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:

• Strong Retail Sales: The Q1FY21 performance were marked by strong retail sales supported by improved traction from brands like Backyard Living, Tools, and Cycling etc. along with purchasing patterns of the consumers. Moreover, early arrival of spring also boosted the company’s relevant products. Additionally, the company’s homegrown brand also performed well, backed by increased penetration. The cycling, footwear and clothing segments also witnessed a surge in volumes, due to higher eCommerce penetration.
  

• Increase in Dividend distribution: The company reported a higher dividend payment in Q1FY21 at CAD 116.7 million compared to CAD 93.8 million in pcp. This is impressive as most of the companies are lowering their dividend payout in order to retain liquidity.

Q1FY21 Financial Highlights:

• The company announced its first quarter result and posted revenue of CAD 3,322.9 million, which grew 16.7% on y-o-y basis.
• Gross profit jumped 26.3% y-o-y to CAD 1,186.4 million, primarily supported by higher revenue.
• Income before income taxes was recorded at CAD 254.5 million, significantly higher than CAD 2.9 million in the previous corresponding period (pcp). The growth was supported by higher gross profit coupled with lower net finance costs, partially offset by an increase in the selling, general and administrative expenses.
• The group posted a net income of CAD 186.4 million, climbed from CAD 12.2 million in pcp.

Source: Company Report

Risks: Continuation of restriction imposed by the government would result in a lower retail demand, which might hinder the company’s topline and cash flows.

Stock Recommendation:

In Q1FY21, the company’s operation remained closed due to various restrictions imposed by the government in order to curve the impact of the pandemic. Hence, the daily weighted of store network operations stood significantly lower to less than 50% during the month of January 2021 and February 2021. However, the operations improved gradually, and the group reported full operations in the month of March and April of 2021, which is encouraging. With the ease of restriction due to the mass vaccination program by the Government, we expect improved operations in the coming quarters. On the valuation front, the stock of CTC.A is available at a price to earnings multiples of 11.7x on an NTM basis, as compared to the industry (Diversified Retail) retail of 19.6x. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 191.29 on July 29, 2021.

One-Year Technical Price Chart (as on July 29, 2021). Source: REFINITIV, Analysis by Kalkine Group 

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

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