Canadian Tire Corporation, Limited

Please stand by, your meeting is about to begin. My name is Donna and I will be your conference operator today. Welcome to the Canadian Tire Corporation earnings call. All lines have been placed on mute to prevent any background noise. If you would like to ask a question, simply press star then the number one on your telephone keypad. To withdraw your question, press star then the number two. Now I will pass along to Karen Keyes, Head of Investor Relations for Canadian Tire Corporation. Karen?

Thank you, Donna, and good morning, everyone. Welcome to Canadian Tire Corporation's second quarter 2023 results conference call. With me today are Greg Hicks, President and CEO, Gregory Craig, Executive Vice President and CFO, and TJ Flood, President of Canadian Tire Retail. Before we begin, I wanted to draw your attention to the earnings disclosure, which is available on the website. It includes cautionary language about forward-looking statements risks, and uncertainties, which also apply to the additional material included this quarter to help you better understand the results of discussion during today's conference call. After our remarks today, the team will be happy to take your questions. We'll try to get in as many questions as possible, but ask that you limit your time to one question plus a follow-up question before cycling back into the queue. And we welcome you to contact Investor Relations if you don't get through all the questions today. I'll now turn the call over to Greg. Greg?

thank you karen good morning and welcome everyone as i'm sure you gleaned from our disclosures this morning our second quarter results mark a turning point in the canadian economy when we announced our q4 and 2022 results in february i advised we expected a more constrained demand environment specifically in the first six months of 2023 as inflation continues to persist along with rate hikes Consumers are feeling the squeeze and finding themselves in a precarious financial position, which has driven a change in household spend, a trend reiterated by the Canadian Chamber of Commerce and Angus Reid data several weeks ago. Despite these difficulties, our teams have done a commendable job navigating through the dynamic economic conditions, managing the remediation efforts at our A.J. Billis Distribution Centre, and supporting Canadians impacted by the devastating wildfires. I'm grateful for our team members' dedication to making life in Canada better for our customers, communities, and each other while remaining focused on driving our long-term success and growth. Our management team remains disciplined and dedicated. There's no question that everyone is clear-eyed about the challenges Canadians are currently facing. I'll spend some time this morning discussing in more detail what we're seeing in terms of consumer demand, but before I do, I'll provide some color on our Q2 results. Overall, our Q2 results were in line with last year's figures, but arrived in a slightly different manner than expected. Consolidated comparable sales were up 0.1% following strong growth of 5% in Q2 of 2022. Despite softening demand for discretionary goods, we continued to drive customer engagement by executing the initiatives within our better connected strategy. And our strong gross margin aided by the MSA impact helped offset increased expenses driven by our continued investments and higher supply chain costs, which were in part due to the DC fire. This enabled us to deliver a normalized EPS of $3.08 slightly below what we achieved in Q2 of last year. Although Gregory will address this in his prepared remarks, I think it's important to say up front that given the macro environment, we are managing operating expenses carefully while continuing to invest in the building blocks for our future. Now let's address the challenging macro environment we face. With 10 interest rate hikes in less than 18 months, and persistent inflation impacting the cost of living and leading to reduced savings cushions. Canadian consumers are experiencing increased financial strain and facing tougher spending decisions. Our triangle rewards and credit card data provide us with a privileged perspective on the economic landscape. These macro pressures are affecting spend across many external categories. This trend, which we've been observing over the last few quarters, accelerated in the latter half of Q2, especially the last few weeks of June. The spend per cardholder in Q1 was flat relative to last year, but Q2 marked the first quarter since 2020 that saw a decline in spend. Spend categories including home, gas, electronics, and clothing are now declining. And stalwarts like travel, dining, and grocery experienced significantly lower growth rates as the quarter progressed. When you move from external credit card spend to what is happening within our businesses, and Triangle Rewards membership specifically, we are seeing more pressure on consumers, particularly following the ninth interest rate increase in June. At the macro level, what we are seeing is real performance bifurcations. between essential and discretionary categories. At CTR, our essentials portfolio was up more than 6% in the quarter, and our discretionary portfolio was down more than 3%. This performance delta was evident for much of the quarter and accelerated in June. When combining our triangle membership data with external household data we use in our real estate modeling, we see that the discretionary softness is coming from more indebted households, most notably in Ontario and BC. Spending on higher ticket items started to get squeezed and customers prioritized essential products over discretionary ones. As you would expect, this has had a bigger impact on sales at CTR compared to our other banners. Changes in monetary policy are softening consumer spend across the country. With the last two interest rate moves specifically, creating a more pronounced demand impact in discretionary categories. Overall, the macroeconomic environment and consumer demand differ significantly from our expectations when we set out our strategy in early 2022. Given this and further to the noticeable slowdown in sales in the second quarter, we have decided to withdraw our previously disclosed financial aspirations at this time. It is unclear whether the monetary policy tightening has ended. By the end of Q4, we hope to have a better view of the long-term macro environment and interest rate impacts and expect at that time to be in a better position to provide an update on our long-term aspirations. To be clear, our decision to withdraw our financial aspirations at this time does not shake our commitment nor our conviction for the building blocks of our Better Connected Strategy. Our ongoing commitment to our Better Connected Strategy further positions us to deliver value over the long term, as the investments we are making in our stores and digital capabilities continue to outpace expectations. Although spending may be down, store traffic at CTR remains flat, indicating that customers, even with less to spend, continue to choose us for their purchases reflecting our sustained relevance and their trust in us. We are continuously adjusting our tactics while staying true to our better connected strategy. Our Triangle Rewards Loyalty Program is a crucial avenue for delivering value to our customers. Investments in our Triangle Loyalty Program have provided members with more opportunities to earn Canadian Tire money. In the last 12 months, we've seen our highest spending members earn on average of 8% back on their annual spend, which helps their dollars go further at our stores. Canadian Tire Money Redemption continues to deepen engagement and drive spend. In Q2, customers redeemed $100 million in Canadian Tire Money across our banners, and the associated spend totaled $220 million, a 3% increase over last year. And although in Q2 we saw a decline in spend per member, total transactions remained flat, another indication of our sustained relevance. Overall in Q2, loyalty member spend continued to outpace that of non-members and member registration rate also increased. Ultimately, our ongoing investment in growing our registered, promotable and triangle select members is paying off and creating a pipeline of opportunity for when the market normalizes. In addition to Triangle, our high-low retail approach and broad multi-category assortment allows us to offer value to customers through pricing and promotional strategies across our banners. Our own brand's portfolio gives us the flexibility to provide customers with what they need at budget-friendly prices. And our recent promo value message campaign emphasizes our commitment to helping customers stretch their dollars further. Finally, before I turn it over to Gregory, I want to emphasize our sustained commitment to investments that will enhance our competitive position and create shareholder value in the long term. As I said off the top, we do expect these macro challenges to continue for some time, but the market will inevitably stabilize. These investments will ensure we stay ahead and build our relevance to consumers, and they are delivering great results even today. Our strategic investments are working as we expected them to, notwithstanding the challenges we face. The recent addition of Marks and SportCheck to our one digital platform streamlined the customer shopping experience, further enhancing customers' online experience and supporting sales through our websites. And our new partnership with Microsoft will accelerate our modernization efforts, enhancing flexibility, stability, scalability, and innovation. Through our co-innovation with Microsoft in the generative AI space, we will pilot our first customer use case in a key essential category this fall. Additionally, we are already reaping the rewards of our CTR store investments. The 57 new or refreshed store projects completed to date continue to outperform both our financial and customer experience score expectations. We believe our Concept Connect format is a strong representation of the future of retail. Overall, while we face challenges today, we are not losing sight of the bigger picture. Our focus on customer value through triangle rewards, own brands, strategic investments, and our high-low value-driving retail model position us well for long-term success. And with that, I'll pass it over to Gregory.