution is coming out of our Automotive group and we are very optimistic about their future performance. As you know, whenever we have a quarter that doesn't meet our or your expectations, then I blame it on the weather and when we have a good quarter then it's just because we are good retailers. So proof's out of the gate to try and lessen the effect of non-seasonal weather on their businesses has been Canadian Tire Retail. They have more levers to pull than our footwear and apparel banners, however their business is extremely complex and can be thrown out of balance quite easily, but great progress is being made. I won't cite examples, but Allan MacDonald can address these for you during our Q&A session if you would like. Our Mark's business had a strong quarter and ended the year in a very solid position, as you can see from their impressive same-store sales numbers. Rick and his team have done a tremendous job of building alternate channels for growth by bringing great products, particularly in their denim and casual footwear categories to help offset the industrial business which has been affected by the Alberta economy. As you would expect, winter weather did provide an uplift in sales of outerwear and casual footwear and weather related products accounted for approximately 50 percent of the sales growth achieved during the quarter.
Our FGL Sports business continued to deliver solid top line results despite warmer temperatures in October and November, which dampened sales of winter related products, such as skis and snowboards. We continue to build on opportunities across this business to curate assortments that are less weather sensitive, and we saw strong growth in athletic apparel and footwear, licensed products, as well as wearable technology which helped to drive the top line. That said, when winter weather did arrive in December, we saw strong sales at Sport Chek across all key categories as customers chose us as their destination for outdoor winter sports and activity. Our Financial Services business continued to execute against their strategy as we had planned this quarter and we were able to see the benefits of how we have embedded into performance into the operations of our CTR Retail business through the lift in sales transacted on our Options MasterCard and with the increase in sales that utilized in-store financing. I should also mention that our in-store financing offers were extremely well received by our customers this quarter, with tires and outdoor shelters seeing sales uplift which we believe were largely incremental sales. Our focus for 2017 is to put more effort into the in-store promotion of our financing offerings, continue with our customer analytics, and also offer Mark's and FGL Sports customers’ similar financing plans. With Greg Craig now leading Financial Services, his previous retail experience will be a significant asset as we continue to evolve the business to be more retail focused. We will continue to invest in integrating its operations with our other retail banners this year and on driving customer accounts and GAAR growth in the credit card portfolio. As far as major initiatives and projects are concerned, our e-commerce strategy is unfolding as planned and is being rolled out at a pace based on the needs of our retail banners, our customers and our assortments. We are making the right investments in technology, people, content and performance, our consumer analytics teams are growing in strength and our Senior Management are rapidly learning to use our data to make more insightful decisions. Our website traffic continues to grow, with over 300 million visits in 2016 across all our banners, representing some of the top sites in the country. These visits are obviously giving us great insights as well as shaping the evolution of our digital experiences. With much of the underlying technology in place, we made great strides in enhancing the online shopping experience for our customers in 2016. We added to our online presence by launching transactional sites for L'Équip and Atmosphere
CANADIAN TIRE CORPORATION, LTD. Q4 and 2016 FULL-YEAR EARNINGS CONFERENCE CALL
Thursday, February 16, 2017 – 1:00 P.M. ET
Page 4
so that customers across all our retail banners now have the ability to shop through an e-commerce channel. We delivered a home at Mark's and FGL including Sport Chek, Atmosphere and PHL and offered as a test same-day delivery in the GTA for Sport Chek. This has now been operationalized. We have an effective buy online, pickup in-store model at CTR which is working well for us, especially with our ability to show customers real-time inventory availability across our stores. Customers like the convenience of knowing that the products will be available to pick up when they want. We continue to enhance our online experience and our online experience during the business holiday season was well received by our customers. And providing our customers with the right level of experience is what we are focused on, be it in-store or online, and we will continue to deliver on our customer expectations. We are where we need to be and are well positioned to meet our customers' demands. Mark's point-of-sale system is fully operational and FGL is in the process of rolling out their new POs system across the network. And our distribution centre in Bolton, Ontario is on time and on budget and will commence operations during the summer of this year. As far as 2017 is concerned, our agenda is full to say the least, but I believe everyone in the room with us here today sees the same growth potential and we are laying the right foundation. We need to do more groundwork but hopefully over the coming months, we can shed some more light on some of our initiatives, and as this is year three of our three-year strategy, then we owe you an update later in the year. With that, I'll hand off to Dean. Dean?
Dean McCann, Executive Vice President and Chief Financial Officer, Canadian Tire Corporation Limited Thanks Stephen. It was a very strong quarter for us. Diluted earnings per share was $3.46 in the quarter, up 15.1 percent over the fourth quarter of 2015. On a full year basis, diluted EPS was $9.22, up 7.1 percent versus the prior year, however 2015 as you know included a $0.33 gain related to the sale of a surplus property which is not part of our normal operations. Factoring that into the year-over-year results, full year diluted EPS would have been up 11.4 percent over last year, above our aspirations and stronger than we had planned. Key themes for the past few quarters continued in Q4 and the continued solid performance can be attributed to the underlying strengths of our Retail businesses, in
particular, in CTR. The Retail gross margin excluding Petroleum was up 55 basis points, primarily driven by CTR. Strong revenue growth, as dealers bought in to CTR's Q4 merchandising programs, coupled with operational efficiency initiatives and improved dealer earning, were the primary drivers of Q4 margin performance. This performance was particularly impactful given the impact on our cost of the weaker Canadian dollar. Our Retail segment opex ratio excluding depreciation and Petroleum was higher by 42 basis points in the quarter compared to the prior year and higher by 16 basis points for the full year. I am comfortable with the good progress we've made on improving our overall business productivity. Higher costs for variable compensation were a result of the strong Q4 performance, higher marketing costs that clearly drove sales and investments spending to support operational excellence initiatives that drove improved gross margin performance, were all planned investments directly linked to our improved results this year. Our full year EBITDA ratio captures the benefits of our efforts to improve our productivity, as well as the cost and investments being made to drive our growth. It was essentially flat compared to the prior year, excluding the effect of the real estate gain of $29.5 million in 2015 impacted by the opex factors referenced earlier and planned investments we made in the Financial Services business to get that business growing again. As we look ahead, our consolidated EBITDA ratio continues to be a key metric that we are focused on. Financial Service business posted solid results with a GAAR growth of 4.2 percent in the quarter and up 1.5 percent on a full year basis, reflecting the investments made to drive new customer accounts and GAAR growth throughout the year. And while Financial Services had a strong fourth quarter, on a full year basis, as expected, year-over-year income before taxes was down. This reflected the additional investments I just mentioned, as well as higher variable compensation expense. We continue to see a great deal of runway for the Financial Services business as it transitions to a more retail-focused organization. As a result, we will continue to invest in those initiatives to drive this business forward in 2017 and beyond and expect to see a heightened level of investments through 2017. Inventories are healthy across all retail businesses and down 3 percent year-over-year, reflecting a good sell through of winter inventory due to the strong sales of winter related products in December across all of the
CANADIAN TIRE CORPORATION, LTD. Q4 and 2016 FULL-YEAR EARNINGS CONFERENCE CALL
Thursday, February 16, 2017 – 1:00 P.M. ET
Page 5
retail banners. Dealer in-store inventory is also in very good shape across all categories. We made good progress on ROIC. It was 8.34 percent for the quarter, up 25 basis points over Q4 of last year and up 19 basis points from Q3 2016. As you know, our aspiration for ROIC is 9 percent, and while progress has been slowed by challenging conditions like foreign exchange costs in Alberta, the Alberta economy, continuing to focus on our underlying retail earnings as well as being selective in our capital expenditures, is the path to an improved ROIC. Our operating capital expenditures came in at roughly $455 million, below our recent guidance of $475 million to $500 million, but that is only because of some store improvement capex that we forecast to take place in our Retail segment was actually funded in our REIT segment. We continue to be on track with our three-year average operating capital expenditure guidance, as well as the expected spending range we provided last quarter for 2017. For distribution capacity capital expenditures we came in at $122 million for the year, which was within the revised range we provided last quarter. We ended 2016 with a very strong balance sheet and continue to maintain our balanced approach to capital allocation. Over the course of 2016, we repurchased $440 million of Class A Non-Voting Shares, completing our announced buyback program of $550 million of Class A Non-Voting Shares from November 15 to the end of '16. We also increased our dividend to $2.60 and announced our intention to repurchase another $550 million of Class A Non-Voting Shares by the end of 2017. As I look ahead to '17, there are a few things I suggest you keep in mind. As Stephen indicated, we have a number of initiatives underway that require investments for future growth. We remain committed to our ongoing efforts to make our operations more productive and efficient and we will continue to invest in these initiatives that ensure our competitiveness in the future, including product and branding capabilities, data analytics and e-commerce. I'd also remind you that our Bolton DC is nearing completion and will be up and running in the third quarter of this year. As such, there will be additional costs as the Brampton DC continues to operate in parallel while we bring the new DC online, as well as incremental depreciation cost. These costs will impact us in the back half of the year. Finally, we have once again released our year-end review digital summary that highlights our
accomplishments for the year. The videos provide views with messages from our senior leaders and employees on what drove our business results over the past year. It went live this morning and can be accessed at, all one word, yearendreview.canadiantirecorporation.ca. With that, I'll turn the call back over to the Operator for the Q&A session. Operator?
Q U E S T I O N A N D A N S W E R S E S S I O N
Operator Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We ask that you please pick up your handset or step close to your speakerphone system when asking your question, and to limit your time to one question plus one follow-up question. We'll pause for a moment to compile the Q&A roster. The first question is from Kenric Tyghe from Raymond James. Please go ahead.
Kenric Tyghe, Raymond James Thank you and good afternoon. With respect to the weather proofing of the business, certainly given the atypical weather we saw in the quarter, I wondered if you could speak to what was different in October/November, what do you see different in your business and how is it the business performed as well as it did through October/November pre the December lift or benefit of the weather sort of normalizing for the quarter? If you could maybe provide some colour around that, please?
Stephen Wetmore, President and Chief Executive Officer, Canadian Tire Corporation Limited Yes, thanks. It's Stephen. Let me comment on October/November for CTC and maybe I'll hand off to Allan MacDonald because it's more applicable to his business than the other two. I think it was an up and down situation in terms of October/November because we saw October turning a bit in some parts of the country and certainly some parts of the west we saw an uplift in apparel and footwear during that period of time and then warm weather kind of struck in the month of November, coming back in early December. I think at that point in time in terms of outerwear both Mark's and Sport Chek
CANADIAN TIRE CORPORATION, LTD. Q4 and 2016 FULL-YEAR EARNINGS CONFERENCE CALL
Thursday, February 16, 2017 – 1:00 P.M. ET
Page 6
saw a tremendous uplift during the month of December. As far as Sport Chek was concerned, it affected some of the hard goods, which Duncan can always give you more briefing on in terms of detail, but it affected them a little bit in their hard goods but had tremendous benefit for Mark's during the month of December. I can probably say this, it's not as easily for Allan MacDonald to say this, but through the month of October and then lack of traditional seasonal weather or wintery weather in the month of November, in some ways they were acting pretty smug because they had such a great run rate at that point in time and wanted to try to show the world that they had weather proofed the business but in my job I was really glad that winter came because they also got a boost on top of it. But let me hand off to Allan and he can probably tell you where we stood entering the month of December and what weather impact was on his business at that point.
Allan MacDonald, President, Canadian Tire Retail, Canadian Tire Corporation Limited Thanks Stephen. Smug's probably not the word I'd use, but we did feel pretty good about where we were at the end of November. As we talked about often, we've been on a path to turn weather from something we're dependent upon to something that's opportunistic for us, which is a nice way to say reduce our reliance on weather categories, and a lot of the investments we've made over the past three and four years have really come into their own and we've seem maturing of products like canvas and categories that aren't as weather dependent like the Christmas and the sort of seasonal changeover type categories that performed really, really well for Canadian Tire going into Q4. That coupled with a lot of work we've been doing on our promo effectiveness, on introducing a broader range of assortments and things like on the marketing side, like the WOW Guide, have all paid dividends. So, sitting at the end of November we're actually very, very pleased with the balance of growth we're getting from our promo, from our reg sales across our various categories. I can't think of a category that I would point out as a disappointment or a poor performer, and then when the weather hit around about the second week of December we got an extra kiss from that. So all in all I was very, very pleased with the foundational strength of the business.
Kenric Tyghe, Raymond James
Thank you, that's great. If I could very quickly by way of a follow-up. Just with respect to Mark's at a high level, would it be a fair characterization to say that we have finally cycled the worst? I mean can we put a pin in Mark's here just looking anecdotally at what's happening in the energy patch and the like? I mean while the industrials business is perhaps still challenging it certainly appears that you're doing a lot of the right things outside of industrials given the sort of compound that you put out this quarter and have for a couple of quarters?
Rick White, President, Mark's Thank you Kenric. It's Rick White here. I don't know if we could a pin in it. I think I'd be safe to say that if we took a look at Q4 half of our business POP was related to winter goods such as winter boots, accessories and outerwear, and the other half was related to new strategic drivers of the business or alternative channels such as men's casual, men's and women's denim and men's and women's casual footwear. So I think what we could say is we're still not out of the woods when it comes to the negative impact of low oil prices on our business because it certainly has a negative impact not just on industrial, it has a negative impact on traffic. But the good news is while we can't totally replace the lost oil business we've certainly continued to learn how to work around it and we find different ways to replace it. So we're part of the way there but I caution that we're not all of the way there, if that's a good enough answer for you.
Kenric Tyghe, Raymond James That's great. Thanks very much. I'll leave it there.
Operator Thank you. Your next question is from Mark Petrie from CIBC. Please go ahead.
Mark Petrie, CIBC Good afternoon. Over the last year in some of your newer and renovated stores, it looks like you've made a bigger push to leverage customer data just in terms of store design and assortment. I'm wondering if you could just comment on that strategy, how far along you are in that process and what type of results that's been generating in those stores?
CANADIAN TIRE CORPORATION, LTD. Q4 and 2016 FULL-YEAR EARNINGS CONFERENCE CALL
Thursday, February 16, 2017 – 1:00 P.M. ET
Page 7
Stephen Wetmore, President and Chief Executive Officer, Canadian Tire Corporation Limited Well is there a banner in particular that you're focused on or is it just across the board?
Mark Petrie, CIBC Yes, sorry. Focused on the Canadian Tire banner. Thanks.
Stephen Wetmore, President and Chief Executive Officer, Canadian Tire Corporation Limited Canadian Tire.
Allan MacDonald, President, Canadian Tire Retail, Canadian Tire Corporation Limited Yes. Hey Mark, it's Allan. Well it's interesting, we've been putting a lot of energy in terms of evaluating where we've made investments in-store and return we're getting on them, of course real estate's one of the biggest ones, and the historic view of the Canadian Tire format is one that works across the country in a lot of different communities and we're starting to look at that with a more critical eye to see if there's opportunities for us to improve the productivity of our stores by augmenting the assortment or the way that we're merchandising based on the demographics, the location, the community, you name it, and we're starting to get some insight. I'd say we're at the point where we have more questions than answers, which is really, really encouraging. This is something that started probably four years ago when we opened the Showroom store here in central Toronto. We've been looking at across the board how we can bring to life more of the strengths of Canadian Tire. Things like the role that automotive plays in various communities were challenging and I think that that shows a lot of promise for us in terms of the value we generate. So yes, we're challenging our assortment and customer data across the piece, the investment we made in loyalty programs, the investment we made, again, several years ago in the automotive infrastructure systems has given us a leg up to help us really understand how our customers are shopping us, what's really resonating with them and then start to augment our assortments accordingly. So you should see it when you walk in the store, hopefully not just from a merchandising standpoint, but also the
types of assortment we're bringing to market. You should also see it for example in the WOW Guide. So short answer, yes, we're looking at that and we're going to continue to challenge it. In terms of where we are in the journey, I don't see this as something that ever ends. I think it's always going to be a dynamic part of the business and something we should always be paying attention to.
Mark Petrie, CIBC Okay, thanks. And then just related to that and I guess some earlier comments related to choosing to make investments to strengthen the business and for future growth, particularly as it relates to opex, do you think it's a realistic expectation for 2017 that you could grow opex slower than revenue growth?
Dean McCann, Executive Vice President and Chief Financial Officer, Canadian Tire Corporation Limited I'll take that, Mark. I mean everybody...
Stephen Wetmore, President and Chief Executive Officer, Canadian Tire Corporation Limited You better.
Dean McCann, Executive Vice President and Chief Financial Officer, Canadian Tire Corporation Limited Certainly there is an absolute focus around here on controlling our opex growth. That said, we're not going to sacrifice on the opportunities to invest in the things that we think are important. So things like product and the branding initiatives that CTR is doing as an example are places that we want to put money. That said, from an operational efficiency point of view, we're looking at everything, right, in terms of opportunities to take cost out and it's that classic case of the old versus the new, right, and trying to take a dollar out of the old as we reinvest it back into the new. But certainly from the perspective of the answer to your question, yes, definitely we want to grow opex at a lower pace than we are growing revenue without question and get the operating leverage that comes with that. That's I referenced with respect to the EBITDA ratio, that's a metric that internally we're really focused on having that growing as a percentage of revenue over time.
CANADIAN TIRE CORPORATION, LTD. Q4 and 2016 FULL-YEAR EARNINGS CONFERENCE CALL
Thursday, February 16, 2017 – 1:00 P.M. ET
Page 8
Mark Petrie, CIBC Okay, thank you.
Operator Thank you. Your next question is from Irene Nattel from RBC Capital Markets. Please go ahead.
Irene Nattel, RBC Capital Markets Thanks and good afternoon everyone. Just continuing on that line of thinking, it's a couple of years now where we've seen some nice growth in gross margin. Wondering how much more is left there in that process. You've been doing a lot of work on how you source and the approach, pace of sourcing. Where are we there? Is it reasonable to expect, all things being equal, putting aside currency impact, ongoing improvement in gross margin?
Stephen Wetmore, President and Chief Executive Officer, Canadian Tire Corporation Limited Yes. Hi Irene, it's Stephen. You're right; we have seen a very nice lift in our margin work and all of it primarily attributable to the great work that has been done on pricing and promo and in purchasing, primarily through Canadian Tire Retail. Obviously it's the biggest impact and that work continues. I am extremely, extremely impressed of the fact that they have been able to take on the—primarily the foreign exchange impact, the negative impact from foreign exchange and come out the winner. So the work will continue. I think in some cases you may see it fluctuate by quarters, perhaps, depending on the products that are offered in those quarters and the margins that are available with those products. I think they've had a very positive impact to their business by the introduction of some of our own brands and being able to control them and have the ability to place them properly and price them properly. So great work as well on our weekly promotions. So across the board, like excellent work. Do I expect them—look, these are great margins and you have to go with the flow. I'm not—I think they have insights that they never had before so I believe they have very, very good control of their margins, but margins drive you so far and then they tail off. There's no doubt about that. I expect that we're going to stay unbelievably focused with it but there's a limit to the margins that we want to take and not
hurt the business, let me put it that way. So I'm—this type of margin performance, keeps me fairly happy.
Irene Nattel, RBC Capital Markets That's great, thank you. Just thinking about the success you've had with private brands and the role that plays both in differentiating your offering and in driving margins, can you just provide us with a little bit of colour as to what brands you may be a little bit more focused on this year, where you see opportunities to perhaps to add more brands?
Allan MacDonald, President, Canadian Tire Retail, Canadian Tire Corporation Limited Yes, I think—hi Irene, its Allan here. We think of the brands quite often in terms of our customers and the various categories that we're in and how we're performing. So when you look at categories like home decor that we're very strong in but our brands weren't performing as much as we'd like, we knew that was an area of opportunity. And then there's some opportunistic ones that come your way. When Woods became available and camping was a category that had been fairly stagnant for us we thought this would be a way to invigorate it, so that was a great success. So we're going to continue to come at it from the standpoint of where are our brand-led categories where our own brand penetration isn't perhaps maxxed out where there might an opportunity, where are the categories that while we're not performing as well as we think we could, and perhaps an owned brand or a different brand strategy, could remedy that, and then where categories perhaps we were looking to expand into that are natural extensions where an owned brand might be an asset. So, that's one way to say we're going to continue to be deliberate in terms of strengthening the business in a way that really resonates with our customers, and then also being opportunistic as opportunities present themselves.
Irene Nattel, RBC Capital Markets Would you care to share with us categories, the ones you think you're underperforming?
CANADIAN TIRE CORPORATION, LTD. Q4 and 2016 FULL-YEAR EARNINGS CONFERENCE CALL
Thursday, February 16, 2017 – 1:00 P.M. ET
Page 9
Allan MacDonald, President, Canadian Tire Retail, Canadian Tire Corporation Limited I'd love to give you more detail on that but I'm afraid I'm going to have to hold fire for this point because I'm not quite at the stage where we can share it with you yet.
Dean McCann, Executive Vice President and Chief Financial Officer, Canadian Tire Corporation Limited Kind of no, Irene.
Irene Nattel, RBC Capital Markets Okay. Thanks guys.
Operator Thank you. Your next question is from Patricia Baker from Scotia Bank. Please go ahead.
Patricia Baker, Scotia Capital Thank you. Good afternoon everyone. Actually I'm not going to ask Allan any questions on Canadian Tire Retail, so I'm sure he's going to be surprised by that. I've actually got a broader question on Forzani and the whole sporting goods, that segment of retail in general, and just looking at if we just look at the performance there—and there's nothing to sneeze at at that 5.1 percent comp, that's tremendous performance that most retailers would love to have—but if we just look at the trend over the course of the last several years we have seen that the—since the beginning of 2016 the two year stack at Forzani Group has come down and for the first time that I can recall we've actually seen Sport Chek marginally underperform the overall banner—I don't know how much that had to do with weather or anything else—but just generally when we look at that business I think it would be fair to say that you've got a tremendous position being the leader in Canada, pretty much the only national player in this arena, have had tremendous success with a lot of innovation products, new stores, but probably the part of your business that's most vulnerable to online competition and just looking at what's happened south of the border, the pressure that we're seeing on a number of the vendors, etc., and just the dynamic generally around this segment of retail, I would say not just in North America but around the world, are you starting to think strategically differently about that part of the business? If
we go back when you acquired Forzani—I'm sorry, this is such a long question—the initial thing was to fix it, you guys did a great job fixing it, then it was getting the real estate right and rolling out the new format stores. So how are you thinking about that business strategically now, either Steve or Duncan, or is this a question you want to leave until your analyst day?
Duncan Fulton, President, FGL Sports I think you almost answered it for me, Patricia. Keep going. If you look at where we've come from, obviously the strategy was acquiring the asset, build the Sport Chek brand as we have done with great results, expand the network significantly, and that was all with the five-year plan and we're at the other side of that five-year plan now and the footprint we have across the country is what we hoped it would be when we talked about that five or six years ago. There's a lot of optimism and opportunity right now to get more out of the asset that we already have. We have a great store network. We have a great brand. The categories that we play in we're still seeing the kind of growth that we would want. To the weather point, we are taking a page out of the CTR playbook from what they started a few years ago where it's great to be the store that Canadians want to come to whenever it's cold or snowing, but we can't be completely reliant on winter weather for two of our four quarters a year and I think there's some other categories you're going to see us expand and grow that already have some momentum in them. So I think you're going to still continue to see growth. You'll see renovations and relocations in stores wherever it makes sense, but certainly there's a lot of focus here for the next couple of years on getting a lot more from the assets that we already have.
Patricia Baker, Scotia Capital Just to refresh for me, and I know I should know it but I don't, in terms of the new modeled stores, how many of these new Sport Chek have you got open currently? What is the plan for '17? And then can you explain that 20 bps difference between the comp at Forzani and Sport Chek?
Duncan Fulton, President, FGL Sports There's six flagships that we would call flagships that are open now and there's a few other stores that we would
CANADIAN TIRE CORPORATION, LTD. Q4 and 2016 FULL-YEAR EARNINGS CONFERENCE CALL
Thursday, February 16, 2017 – 1:00 P.M. ET
Page 10
call hero stores, which is our polite way of saying we didn't spend as much money to build them. But they still have a lot of the exceptional vendor shops inside of them and a lot of the digital presence that you see inside of the flags. Those are great brand standards for us. We're getting a lot better at getting the output of those stores that we want as well as we kind of adjust our payroll and adjust how we run those stores. I'll tell you that the conversations we have with vendors as the vendors walk through those flagship stores, it directly affects the line extensions that we get from them and the kind of products that they want to sell through our network because it's the kind of retail experience that vendors want to associate their brands with. So, there is a couple of stores that are kind of in-process right now for what we'd call a hero type renovation. I don't think you're going to see another flagship in our immediate future. There's a lot we can still get out of the ones that we have and the vendors are certainly very happy with the footprint we have there.
Patricia Baker, Scotia Capital Thank you for that. I'll get back in the queue.
Operator Thank you. Your next question is from Derek Dley from Canaccord Genuity. Please go ahead.
Derek Dley, Canaccord Genuity Yes, hi. Thanks guys. Just switching gears a little bit to CTFS, we've got three quarters and we're now in the realm of GAAR growth, obviously we've got an acceleration here in Q4. Given the investment that you guys have had in that business in the past, should we expect you to continue to invest in growing GAAR and kind of look at the business on a similar trajectory to what we saw this quarter?
Gregory Craig, President and Chief Executive Officer, Canadian Tire Financial Services and Canadian Tire Bank Hi Derek, it's Greg here. Yes, I think we separate that into two pieces around kind of what we've experienced to date and then talk a little bit about as you look forward and our hopefully continuing investment in the business. It has been a great year for 2016 for CTFS. We've been
really pleased with where we've come from. If you take a look at where we started the year, look at, as Allan talked about, the WOW Guide, look at our presence in flyers, we've even had two TV commercials which we've never had before, they're really focused on getting customers to understand our value proposition and what we found is that once you understand the value proposition that the sales and the receivables and the active accounts tend to follow. So, really pleased by what we've seen all through the year and for me it's really—and here's how I characterize it. It's taking—we're pleased with what we have but we're really excited about what the future can hold. If I look at building out further with retail, building out further with Mark's, building out further with FGL, I think there's still lots of runway left for this business to continue to grow and we're just going to get deeper into the retail integration with all the banners that we've already started with CTR.
Derek Dley, Canaccord Genuity Okay, great. Thank you. Just on your capital allocation priorities, I mean we're seeing the capex number come down about $200 million, let's call it the midway point of 2016, and you guys intend to buy another 550 million shares. But outside of that, are there any other capital allocation initiatives that you guys are evaluating?
Stephen Wetmore, President and Chief Executive Officer, Canadian Tire Corporation Limited Nothing of—I mean we have to—obviously we had to finish the distribution centre and our—as far as major store builds and things like that, I mean we're going along more of a traditional sense from that point of view. Allan MacDonald's put a few additional stores in his network for refurb in the coming year, but that's minor in terms of total capex. The technology is obviously the major—our major thrust and picking and doing them sequentially as Eugene Roman and his team feel that they can handle it and then within the strategies that we have for each of our business units is absolutely critical. So we are—we've finished our point-of-sale investments for our Western companies and the distributor order management systems, yes, but they're not huge in terms of investment. So, it's strengthening, it's making us better as far as our focus is concerned on technology investments. Out to two years and three years, we probably are looking at
CANADIAN TIRE CORPORATION, LTD. Q4 and 2016 FULL-YEAR EARNINGS CONFERENCE CALL
Thursday, February 16, 2017 – 1:00 P.M. ET
Page 11
supply chain investments and things like that, but not in the—as far as technology is concerned but not in the 2017, early '18 period at all.
Derek Dley, Canaccord Genuity Okay, great. Thank you very much.
Operator Thank you. Your next question is from Jim Durran from Barclays. Please go ahead.
Jim Durran, Barclays Good afternoon. Just going back to productivity, obviously some very significant contributions over the past two years. As we look out over the next two years, I know we're going to trip into the new timeframe for the new strategic plan, but do you see the size of opportunities as great on a net basis? I mean obviously there's some investment spending required to capture it but do you see the size of the benefit being as significant as it has been over the past two years?
Stephen Wetmore, President and Chief Executive Officer, Canadian Tire Corporation Limited Hi Jim, it is Stephen. Over the short-term I mean we're on track. Over the next two or three year horizon, these investments that we're making are as much skill set investments as they are kind of one-off investments. It wasn't like a yes, we have done better in negotiating some contracts and I won't say that that isn't part of our theme here, but that is the small part of the theme. I think in understanding and having the tool sets to be able to negotiate better pricing from our vendors, for example, is extremely important to us. A lot of that skill set across the board will roll out to our other vendors as well. Pricing and promo optimization work is just a straight skill set, and that's what I mean by great retailing and I don't know how else to describe it. That skill set stays with you and Allan and Greg Hicks and team have spent a fair amount of time and effort and some cash in order to increase that skill set and get the tools. Some of it too has come from pure data analytics. Both the merchandising team and our IT team has done a tremendous amount of work in making sure that that data
is accessible, that the data has the right tools for accessibility, and that our merchants understand how to access it. All those skill sets stay with us. So some of it, the latter what I just mentioned is also now rolling out to other places. So the benefits of those we will see over time. And I think there was a, I forget who asked the question in terms of consumer data assisting with our store merchandising and layout, that is one of the next big themes I think that the guys are doing a huge amount of work on because that data tells us a tremendous amount about our physical stores along with our e-store if you will. I think overall it's going to stick with us. And owned brands will also play a very significant role going forward in terms—we've kind of called productivity and operational efficiency a big basket here. One of the reasons we wanted to move off calling it productivity is that the traditional interpretation of productivity in a way was trying to get more out of the same—trying to get more output out of the same input. This is—a lot of this is just straight skill set. So the long answer but yes, is the short answer.
Jim Durran, Barclays Great, I appreciate that, thank you. On the FX side, can you give us some idea as to what your FX outlook is for the new year like is there a point in time where FX will no longer be a drain based on how you've been accumulating your U.S. dollars?
Dean McCann, Executive Vice President and Chief Financial Officer, Canadian Tire Corporation Limited Yes Jim, its Dean. So it is still a big factor but as I used my metaphor before we are kind of heading for a glide path here that brings us more in line with what, if you would, typical spot would be today. But we're getting ever closer to that but the team throughout 2016 has had to deal with a very significant year-over-year difference in effective rate. That will continue to moderate, right as we go into 2017. So if I had to characterize it, I mean it will be less significant in ‘17 than it was in ‘16 for sure as old hedges rolled off and the new hedges that we've been putting on over time come into play.
Jim Durran, Barclays Okay, and last question just e-com. Is e-commerce now at a point in some of the businesses where it's having a meaningful impact on comp store sales?
CANADIAN TIRE CORPORATION, LTD. Q4 and 2016 FULL-YEAR EARNINGS CONFERENCE CALL
Thursday, February 16, 2017 – 1:00 P.M. ET
Page 12
Stephen Wetmore, President and Chief Executive Officer, Canadian Tire Corporation Limited No, not at this stage at all.
Jim Durran, Barclays And how far off do you feel that that timeframe is?
Stephen Wetmore, President and Chief Executive Officer, Canadian Tire Corporation Limited I guess it’s the definition of meaningful as well in terms of comp. So our e-com is growing rapidly. It's a smaller base.
Dean McCann, Executive Vice President and Chief Financial Officer, Canadian Tire Corporation Limited And we can wow you with some big percentage increase in numbers but yes…
Stephen Wetmore, President and Chief Executive Officer, Canadian Tire Corporation Limited Yes, it’s fairly impressive. I think in some of the—it's always going to be difficult in Canadian Tire Retail because of the variety of the assortment that they have to understand the comp effect. Certainly, I think Patricia's comments about Sport Chek and the future of sports industry, bang on, it's a complicated thing and that's why Duncan and team are flat out to make sure that the customer is getting exactly what they want in that business. So, that one probably would have the—you will see an effect sooner maybe than other categories in our businesses. But it will be a while before it's a significant effect that's for sure. I think in the U.S. they include it in same store sales, don’t they?
Jim Durran, Barclays Typically yes
Stephen Wetmore, President and Chief Executive Officer, Canadian Tire Corporation Limited
Yes, yes. Well, if it benefits us then we’re going to do the same, Jim.
Jim Durran, Barclays I appreciate your honesty. Thanks very much.
Operator Thank you. The next question is from Brian Morrison from TD Securities. Please go ahead.
Brian Morrison, TD Securities Hi, thank you. Dean just a follow up to Jim's question. Can you just remind us how far in advance on average you put in place your hedging strategy?
Dean McCann, Executive Vice President and Chief Financial Officer, Canadian Tire Corporation Limited Good try, Brian, but I never actually answer that question usually, but we go out, we do go out probably a little longer than most retailers is what my understanding is. But I don't really lay out how far we go out. But if you kind of think about it, as we are moving towards that glide path of getting closer to kind of what current spot is, it's taken us quite a while to get there.
Brian Morrison, TD Securities Fair enough.
Dean McCann, Executive Vice President and Chief Financial Officer, Canadian Tire Corporation Limited Because that's as far as I’ll go.
Brian Morrison, TD Securities Okay, then I have a question on the balance sheet and perhaps I could direct it towards Stephen please. Looking forward I don't imagine the capital structure is likely to change at CTREIT or Financial Services, and you have just ended the year with a little net cash within retail and I don't see how this is likely to change much next year even after your active NCIB based on your
CANADIAN TIRE CORPORATION, LTD. Q4 and 2016 FULL-YEAR EARNINGS CONFERENCE CALL
Thursday, February 16, 2017 – 1:00 P.M. ET
Page 13
positive operational commentary and you've got capex coming down. So without a material transaction as it’s often alluded to as not your style, what are some of the other potential alternatives you banter about with your advantageous financial position?
Stephen Wetmore, President and Chief Executive Officer, Canadian Tire Corporation Limited Well, I know you might say it's not my style as far as the acquisition; it's not my style of just until we find something that's good. But the owned brands, I suspect we're doing a lot of work and when the opportunity arises we're going to take it in terms of if there is something to acquire or licensing at a fee and those sort of things we definitely will. We keep a little bit in reserve should we ever have to invest in some of our productivity initiatives but that's not going to have any significant effect on anything. So I'm not overly concerned at all at the moment with the quantum of cash that we're carrying along. It does vary during the year substantially depending on how we use our working capital at end of the year usually fairly strong like this. But I fully intend to push as hard as we can to bolster our business as much as we can if we find the right opportunities to acquire some smaller brands and things like that. So that would be in the line of sight and I don't want to get next year where we've gone from $250 million at the end to say ‘15 to $600 million at the end of ’16 and I don't really want to get to $900 million at the end of ’17, so I'm very conscious of it.
Brian Morrison, TD Securities Okay, thanks so much.
Operator Thank you. Next question is from Peter Sklar from BMO Capital Markets. Please go ahead.
Peter Sklar, BMO Capital Markets On your SG&A line or operating expenses, that line as you know grew quite considerably year-over-year. I take it that one of the growing expenses is loyalty as you reward consumers who sign up for your financial services. And another growing cost in there I sense from your commentary today is the cost of data analytics as you continue to deploy data analytics. So I just want to
get a sense of like are those costs significant and are you going to continue to grow those costs as initiatives of Canadian Tire or are we kind of plateauing out. So if you could just talk a little bit about that please?
Stephen Wetmore, President and Chief Executive Officer, Canadian Tire Corporation Limited Okay. Well data analytics—firstly loyalty up probably, no doubt about that but it's not—I mean that's just good spend. As far as I'm concerned it's not something that I think you should be materially focused on particularly. Data analytics it was really that part of the investments have occurred from Eugene's point of view in terms of getting us what we need. Certainly setting us up with unbelievable facilities in Winnipeg has been a big part of this and the security that surrounds it has been a huge part of it. The accessibility has been a huge part of the investment. So that sitting there, we’re always going to make some to make it—keep it up to date. We have the tools. So what we've been spending which is why you see it in a little ways through opex is some of the skill set work. But those aren’t that substantial really for me to highlight to you to tell you the truth. The analytics is—it's more skill set based than it is spending a lot of money on it. Digital marketing efforts and things like that we have to keep a close eye on to make sure they return the investment, that's a different type of investment. It's more expensive than traditional advertising and you’re going to be careful. But I guess that's related to data but no I wouldn't concentrate in those two things really as driving a substantial SG&A going forward.
Peter Sklar, BMO Capital Markets So if you look at your SG&A line it grew about 10 percent year-over-year so if there's something happening there, what should we be focusing on?
Stephen Wetmore, President and Chief Executive Officer, Canadian Tire Corporation Limited So, well part of it was our variable comp at the end of the year. So that's kind of a one off. It's our incentive plan to be blunt about it for Management Team, which goes very deep into the organization. That was there and we incurred and spent some money to teach some of our folks the skills necessary in some of the other areas of operational efficiencies that I had mentioned earlier. So
CANADIAN TIRE CORPORATION, LTD. Q4 and 2016 FULL-YEAR EARNINGS CONFERENCE CALL
Thursday, February 16, 2017 – 1:00 P.M. ET
Page 14
we got some outside help. Yes, with some data I mean to help some of the teams to analyze the data but skill set investment primarily. I mean that was what was driving our SG&A especially in the fourth quarter. I think I missed one though.
Dean McCann, Executive Vice President and Chief Financial Officer, Canadian Tire Corporation Limited Yes, I think—Peter, its Dean, three lines right, so as Stephen rightly highlighted right, the outside help if you will around operational efficiency is one of the buckets that in fourth quarter was a heavy spend with respect to that because we got momentum with the program, took it on the road so to speak. The marketing investments around loyalty because of—quite frankly because we've got great take up and great cooperation between retail and CTR and CTFS, particularly around ISF and that drove some incremental loyalty costs with the take up of that program and benefit of both businesses. And then, so those are kind of the other two buckets, right, on top of, as Stephen mentioned, the variable comp which extends right down through the organization. So obviously with the top lines at Mark’s particularly and as well as FGL, that's right down into the store level personnel, kind of guys that we were taking along through the year and then they had just a fantastic result in the fourth quarter. So we had some catch up to do with respect to recording those expenses.
Peter Sklar, BMO Capital Markets Okay and Dean the other question I wanted to ask, it seems from listening to Management speak today that the financial services side of the business has and will become more and more integrated with the retail side of the business, and Canadian Tire had some very powerful executive, retail executive. So who's going to be the policeman to ensure that credit standards and other standards are not compromised in any way to drive the retail business? Is that you? Or I mean if the two businesses become integrated that's something I would think you want to be watchful of?
Dean McCann, Executive Vice President and Chief Financial Officer, Canadian Tire Corporation Limited Jump ball here but…
Gregory Craig, President and Chief Executive Officer, Canadian Tire Financial Services and Canadian Tire Bank Peter, yes, Greg here. Let me start. As you know we're a federally regulated entity. We have our own Board and bank Board as well and we're very cognizant and aware of that exact fact. I'll talk about ISF maybe as an example. I mean ISF does a lot of great things for CTR and we also test that in Mark’s in the fourth quarter. But ISF also is a great source of new accounts for the bank. So we're very aware of—and frankly ISF surprisingly, the people that are taking up ISF are lower risk super prime customers. So that really isn't changing any of the risk profile. If you think about it you have to have $200 of a transaction in the Canadian Tire cash lane. But we're very aware of the fact that we’re a federally regulated institution and with the Board and I don't think I want to walk in and tell Stephen that the write-off rate changed any time soon. So very aware of that fact and we're watching it extremely closely.
Stephen Wetmore, President and Chief Executive Officer, Canadian Tire Corporation Limited Yes, more—certainly Canadian Tire Retail where we're trying to blend it into some of them to take more accountability, to assist Greg in customer acquisition for example. So, much of the customer acquisition is done in-store and a lot of it, etc. within Canadian Tire Retail and within Petroleum. Given the far in excess of 200 million visits online was adjusted within the Canadian Tire Retail environment where if the marketing teams can sit down and figure out how can that benefit Canadian Tire Financial Services both in terms of just good marketing, good exposure when you get on the website, great offers as they pop up against certain product sales, etc, etc that's where the power of Canadian Tire Retail and its reach can help Greg and his business. And so that's kind of what I meant.
Peter Sklar, BMO Capital Markets I understand what you’re saying, Steve.
Stephen Wetmore, President and Chief Executive Officer, Canadian Tire Corporation Limited Okay. Thank you.
CANADIAN TIRE CORPORATION, LTD. Q4 and 2016 FULL-YEAR EARNINGS CONFERENCE CALL
Thursday, February 16, 2017 – 1:00 P.M. ET
Page 15
Operator Thank you. Ladies and gentlemen this concludes today's call. A webcast of the conference call will be archived on Canadian Tire Corporation Limited Investor Relations website for 12 months. Please contact Lisa Greatrix or any member of the IR team if there are follow-up questions regarding today's call or the materials provided. You may now disconnect.
