Canadian Tire Corporation Limited

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 

• Robust performance from the retail segment: The Company is continuously showing spirited performance from the retail segment. In FY2020, the revenue grew by CAD 410.2 million or 3.1% to CAD 13.6 billion, against 13.2 billion in FY2019. Strong growth at Canadian Tire primarily attributable to strong shipment growth, the impact of the Company's cost and margin-sharing arrangement with its Dealers, and Party City's inclusion drove the retail revenues to a new height.

Source: Company 

• eCommerce has a golden future: The company continued to step up its digital and eCommerce forces across all banners. The eCommerce channel witnessed increased customer demand as the sales reached CAD 1.6 billion in 2020, increased by CAD 1.0 billion, compared to 2019, with Canadian Tire delivering over 250% growth. In Q4 2020, digital visits across retail banners grew almost 50% to over 230 million visits.

• Focus on improving operational efficiency:The Company is continuously focusing on executing prudent steps against its operational efficiency initiatives and remains committed to delivering its targeted over CAD 200 million in annualized savings by 2022, which looks impressive and commendable. Furthermore, this would augur well for more healthy margins and future cash flows.

• Strong liquidity position:The group continues its focus on ensuring a solid cash position and financial flexibility. The Company ended FY2020, with CAD 2.0 billion in cash and marketable securities, along with a cumulative credit facility of more than CAD 7.19 billion. 

• Dividend distribution:The company has a strong history of dividend payment, which establishes the fact that the company’s business is resilient and has generated stable cash flows over the years.

Source: Refinitiv (Thomson Reuters) 

Financial overview of FY 2020

Source: Company 

• With strong in-store and eCommerce performance in FY2020, the company reported an increase of 6.2% in retail sales to CAD 16.9 billion compared to CAD 15.8 billion in the previous corresponding period.

• The Company posted Net income of CAD 862.6 million, decreased by 3.6% in FY2020 as compared to CAD 894.8 million in 2019, primarily due to increase in SG&A expenses and higher income tax expense. 

Risks 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 ReutersStock recommendation

The Company achieved outstanding operational and financial results in 2020, driven by strong growth in eCommerce and owned brands and the addition of 1.8 million new customers to the Triangle Rewards program. Furthermore, the group continued to accelerate its digital and eCommerce efforts across all banners giving optimum results favouring the group. The Company is also focusing on improving its operational efficiency and targeting an annualized saving of over CAD 200 million by 2022. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the closing price of CAD 179.11 on March 22, 2021. We have considered Metro Inc, Loblaw Companies Ltd, Empire Company Ltd, etc. as the peer group for the comparison.

1-Year Price Chart (as on March 22, 2021). Source: Refinitiv (Thomson Reuters)

Empire Company Limited

Empire Company Limited (TSX: EMP.A) operates in food retailing, investments, and other operations. The food retailing division operates through Empire's subsidiary Sobeys and represents nearly all the company's income.

Key Updates:

• Agreement with Loop Insights Inc.: A announced its collaboration with Loop Insights Inc., a provider of contactless solutions and artificial intelligence to drive real-time insights, wherein the former would provide Insights and Engage platforms, including its new digital receipt capability, as well as Loop’s Wallet pass technology.
• Strategic initiatives to support Growth: The company is focusing on improving its market share via addition of new stores, increasing store’s productivity, scaling up e-commerce services etc.

The group would inculcate its brand marketing strategies and the expansion of the Farm Boy and FreshCo banners. Also, the company plans to invest ~CAD 700 million for the next three years. Additionally, company is expanding its Western discount business and accelerating its presence in Ontario.

• Strong Traction from E-Commerce segment: During the third quarter of FY21, the group reported strong growth of more than three times from its E-commerce segment on y-o-y basis. Due to the change in the consumer’s buying pattern, the corporation witnessed solid growth from the segment, while we believe the above trend is likely to continue in the coming quarters, which would deliver improved business prospects to the company. Moreover, the group is accelerating in building its two e-commerce Customer Fulfilment Centre (CFCs) – for a total of four CFCs across Canada, which would cater for the growing pick order solution.
• Acquisition of controlling stake of Longo's: Recently, the group reported 51% acquisition of Longo's, which is a family-built network of specialty grocery stores in the GTA of Ontario. The group has a presence over 36 locations in the GTA and the Grocery Gateway e-commerce business. Longo's reported Sales stood at ~CAD 1.1 billion in FY21. 

Q3FY21 Financial Highlights:

• A announced its quarterly result, wherein the company posted revenue of CAD 7,018.7 million, higher than CAD 6,395.2 million in the previous corresponding period (pcp). The increase was driven by improved market share within the Food retailing segment, coupled with the increase of FreshCo in Western Canada and Farm Boy, Ontario which was partially offset by lower fuel sales.
• Operating income soared to CAD 320.4 million, as compared to CAD 235 million in pcp. The increase was driven by higher revenue, partially offset by higher cost of sales and an increase in selling and administrative expenses.
• Net earnings stood at CAD 187.3 million, significantly higher than CAD 120.9 million in Q3FY20, supported by higher operating income and a slightly lower finance cost.
• The group reported a cash and cash equivalents of CAD 784.3 million, while total assets were recorded at CAD 14,962.4 million.

Q3FY21 Income Statement Highlights

(Source: Company Report)

Risks: Change in consumption pattern is likely to hinder the company’s performance due to change in demand-dynamics.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock Recommendation:

In the recent past, the Company has significantly improved its efficiency and cost competitiveness through Project Sunrise, which was impressive. The group reported higher cash from operations of CAD 579.1 million and CAD 1,297.3 million, respectively in Q3FY21 and 9MFY21, respectively, as compared to CAD 480.5 million and CAD 1,201.8 million, in the respective corresponding periods, which is a key positive. We have valued the stock by using the P/CF based relative valuation approach and arrived at a target price offering single-digit upward potential (in % terms). We have considered peers like Metro Inc, Alimentation Couche-Tard Inc, etc. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 38.11 on March 22, 2021.

One-year Price Chart (as on March 22, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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