Canadian Tire Corporation, Limited (CTCA) Earnings Call Transcript & Summary

All right. Thank you for that introduction, [ Lori ]. Good morning. Welcome, everyone. I'm glad [ Lori ] mentioned it. I wasn't sure if it was in his remarks or not, but I wanted to make it known. He's the one who started this conference 30 years ago. So full credit to you, [ Lori ], for beginning this wonderful tradition. 30 years is a long time. 3 decades ago, if we want to pivot a little bit to the consumer space, the N64 was released. Donovan Bailey was the world's fastest man. And Alanis Morissette's Jagged Little Pill was topping the charts and sweeping the nation. And still, our conference perseveres and thrives. I find there's always something to keep us interested in this space. It's not everything about the compute and the AI trade. We saw a couple of multibillion-dollar deals this past summer in the consumer space. I find earnings days are more volatile and have larger reactions than we're used to in the past. And once again, our conference coincides with another Fed meeting. And I, for one, I'm grateful for, even under new management, the Fed meeting Wednesday and mid-September every year to keep things interesting for us around 2:30 in the afternoon. They routinely do this. And I think that word routine, it lines up with back-to-school, it lines up with September. Sometimes it implies no changes or doing things the same way. I look at it a different way. I think September and the back-to-school conference are a great time for a fresh start and for new beginnings. And I think it's a time we can sharpen our approach to investing. We can learn different methods, we can generate new ideas. So, what better way to do that than to interact with some of the largest and best-known consumer names out there in the Canadian space that are here today. We're also really looking forward to having our guest speaker, Doug Stephens, over lunch hour, he can share his thoughts on consumer habits and some of the successful strategies that he has seen. The goal today, though, is always to help you with your investment decision-making process. And in that regard, I know today will be invaluable to you. So, with that, let's begin and enjoy the day. So, our first presenter is Canadian Tire. Please help me welcome to the stage, EVP and COO, TJ Flood; and EVP and CFO, Darren Myers.Please join. We make you go the long way this year, get your steps in. Okay. So, good morning. Thank you both for being here today and for kicking things off for us. We're starting with a theme here about state of the consumer. So, I would love to know your thoughts on consumer health and spending at the moment. Do you think there's been a shift to a slowdown? Pick your reason why higher gas prices, tariff, trade developments, et cetera, geopolitical uncertainty. What are you seeing from the consumer? And is it slowing down?

Maybe I'll jump in on that, John. And, first of all, thanks for having us up here. Thanks for aging me too. I thought 30 years ago, I was young, but Jagged Little Pill, I remember it like it's yesterday. So, thanks for the reference there. Yes, consumer sentiment, it's a tough thing to peg right now. I would describe it as -- we have a very cautious but resilient customer. I think with everything going on, you mentioned gas prices, the geopolitical situation, it's tough to meander through with the news that consumers are reading and digesting every day. We've seen them definitely migrate a little bit towards the value orientation. And -- but at the same time, I find them, kind of, picking their spots on where they're willing to invest. If we can come up with the right innovation, the right brands, they are willing to invest. So, I would call it resilient, it is probably the best word I could describe it as. As far as things like patriotic purchasing, hard to tell yet whether we're going to see kind of a second round of that. We definitely saw a first round of it, I'll call it, in Q2 of 2025, right after Trump's inauguration and kind of the fervor around that. But with the most recent trade war escalation and the rhetoric around that, it's hard to tell whether we're -- it's a bit early, I would say, to, kind of, put our finger on that. But overall, I would say a cautious and resilient consumer.

And you used the word value. We're going to say that word a lot today. Do you get a sense that there's been a shift in value seeking over the past 3 to 6 months? And whether or not you do, what is Canadian Tire doing to address Canadian's priorities for value?

Yes. What we've been seeing has really been over the last 12 to 18 months and maybe a little bit more pronounced in the last 3 to 6, but we definitely are seeing consumers gravitate to a stronger value orientation. They're picking their spots in terms of where they're going to invest. They are leaning more into promotional activity. For us at Canadian Tire, what we've been trying to do, I feel like we've built a lot of capabilities in the last 5 or 6 years that make me feel a lot better about our ability to offer value to consumers. We're obviously a high-low retailer, but we've expanded with -- so we offer a lot of value from a promotional standpoint. But our Triangle membership base has expanded significantly in the past couple of years, and that allows us just one more way through Canadian Tire Money to provide value to consumers. We also take great strides to -- in our assortment architecture to give consumers choice. So if you go category by category throughout our stores at Canadian Tire, we have a good, better, best assortment. So you can pick your spots, whether it's a barbecue or whether it's a frying pan, we offer that choice. And then lastly, on value, we have such a strong stable of owned brands that allows consumers to really, kind of, get value -- or sorry, feature sets in innovative items at great pricing. So we're doing a lot on value, and we're always running that balance of, kind of, demand creation and managing margins. But I feel very good about the -- our ability to drive value in a time consumers are really looking it.

Okay. Let's talk about True North. It was about 18 months ago, you announced the strategy. Maybe, Darren, we could start with you. Culture change was one of the key pillars of True North. Maybe talk about what you've seen in the last 1.5 years or so, and then we'll get to capital allocation and how that plays into True North as well.

Yes. So, thanks, John, and good morning, everyone. It's a pleasure to be here, especially on the 30th anniversary. Congrats to Scotia on that. Yes, listen, I think the first thing for investors to understand about True North is not just a set of initiatives and cost reductions. I mean, at its core, and we speak about this a lot, it's really changing how we operate as a company so that we can leverage our scale and what we call our system of retail. And I've been here now, timing is about the same, almost about 1.5 years. And I can tell you, for me, I'm even more optimistic on the opportunity in front of us in terms of how we're changing. So internally, we have elevated significantly the performance culture in the company, the discipline, the rigor, the expectations, the accountability. We've aligned on our long-term financial framework, which is to grow revenue 3% to 5% and have earnings growing faster than revenue. And we're really changing the culture, and that means on every level from the day-to-day to the strategic to all our initiatives, we're tracking, measuring, pivoting and again, holding people accountable so that we can make faster decisions. I think Q2, this is new muscles for us, I will say. So it takes time, but Q2 was a good example. We had operating leverage. We were able to see where the puck was going early, make the pivots, make the changes and drive better financial results, which is one of our primary goals of True North.

And on the capital allocation side, where are the main changes in the next couple of years versus what we've seen?

Yes. Listen, capital allocation, I mean, 2 periods. So, we will continue. So if I just sit back from my philosophy on capital allocation, the first thing is we want to maintain an investment-grade balance sheet. We want to make sure that we continue to invest in the business, support the dividend and the excess would go to buybacks. From a True North perspective, it wasn't about spending more capital in the business. It's being smarter and more disciplined about how we spend the money in the business. So, TJ will speak more about this, but we're investing in areas that matter. We're investing in our stores. We're investing in our new formats, e-commerce, Triangle, AI and a number of areas that improve the value proposition for our customers. The dividend is an important thing. We want to keep growing the dividend. And then finally, on the buyback, it's a very important way to give back to shareholders. I think it is important to note we've been at about $400 million the last number of years. Part of that was the proceeds of Helly that we received in. So we'll talk more about that in the future, but I think it's an important way to give back to shareholders.

Okay. Great. TJ, why don't we get your perspective on True North as well? It was, I think, concurrent with your appointment as COO with all banners and supply chain rolling up to you as well. So why was that change made? And what are the benefits to Canadian Tire?

Yes. I mean if you think about True North at its core, it was really about structuring our organization to be much more customer-centric and much more agile so that we could deliver performance excellence. I mean those are your 3 big things that we are after. And when you think about True North and how we're structured now, the structure that Greg put in place with a commercial officer and an operating officer, the commercial officer was really meant to get us to think differently about our business and not just think about banners in silos and products that we're trying to sell consumers. It's to really think about the enterprise across all of the banners as a way to capture consumers' attention about occasions and not just products. And that's how we structured ourselves. So the commercial Officer, Matt Moore, him and his team are charged with setting the strategic direction from a consumer standpoint. So the each banner and each category manager has a good understanding of their role in that enterprise approach to go after occasions. And they effectively act as setting the flight plans for all of my team. And our team is set -- the operating team is set to deliver against or to execute those flight plans and execute with excellence. So that's how we're structured. It's really been great because it has made us much more customer-centric. Right out of the gate, there's been a couple of examples with our back-to-school lighthouse. When we -- when I talk about customer centricity, we've taken an approach through AI, through an information layer called MOSaiC that has really established the micro occasions across the 52-week period that our consumers interact with. We've done a ton of basket analysis through the AI module that we created. It's a bespoke module as an information layer. And it's created micro occasions, as I say, across 52 weeks. And then we create lighthouses, which are really high-value demand spaces in the marketplace that we think we have an opportunity to gain market share in. And back-to-school was one of them. So that's an example of us kind of -- and then once we establish a lighthouse like that through the information that we have, we put our entire arsenal against it, assortment augmentation, marketing efforts, personalization, mass marketing, in-store approach. So what you would have seen in back-to-school this year was much different than what you would have seen historically from Canadian Tire across the whole spectrum. Back-to-school wasn't just about going back to dorm this year for Canadian Tire. It was about helping you get back to dorm, but also thinking about new categories like bedding, going across the organization. So I have a third year university student. We had to pick him up shower slides at SportChek in running shoes to go back to the gym. He needed a jacket at Mark's and some clothes to go back to school. So it really goes across our whole enterprise with the approach, which is much different for us because historically, you would have just seen SportChek, CTR and Mark's kind of do their own thing. Now we're pulling it all together with one cohesive approach. And we're going to be doing that across a wide spectrum of lighthouses and micro occasions as we go forward here. So we're really, really excited about it. And it's all framed in data and insight that we're driving from AI and all the proprietary data we have from our membership program. So we're really excited about it, and we think it's a big market share opportunity for us.

Perfect time to talk about the current lighthouse. And I think true to form, you've got a slick video for us, one of your lighthouse commercials. Perhaps we could run that now. [Presentation]

Candy Frog, she's right. I feel like it's been 30 years of high-quality commercials or videos that you've brought with you as well. So that's great. Okay. Why don't we talk about the bank? It's a meaningful part of the Canadian Tire business. Where are we with integration of the bank into Canadian Tire as a whole, the investments you're making? And how should we think about profitability of the bank?

Sure. Yes. So a year ago, we came to the market. So after a lengthy strategic review of the bank where we determined we were the best owner of the bank, we said a year ago, we made it clear that we needed to catch up and make further investments. And those investments are both on the regulatory side and on the infrastructure side of the bank. So we are at an elevated level of investment. I wouldn't say we are through that. We're making great progress on all our initiatives, and we're tracking them incredibly closely. But where -- what we did talk about on our last call is that we believe we're at an inflection point on the profit of the bank. You saw Q2, we were flat year-over-year. And of course, subject to the external environment, we do believe we'll start growing the bank again. But when I think about the bank and for investors to understand it, it's an integral part of that retail system that I talked about. And one of the interesting facts with the bank that I don't know if people kind of realize how it works is the majority of the spend is outside of our network. So what that means is we have a bank, a very solid bank with attractive returns with the majority of the spending funded by merchants outside of us. They are funding our points that then go into our network and have people shopping and redeeming in part of our ecosystem in Canadian Tire. So it's a great flywheel. It adds to our Triangle flywheel. And again, it's funded by others. So it's a pivotal part of that retail system. We think there's -- the opportunity is twofold. One is there is significant opportunity to keep growing the bank credit card business. We think that there's a lot of areas that we can keep growing that in. And then secondly is how do we support retail better. In the past, the bank was run for the bank, obviously, with the point cycling, but we're now looking at more campaigns, joint campaigns, kind of where TJ was going before with the lighthouses and how we're going to market together. It's going to be the same thing with the bank and the Triangle offers that you're getting. One of the examples of things that we did last year that we would not have done in our past is the bank looked at good paying credit customers that were at their limit that the bank itself wouldn't give a credit limit increase to. They weren't asking for credit limit increases. And we said, wait a minute, if we give them a credit increase, let's -- and they were loyal shoppers at Canadian Tire, what happens to the sales at Canadian Tire. So we gave them the limit. They kept paying their bills, and we saw a sizable increase in the -- in how much they were shopping at our Canadian Tire stores. So again, that's an example of the integration decisions we're making that we would not have made if we just looked at this as a silo. So we think there's a lot of opportunity in both areas.

Okay. That's a great example. I want to ask everyone today about AI and how you're leveraging it. I think you have a few terms we hear frequently in DaiVID and MOSaiC. So feel free to take this in whichever way you like, customer-facing or otherwise. But it sounds like you have a lot of interesting stuff going on behind the scenes at Canadian Tire. Tell us a bit more about that.

Yes. It's a dynamic time right now to be sure. And as we go to market, we're doing our best to build capabilities with the help of AI. I think if you start with the bare basics, we have 95% of our employee base now up and running on Copilot. We've never seen an adoption rate as fast as this and anything we've ever implemented with our employee base. We obviously started with creating a safe environment for them to operate and utilize AI and the adoption has just been incredible. There's a real hunger for utilizing AI to help people kind of just conduct their daily lives and their daily tasks at the company. And then when you think about consumer-facing and what we're doing to drive the business, I mentioned MOSaiC. I think that's going to be a really interesting one for us. It's the information layer that we're going to be using to help our migration to be a much more occasion-focused business. DaiVID is also very interesting. DaiVID is our, kind of, pricing and optimization engine. We have what we describe as a margin nerve center, and it's powered by DaiVID, and it's using all of our proprietary data and elasticity modeling with all of the price changes that we do over years. So it really helps us invest where we think we can create demand and capture margin where we think we have opportunities to capture margin. So we've had that rolled out for a couple of years at Canadian Tire Retail, and it's about to roll out into our Western banners as well. So feel very good about that. And then not to tip my hand, but you're going to hear us talk a little bit in the coming quarters about some really exciting AI we're about to launch next week at our dealer convention to help. I'm not going to get into it too much, but it's obviously going to help them with how they operate their stores, and we're really excited about that as well. So AI is definitely something we're investing in where it makes sense, and we see it providing a lot of value already in the form of DaiVID, and we're excited, particularly on the strategic side of what it's going to do for us with MOSaiC and then in the stores as we go forward here.