Canadian Tire Corporation

Canadian Tire Corporation (TSX: CTC.A) sells home goods, sporting equipment, apparel, footwear, automotive parts and accessories, and vehicle fuel through more than 1,750-store network of the company, dealer, and franchise-operated locations across Canada. Apart from the namesake banner, stores operate primarily under the Mark's, SportChek, Party City, Atmosphere, and PartSource monikers. 

Key Highlights:

• Improved retail sales supported by higher average spending: In Q2FY21, the group reported a strong performance from the retail segment supported by a 3% growth in average spending. Moreover, various sales strategies like reward propositions (via Triangle Rewards membership) have resulted in almost 600,000 new members joining the program during Q2FY21.
• Stable dividend distributions: Despite the ongoing sluggish economic scenario, the company has increased its dividend distribution to CAD 135 million in H1FY21, higher than CAD 132 million in pcp. Notably, the stock carries a dividend yield of ~2.5%, which is impressive considering the current interest rate scenario.
• Growing eCommerce segment: The company reported a tremendous surge in eCommerce sales in Q2FY21 at CAD 856.7 million, up 34% on a y-o-y basis, aided by growth from the Canadian Tire banner of 63.2% on y-o-y basis. Notably, eCommerce sales stood at CAD 2.1 billion in the last 12 months.

Q2FY21 Financial Highlights:

• The group announced its second quarter result, wherein revenue was recorded at CAD 3,918.5 million, a growth of 23.9% on y-o-y basis, supported by strong revenue growth within the Retail segment, partially offset by lower income from the Financial Service segment.
• Gross profit jumped 43% y-o-y to CAD 1,345.0 million, primarily supported by higher revenue.
• Income before income taxes climbed to CAD 357.5 million, from CAD 8.3 million in the previous corresponding period (pcp). The growth was supported by higher gross profit coupled with lower net finance costs, partially offset by higher selling, general and administrative expenses.
• The group posted a net income of CAD 259.1 million, surged from CAD 2.3 million in pcp.                         

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: Imposition of further restriction by the government would result in a lower retail demand, which might hinder the company’s topline and cash flows. The group also witnessed an increase in input costs, and the continuation of the above would dampen the profitability and margins.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

In the recent past, improved consumer sentiment has resulted in strong performance metrics for the company. Notably, Triangle Rewards members constitute ~57% of the total retail sales, which is a key positive. The company is also prioritizing on retaining its existing members under the Triangle Rewards member’s segment.  We have valued the stock using the Price to CF-based relative valuation method and have arrived at a single-digit upside (in percentage terms). Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 190.78 on August 26, 2021.

One-Year Technical Price Chart (as on August 26, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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