Canadian Tire Corporation Limited (TSX: CTC.A) is a Canada-based company, which operates through a range of businesses. The Company's operating segments include the Retail segment, the CT REIT segment, and the Financial Services segment. The retail segment is a significant contributor to the group's profile.

Key highlights 

• Increase in dividend distribution: The Company approved a 3.3% increase in its annual dividend from CAD 4.55 to CAD 4.70 per share. This is the 11th consecutive year with an increase in annual dividend.

• eCommerce segment driving growth:With the stores closed and consumers sheltering at home, they naturally turned to E-Commerce. The company continued to step up its digital and eCommerce forces across all banners. Consequently, eCommerce sales reached CAD 1 billion on YTD, increased by CAD 700 million, compared to 2019. eCommerce sales grew 132% in the quarter, led by 178% growth at CTR. eCommerce penetration rates more than doubled as compared to 2019. Digital traffic increased 40% across all banners.

• Strong liquidity position:The group continues its focus on ensuring a strong cash position and financial flexibility. The Company ended the quarter with CAD 1.7 billion in cash and marketable securities, along with a cumulative credit facility of more than CAD 5 billion. 

Financial overview of Q3 2020

Source: Company 

• With strong in-store and eCommerce performance, the company reported an increase of 9.6% in Consolidated revenue to CAD 3.99 billion as compared to CAD 3.64 billion in the previous corresponding period. Excluding Petroleum, consolidated revenue increased by 15.3% in the reported quarter.

• The group’s consolidated retail sales increased CAD 510.1 million or 13.1% in Q3 2020. Excluding Petroleum, consolidated retail sales were up CAD 635 million or 19.1% as compared on the previous corresponding period. 

• In Q3 2020, the gross margin stood constant at 33.8% as compared to the previous corresponding period. 

• The company posted Net income attributable to shareholders of CAD 296.3 million, increased by 41.5% in Q3 2020 as compared to CAD 197.2 million in Q3 2019.

Revenue bifurcation

Source: Company 

Risk associated with investment

The performance of the company’s business is prone to several risks which could affect income and liquidity. Risks related to resource supply, food processing, suppliers, customers, competition are beyond management control. The changing consumer preferences and expectations related to eCommerce, online retailing and the introduction of new technologies also features as a potential risk. 

Valuation Methodology (Illustrative): Price to Earnings 

(Note: All forecasted figures and peers have been taken from Thomson Reuters). 

Stock recommendation

The Company was able to maintain the pace of growth in revenue and profitability. Further, the group continued to accelerate its digital and eCommerce efforts across all banners giving optimum results in favour of the group. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ rating at the closing price of CAD 165.45 on November 24, 2020. We have considered Metro Inc, Empire Company Ltd, Loblaw Companies Ltd etc. as the peer group for the comparison. 

Daily technical chart. Source: Refinitiv (Thomson Reuters)

Alcanna Inc

Alcanna Inc (TSX: CLIQ) is a Canada-based retailer of wine, spirits, beer, and cannabis. The Company operates stores in Alberta, British Columbia, and Kentucky. The Company also operates over 33 cannabis retail stores under the Nova Cannabis brand, with over 32 locations in Alberta and one location in Ontario.    

Key highlights 

• Strategic disinvestment: On October 8, 2020, the Company agreed to the sale of eight convenience-format liquor stores on Vancouver Island, British Columbia. The Company received CAD 20.9 million when the BC Transaction closed on October 30, 2020. Proceeds from this transaction would be used for investment in its Canadian liquor and cannabis retail businesses, debt reduction and for general corporate purposes.  

• Capital Investment:  The Company will invest by opening one new Wine and Beyond store in British Columbia, which is expected to open in late Q2 2021 at a capital cost of CAD 2.0 to CAD 2.5 million, plus an inventory investment of approximately the same amount. In the cannabis segment, the Company will be investing around CAD 7.5 million by opening eight stores in Ontario by early Q1 2021, and another two to four Alberta cannabis stores in 2021.

Financial overview of Q3 2020

Source: Company 

• The company continued its strong performance in Q3 2020 and posted total sales of CAD 211.5 million, increased by 10.9% as compared to CAD 190.7 million in the previous corresponding period. The revenue rose due to the change in pricing strategy implemented in 2019 and continued into 2020, as well as due to change in the customer's consumption habits.
• Cannabis sales increased by 23.6% to CAD 16.0 million in Q3 2020, compared to CAD 12.9 million in Q3 2019. The increase is primarily due to the twenty-four retail cannabis stores that have opened since June 30, 2019.
• Same-store sales contributed to 88.3% in total liquor sales, improved by 290 basis points as compared to the previous corresponding period.
• The company posted a Gross margin CAD 50.5 million, increased by 17.2% in Q3 2020, as against CAD 43.1 in Q3 2019. Gross margin as a percentage of sales stood at 23.9% in Q3 2020, as compared to 22.6% in the previous corresponding period.
• In Q3 2020, the company recorded net earnings of CAD 5.6 million as compared to a loss of CAD 3 million in Q3 2019, primarily due to the strategic decision of recalibrating pricing to regain market share in the Alberta liquor market and increase in demand for liquor products. 

Risks associated with investment 

An extension in lockdown restrictions might result in supply chain disruption and temporary closure of the stores, which would affect the group’s performance adversely. Further, a continued decline in economic or geopolitical conditions, including an increase in unemployment, could result in reduced consumer disposable income. 

Valuation Methodology (Illustrative): Price to Earnings

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company's liquor and cannabis stores are categorized under essential services which remained open to date. In the recent past, the company witnessed an increase in the product demand aided by the company's change in pricing strategy that was implemented in 2019 and continued into 2020, and the change in the consumption pattern was a key positive for the company. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ rating at the closing price of CAD 6.02 on November 24, 2020.

Source: Refinitiv (Thomson Reuters)

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