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

Well, good morning, everybody. In a time where the country is really focused on what Canada has to offer itself in the world, I'd argue there are probably a few more indelible brands in the Canadian consumer space than, of course, Canadian Tire. It's got mainline dealers across the country to serve all Canadian families and also a host of specialty retail banners like Sport Chek and Mark's. The company really has a retail format for everyone. And we're very pleased to have Greg Hicks, the CEO; and Darren Myers, the CFO, joining us today. And so I think where we wanted to start was Canadian Tire has been in business for how long now?

Almost 105 years next year.

105 years. So it's seen a few cycles. And so maybe that's a great place to start. Obviously, there's lots going on in the economy right now, whether you want to talk about consumer health, tariffs, the price of oil, all the stuff is changing in real time. And could you talk a little bit about what lessons lie in the history of the company that sort of help you figure out what to do today?

Sure, sure. Well, Tal, thanks for having us.

No worries.

Welcome to the account, so to speak.

Yes.

So there's a lot of statements of fact in your question there. And so I'm not going to debate the fact that we're in uncertain times, and there's lots of things that we're dealing with as a retailer, a very cautious consumer, very focused on value. So maybe I'll just focus more on with 105 years of longevity, we have seen a lot and spend more time there in terms of what we learned from those different cycles and how we're deploying differently right now. So this probably oversimplifies what a retailer needs to do in an environment like this, but it really comes down to making sure that you break through value. And so in order to do that, I think you need to have a very good understanding of what your customer is actually looking for in an environment like this that derives and provides value. And so with 100 years, we've got a pretty good sense of a playbook that emerges in an environment like this for us. And it's kind of 4 or 5 themes that come through that have us needing to kind of pivot and deploy a different playbook. So the first, and we're seeing it significantly in today's environment is just a heightened elevation of unit elasticity of the business. If you get your pricing wrong too much to the upside, unit demand is going to fall off a cliff. But on the other side of that equation, if you can kind of engineer a little bit of price crashing and lower your prices, you really see units take off. So lots of sensitivity there. Number two, you start to see trade down. So both from other competitors and/or industries into our business, but also within our business with our assortment architecture. For the most part, has a good, better, best quality architecture to it. So the best is down to better, the down to good. Number three, you really start to see in our high-ticket discretionary business, you start to see demand fall off. So pick a price point, $150, $200, you start to see demand fall off. Number four, we're in over 300 categories. And you start to see demand pivot towards repair and maintenance categories. So that high-ticket discretionary business that gets soft, which I just alluded to, so think of barbecue, transitions to barbecue repair. Instead of bike replacement, it's bike repair and accessories. And that moves across so many categories within the portfolio and which would lead me to my last kind of theme within the playbook that emerges, and that is our automotive business becomes much more important. In times like this, structurally, the new car sales start to trend down, the car park ages in the country, and there's much more repair and maintenance, both on the DIY and the DIFM side of our business. So what -- so we got a good handle on what happens to the business in an environment like this. And the good news is we've been building capabilities to drive more resilience around those 5 things. And so we're deploying that playbook as we speak right now from a pricing is so important. And so over the course of the last couple of years, we've built our first kind of at-use AI scale platform in our business. It's a pricing and margin AI platform that we call DaiVID. It allows us to kind of evaluate hundreds of thousands of transactions with elasticity curves and give us a sense how to surgically allocate price investment in the business. We've been able to, in some cases, with tariffs where we've had to take price to the consumer, move prices up, but also take thousands of prices down through that engine and keep our kind of North Star margin rate that we've committed to the Street and also improve our price perception substantially over the course of the last 12 months. From a trade-down standpoint, we love a trade down because for the most part, when you think about our own brands business, for those that don't know, we have a good multibillion-dollar book of private label or own brands business, which provides a significant margin premium. And it's penetrated in every component of the architecture, but it's really developed in good and better. So when you start to see trade down, it's a trade into our own brands at a significant margin premium. And then secondly, we're trying to create brands that Canadians covet and remain loyal to over time. So it induces trial, which we quite like because we think Canadians will be happy with the quality and the value proposition that's in our own brand portfolio. And then from a repair and maintenance standpoint, this is blocking and tackling retail. It's A good chunk of our cash allocation goes into our working capital, 65%, 70%. So it's looking at the accordion, just dialing kind of our inventory buys more to repair and maintenance categories, really focusing on sharp price points, in-stock, presentation in store, where we think there's some elasticity is feeding that through the DaiVID engine, et cetera. And then lastly, automotive. We've been building our automotive business to go more on offense for the course of the last many years. We were talking at dinner last night. We've got 6 years or 24 straight quarters of positive comp store sales. We've got lots of market share opportunity in our DIFM business. And our auto service business is also a trade-in because it is the value play in terms of where to get your car fix at good value at a good price with a nationwide warranty, et cetera, et cetera. So the good news is we've been building capabilities. We've been through an environment like this. We're deploying a different playbook. We'd like some kind of economic growth behind our sales, but we know how to maneuver in an environment like this.

And are there certain things that are constant that you kind of know like this is what we have to deliver that sort of kept the success going through the company's operating history? Or it's been such an interesting thing to watch Canadian Tire just sort of continue to incrementally get better each year. I don't know if it's like changing things or whether there's a really core set of things that really gives the durability to the business.

Yes. It's probably not profound. It's probably exceedingly simple. But in an environment where sales are challenged, especially in our namesake banner, our store owners are on us, right? Where we make mistakes, those mistakes are -- they're really amplified. And so in-stock just becomes so much more important, being in stock and being priced right. So I think the dealer model is just so important in times like this. We get the pulse of the customer. They give us constructive feedback about where we're letting them down in stock because they're trying to make sure every time a customer walks through the door or visits our site that we actually have an opportunity to close with them. And they're the old phrase, you can't sell from an empty wagon. So I think that's what's been the secret sauce of our ability to kind of stay relevant through a lot of different cycles. It comes from that very constructive dynamic between us and the others.

Okay. Canadian Tire tends to provide like some sort of strategic update or plan every sort of, I would say, 3 to 5 years sort of seems to be the cycle you guys tend to work on, and I think you're roughly 18 months into the True North program. Do you want to just run through the core elements for everyone of True North?

Yes. Maybe I'll -- I guess I'll start with the context for True North. We celebrated 100 years in 1922. It allowed us to kind of really relive our history and think about what makes us special. And then we went into 2023 and 2023 was a really tough year for us, similar dynamics to what we're dealing with now in terms of gas prices and inflation and soft discretionary demand, et cetera, et cetera. And so it forced us into a real introspection mode as a management team and as a Board. And we looked across where the disruption and what was happening across the industry, across the globe, specifically in Canada. And we came to the realization there was 3 kind of -- I love Jim Collins -- 3 brutal facts that we needed to confront in our next strategy. And one is that Canadian Tire offers or operates at a scale disadvantage to mega scale global retailers. Two, that technology -- I'm trying to remember them -- two, that technology and the adoption of disruptive technology was creating leaders and laggards in the industry. And that was before Gen AI. So that's only gotten worse. And then three, that these global scaled competitors who are taking share and leaving retailers in their dust globally that they had raised the bar in terms of a customer's expectations of what value a retailer provides. And so we really endeavored to think about how we construct a strategy that deals with those brutal facts. And ideally, as you know, in any strategy, you want to rally behind some sort of differentiated strategic capability or asset. And so it's hard -- it was hard for us to believe that you're ever going to outprice Walmart or out convenience an e-commerce, Amazon. So what truly makes Canadian Tire special. And we came to the realization that we do have a privileged capability against those global scale players. And that is our understanding of Canadians and of life in Canada and having all of that now digitized in the form of our first-party data through our loyalty program and then the personalization capability that's attached to that. So True North, maybe not incredibly well understood, is just a complete operating model change for Canadian Tire. The firm too is essentially an old-school conglomerate that had 10 businesses that operated in front of the customer, a bank, a REIT, a global brand and Helly Hansen, all operating independently in a HoldCo type operating model. And the 2 state in True North is to create a Canadian system of businesses. So it led us to divest ourselves of Helly Hansen last year, all together in a system bound by that strategic privilege capability, first-party data. And it's about a flywheel. It starts with that loyalty program and a value proposition, the first-party data that it provides. And then it moves through -- has to have strong, trusted banners. So Sport Chek, Mark's, Canadian Tire, Party City, et cetera. And so we're going to market very differently. It's not a Uni banner strategy. It's not Walmart. It's not Home Depot, it's not Costco. It's -- we have a system of businesses that we bound together through the loyalty program that need to stand up tall and they earn and redeem Canadian Tire and our bank issues Canadian Tire money. And with that issuance, you create more earning opportunity. And with that earning opportunity, you create more first-party data. And with that first-party data, you start to -- your personalization capability can get better because you know more about your customers. And it just spins. And so that's the strategy and lots of kind of proof points in terms of how it's going to show up or is showing up in front of the customer, but it's also a big change behind the curtain. We've completely changed our operating structure, the structure supporting the business. As you can imagine, whether it's acquisition or greenfield over 100 years, all of those businesses, they're all running on their own processes, their own tech. So behind the curtains, there's a lot of process and consolidation and duplication, the elimination of duplication across process and tech to get us as much as we can on a simplified, efficient tech stack and really operate this business as an operating company. So a huge change. We're convicted that this is the right thing to aggregate the scale that we've created for ourselves to be able to compete more effectively with a better competitive posture, ideally creating a competitive moat around our first-party data. And so far, so good.

And how do you think that you're going to have this enhanced data on the consumer. So if I'm walking into the store, what am I going to start to notice that's different?

I think it's all in the personalization, right? We got to be careful that we're not too creepy. We're quite -- A good tagline. Emphasize the 2. It's really in the personalization. And so I think the proof is in the pudding for us. You got to get some airtime here. Darren has been with us for 18 months or so. And so he keeps coming back to -- 60% of our business right now is with our loyalty. And so that's ginning up the first-party data. And our ability to engage with those members now, you can see nonmember versus member sales. And just -- if you just take Q2, we were 0.7% comp on the top line, but we were 3.5% with our members. So we're spinning that personalization capability, whether it's online or kind of more silent marketing, one-on-one specific offers to you, offers when you get into the store, technology around your ESLs that lights up when you're looking for something in the aisle. There's all sorts of different experiences, lots of multipliers on the Canadian Tire money. A $1 issued for us is essentially a $1 burned when a $1 gets burned in any one of our concept -- any one of our concept stores, there's a basket attachment to the burn. And so that just drives kind of more sales and spend per member, which is an important metric for us.