Canadian Tire Corporation, Limited

Thank you for standing by. My name is Paul, and I will be your conference operator today. Welcome to 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, Paul, and good morning, everyone. Welcome to Canadian Tire Corporation's third 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 our 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 discussion during today's conference call. After our remarks today, the team will be happy to take your questions. We will try and get in as many questions as possible, but we ask that you limit your time to one question plus a follow-up before cycling back into the queue, and we welcome you to contact Investor Relations if we don't get through all the questions today. I'll now turn the call over to Greg.

Thank you, Karen. Good morning and welcome everyone. Our results this quarter reflect the relevance and trust Canadians have in our brand to create value and be there for communities in uncertain times. Despite undeniable challenges, we more than held our own in the market this quarter as our multi-category business model proved its mettle. Although Triangle credit card spend declined across almost all categories in Q3, Our credit card data shows our sales performance outpaced that of the market in the categories in which we compete. Despite the favorable share of spend, however, it is evident that customers are stretched and spending less overall. Consolidated comparable sales were down 1.6% as a result of softening customer demand, especially in Ontario and BC. and we saw a continued performance bifurcation between essential and discretionary categories. Essential categories at CTR were up around 4%, led by strength and automotive, while discretionary categories were down to a similar extent. Last quarter, I mentioned that when combining our triangle membership data with external household data from our real estate modeling, we saw that the discretionary softness is coming from more indebted households. most notably in Ontario and BC. In Q3, we observed similar trends, including at SportCheck, a banner that has higher reach in Ontario. Debt burdened customers decreased spend drove almost 70% of the sales decline in the quarter, especially in the discretionary categories at CTR. Marks, however, was a different story. Sales at Marks increased among debt burdened customers, suggesting that Marks' attractive price-to-value proposition may be appealing to customers with high debt burdens, especially in the current high interest rate environment. Although retail revenue was down slightly, our retail gross margin was positive. This drove retail segment appreciation with the rate up 77 basis points, excluding the MSA benefit. The team managed our margins well at CTR where gross margins excluding the MSA benefit as we stayed competitive and experienced lower freight costs compared to last year. We did, however, see margin rate down in our other banners driven in part by competitive intensity in D2C channels. From an inventory management standpoint, we remain focused on drawing our inventory down and have made significant progress, especially in CTR. These highlights are all evidence of our company's resilience, but I want to be clear. This resilience we so often speak of is neither luck nor accident. We are resilient because we control what we can, take action, and make the tough decisions about our business. A few weeks back, we listened intently to the Bank of Canada's announcement Suffice it to say, the future is increasingly murky given the Bank of Canada's pause was couched in a hawkish tone around risks of further inflation and a potential of more policy rate moves down the road. The amount of time the central bank will need to be in a holding pattern before decreasing rates will be a key determinant of the impact on consumer spending and the economy. We are operating against a structurally uncertain macro backdrop. which has us laser focused on controlling what we can control. We are operating with the assumption that there will be continued pressure on discretionary retail and credit metrics going forward. That said, the remainder of my prepared remarks will focus on three key areas. First, our resilience and focus on value in the short term. Second, how we intend to operate and prioritize as we head toward 2024, and third, our progress and plans for our long-term, better connected strategy. Starting with the short term, we remain confident in our ability to provide our customers with value when they need it most. In the quarter, comp traffic at CTR was down by only half a percentage point, and basket size remained relatively steady. The average e-commerce order value across the retail segment is also relatively flat. Across the consolidated retail business, there are fewer units per basket, given the push to essential shopping. We believe these trends are a clear sign of the underlying health of our business and the role we play in the lives of Canadians. Our triangle program and the first-party data it generates continue to provide insights for assessing our underlying health. In Q3, we had an almost 100 basis point increase in the percentage of our loyalty sales generated by returning members, with over 90% of total loyalty sales attributable to these members. In previous quarters, I've talked about the importance of promotable members, those who have given us permission to communicate with them directly. And in Q3, traffic increased for this critical segment and their sales were up over 4%. Total Triangle member spend associated with our one-on-one offers nearly doubled in the quarter, and our member cross-banner shop rate is accelerating, demonstrating that our one-on-one offers are achieving their objective. We also continue to focus on our highly strategic and differentiated own brands portfolio, which blend our product margins up while offering customers value in all ladders of the quality architecture. Across all our banners, our own brands continue to deliver real value for Canadians. In addition to penetration rate growing by 42 basis points, we had almost 50,000 own brand product reviews in the quarter with an average star rating of 4.2. From a sales perspective, we had strong performance in two of our most profitable own brands, Modemaster and Pro Series, with sales up 10% and 26% respectively in the quarter. Overall, we have highly differentiated programs focused on creating value in the short term, and we continue to work hard with our vendors to engineer price crashing and provide promotions across our portfolio of retail banners. Moving to my second area of focus, as we look ahead to 2024, we are taking action to drive structural efficiencies to support our strategy of creating long-term value. I will speak to running our business more efficiently in three ways, supply chain, margin management, and our SG&A. Starting with our supply chain, where significant deleverage has occurred relative to pre-pandemic trends. Following a tough operating environment for our supply chain, we feel like we are now in a position to focus on the efficiency of the operation to drive operating leverage. Our team's work on inventory management has enabled us to focus on reducing our reliance on third-party logistics DCs. We started the year with 15 3PLs and have managed down to three by the end of this quarter, and we expect to be out of all 3PL sites by the end of the year. Our new GTA DC is officially up and running smoothly, and we will be focused on capacity utilization in this state-of-the-art facility. We'll be moving our sports expire banner into this facility for storage and replenishment in early 2024. In addition to putting the inefficiencies created by the DC fire behind us, these actions provide OpEx leverage opportunity heading into the new year. Moving to margin management, we remain very focused on holding the margin accretion we have created in the business and see product cost opportunities across the retail segment given commodity pricing and freight rates. We have set up a new nerve center, looking at COGS negotiations through to consumer pricing to strike a balance between customer value and margin management. The third way we'll run our business more efficiently is through our SG&A. As mentioned, our SG&A rate was unfavorable in Q3 as SG&A grew while revenue remained relatively flat. We are accelerating efficiency initiatives, prioritizing investments within our Better Connected strategy, and actively managing our resource allocation. With that in mind, it's with a heavy heart that I say this includes a 3% reduction in our full-time employee base. In addition, the closure of current vacancies will result in a further full-time employee reduction of 3%. This was a tough decision that we did not take lightly. There's no question that the most difficult business decisions are the ones that impact your people. At the same time, we know this is what's required to continue to execute our strategy and ensure we are equipped to deliver on our commitments to our customers, employees, and shareholders. As a result of this tough decision, our annualized run rate savings are expected to be $50 million. As we focus on our highest returning investments, we expect our operating capital investments and the related OPEX to support projects in large functions like IT to come down. We expect operating capital in 2024 to be approximately $100 million below 2023 levels. By reducing expenses and prudently managing cash flow, we intend to create the capacity to continue investing in our strategic initiatives and delivering strong capital returns. As you would have seen in our release today, we announced our 14th consecutive year of dividend increases, with the annual dividend increasing to $7 for March 2024. We intend to repurchase up to an additional $200 million dollars class A non-voting shares in 2024, which Gregory will speak to in more detail. My third and final focus area today is our long-term better connected strategy. We see opportunities to slow the pace of some investments and we'll prioritize our highest returning capital investments to position ourselves for strength when the market returns to stability. Priority investments include continuing to refresh our CTR store network. And we expect to have refreshed a total of 45 stores by the end of this year. And we anticipate the pace of our store investments in 2024 will be similar to 2023. We continue to leverage the investments made in our one digital platform by continually honing the site experience. For example, this quarter we launched a new gift registry. improved our site speed by over 35% and made functionality improvements to our product recommendations engine. We also continue to be very focused on leveraging multi-channel capabilities. This quarter, we added 25 new stores to our express delivery pilot and further extended digital experiences like automated lockers, mobile app functionality, digital debit payments for the bank, and electronic shelf labels. Our IT modernization also remains a priority, and we're making good progress through our Microsoft partnership, targeting cloud cost savings and co-innovation efforts, including those focused on efficiency and AI-enabled shopping experiences. I spoke earlier about the role personalization is playing in creating value for our membership, and we have an ongoing investment roadmap to build first-class competence in this area. As we made clear earlier this month, we are leaning into loyalty with the repurchase of Scotiabank's 20% stake in our financial services business, a strategic transaction that gives us greater control and flexibility in accelerating the growth of triangle rewards. The feedback we've received since the announcement has been centered around the price paid and the timing. given what is happening in both the credit and consumer markets. So why don't I hit those two questions head on. First on the price, as many of you had pointed out, the price did include a control premium. Given the fact that there was no call option for us in the agreement and BNS did not want to exercise the right to put their equity to us, the price paid is a reflection of our view on value and embeds a premium to clean up the structure. With complete control of CTFS, we now have the flexibility to pursue a structure that can maximize value creation in our triangle rewards program, a critical driver of value for both CTFS and our retail segment. On the issue of the appropriateness of the timing, as we said in the release, while we have appreciated partnering with Scotiabank over the past decade, with both Scotiabank and CTC having received significant strategic and financial benefits. In recent years, BNS and CTC have invested in and pursued different loyalty programs. Our respective loyalty programs are now competing for the same customer in both credit cards and in a large percentage of our retail categories. The consumer loyalty landscape in Canada is moving extremely quickly with partnerships being formed at pace. We have worked really hard to build a compelling and leading loyalty program in Triangle Rewards, and our intention is to remain a leader. That's why the timing is now. We also announced our intention to evaluate strategic alternatives for our bank. Let me be clear. The optimal structure for us has us owning Triangle Rewards, our first-party data, and ultimately the relationship that we have with our customers. We understand that the merits of this transaction will be clear upon the conclusion of our strategic review. We believe that this was the appropriate decision and we will keep you updated as we move forward on the next steps. Overall, our strategic priorities are focused on improving our customer experience, leveraging the large investments we have already made, and building out our differentiated capabilities. We put the requisite focus on prioritization across the business, and we are actively managing for disciplined expense management while targeting our investments to where we have the best opportunities to support our customers and deliver sustainable growth. And with that, I'll pass it over to Gregory.