Canadian Tire Corporation, Limited

Thank you for standing by. My name is Lauren Cannon 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. Following today's presentation, there will be a question and answer period. If you would like to ask a question, simply press star one one on your telephone keypad. To withdraw your question, please press star one one. Now I will pass along to Karen Keyes, Head of Investor Relations for Canadian Tire Corporation. Karen?

Thank you, and good morning, everyone. Welcome to Canadian Tire Corporation's second quarter 2024 results conference call. With me today are Greg Hicks, President and CEO, Gregory Craig, Executive Vice President and CFO, and TJ Flood, Executive Vice President and President of Canadian Tire Retail. Before we begin, I wanted to draw your attention to the earnings disclosure, which is available on the website and includes cautionary language about forward-looking statements, risks and uncertainties, which also apply to the discussion during today's conference call. After our remarks today, the team will be happy to take your questions. We will try to get in as many questions as possible, but ask that you limit your time to one question plus the 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 will now turn the call over to Greg. Greg?

Thank you, Karen. Good morning and welcome, everyone. Q2 is always our highest discretionary quarter, and we were challenged by a tough macro environment that continued to favor essential shopping. However, our consistent margin and OPEX discipline offset declines in our top line, and we delivered a strong improvement in profitability, with EPS of $3.56 up from $3.08 last year. This is a good result with credit to our teams. There's no question that Canadians are cautious consumers right now, but not all consumers are the same. We see this in our data, which we interrogate constantly to establish a clear picture of the health of our customers and our business. We are seeing some interesting and positive signals. First, our data tells us that debt burden customers, particularly those in Canada's six major Vectom markets, have tightened their belts considerably, more than most other Canadians. Although Vectom represents just a third of our total sales, they have trailed the rest of the country by about 4% in the first half of the year. This gap was more pronounced in Q2, with underperformance in both discretionary and essential spend. This is reflective of higher costs of living. While weather is a secondary theme, it was impactful nonetheless. Data shows that year over year, many parts of the country experienced about 50% more cold days and double the days of rain. As we dug into the data, we found it useful to isolate the Maritimes to examine the effects of macroeconomics and unseasonable conditions. In this region, with Canada's least indebted households, and typical spring weather, our sales were up nearly 2% on top of strong results in 2023. This is encouraging. Even more encouraging, spring and summer categories at CTR were up 4% in the Maritimes versus a 9% decline nationwide. In most regions nationwide, our data suggests that lower debt customers are holding their discretionary purchases stable and increasing essential purchases as compared to more debt burdened customers. This is a valuable perspective as our teams continue to carefully manage dynamics like the variable gap between essential and discretionary categories. We remain ambitious in essential categories where we have competitive advantage, exciting new products, and own brand opportunities. In the quarter, sales growth in our own brand essentials were 600 basis points better than national brands. Combined, our Q2 observations and experiences helped shape our view forward. The June rate cut by the Bank of Canada was too late in the quartered impact results. However, when combined with the July cut, the better weather we experienced in early Q3, and the fact that we are cycling lighter sales comps, the environment appears more favorable for the balance of year. In February, I outlined our focus on three points of leverage for 2024. Growing our Triangle Rewards membership, maximizing value from our existing assets, and driving operating leverage. Let me give you a sense of our progress. Starting with Triangle Rewards, our Q2 loyalty sales were more resilient than non-loyalty sales, and ECTM redemption was up more than 8% over last year. continued proof of the appeal of Triangle Rewards. In addition to energizing existing members, we also attracted new ones, growing both active registered members and promotable members in the quarter. We saw an encouraging response to our MaxStack promotion in May, which allowed customers to stack deals, earning Canadian Tire money multipliers at Canadian Tire, SportCheck, and Marks. This is important because it was the first time we've coordinated a loyalty campaign of this magnitude across our multi-category banners, further establishing Triangle as the strategic system that binds our retail businesses together. The promotion required significant coordination between our loyalty, marketing, and banner business teams and collaboration with associate dealers and store operators. It showed how effectively we can move beyond a banner-specific approach, focusing instead on an enterprise-wide commitment to the customer as our collective starting point. Simply put, by knocking down silos, we created more value for our members. Not only did the promotion drive record loyalty penetration, but it also significantly increased new membership uptake. We welcomed almost 75,000 new members. and 40% of them remained active purchasers within the Triangle system after the event. This is behavior we foster and track closely. I'm also pleased to report that more than a quarter million Canadians have now linked their PetroPoints and Triangle Rewards accounts. More importantly, these linked members spent 9% more across our retail businesses than in Q2 of last year, demonstrating the value for everyday needs that this partnership provides. As with loyalty, we remain focused on driving leverage in our existing assets to provide better customer experiences. We are continuing to surface more value from our digital investments. Our modern ODP e-commerce platform has made us more innovative and nimbler, allowing us to test a new idea or feature in one banner, and if it works, quickly roll out the same modular solution to other banners. This has led to simple but meaningful improvements, like a seamless checkout with simplified three-box fulfillment options, single sign-on across our banners, and the addition of compelling triangle rewards offers on our websites. Customer-facing AI, specifically our CT, Generative AI Shopping Assistant, is now live and driving online tire conversion with the potential to extend the platform beyond tires. Our auto service digital assets are saving customers valuable time. In the quarter, 20% of all service appointments were booked online and over 400,000 service reminders were sent digitally, all helping to drive our auto service business up 7%. Our in-store rollout of pickup lockers is now complete, with our implementation of scan and buy and electronic shelf label technology close behind. And it marks we continue to increase the speed of our buy online, pick up in store fulfillment, with many orders now being completed in less than an hour. In bricks and mortar, we continue to move at pace. We opened 18 refreshed or expanded CTR stores in the quarter, along with four new Pro Hockey Life stores, furthering our reach into key Ontario hockey markets. And by relocating three Mark stores into former Bed Bath & Beyond locations, we can now showcase a much broader assortment to our customers. We also tried something new, opening a Ford with Design pop-up store in Toronto, a great way to drive awareness and sales while engaging and learning from our core customers through authentic experiences. Most important here, our customers are taking notice of our improvements. Even at a time when the average consumer is stretched and stressed, we are charting improved in-store and digital NPS satisfaction scores. In other words, we are enhancing their experiences even while tightening our costs. Finally, I'll quickly touch on operating leverage. Our merchant teams continue to adapt to a cautious discretionary demand environment. This is why we're leaning into essentials through our privileged own brand capabilities and key businesses like auto service. At the same time, our team is focused on driving new products and value for customers. In the case of CTR, new product sales were up 4%, representing a higher percentage of the overall sales mix. And both SportCheck and Marks are generating strong results. and innovation with popular brands like Hoka, Ahn, Reebok, Silver, and Timberland Pro. There's no question across our banners, we are working hard internally and with vendors strategically and tactically to drive sales. There is excitement in our stores, but the top line environment is still tough. So we continue to place heightened emphasis on controlling our costs, improving our retail margins, and managing our inventory. In addition to G&A leverage, we've made significant improvements in our run rate supply chain costs, which Gregory will detail in his prepared remarks. We are driving variable efficiencies through our modernization efforts, specifically our fully automated GTA DC and in-quarter implementation of our Calgary DC's good-to-person technology. Our network is operating very well right now with fill rates higher than they have been in years, all while managing our inventory down. Our resulting inventory position contributes to our optimism and the confidence that we are ready for customers when they are ready to spend. Today, our stores have fresh new assortments and our merchants are buying with an eye to better days ahead. Finding ways to accrete earnings and generate strong free cash flow And an environment like this requires a team effort, and I am pleased with our progress year to date.

And with that, I'll pass it over to Gregory. Thanks, Greg. Good morning, everyone. I'll start with the headline financials. EPS for the quarter was strong, up $0.48 on a normalized basis to $3.56, driven by improved retail profitability and a one-time gain on the sale of a property, which represented about $0.17 at the EPS level. Last quarter, we said we would not take our eye off controlling what we could control. In Q2, improved retail profitability was the result of a strong gross margin rate and OpEx discipline, which offset revenue declines and higher finance costs due to the CTFS repurchase. Over the last few quarters, we've seen a disconnect between the growth rate of retail revenue and sales, led by CTR. But we saw that gap close this quarter. Excluding petroleum, retail revenue was down 4.3%. essentially in line with sales as dealers, franchisees, and wholesalers continue to manage inventory carefully. Retail sales were $5 billion in the quarter, down 4.1%, and down 4.6% on a comparable basis, excluding petroleum. From a trend point of view, we saw a more significant decline in sales in the earlier part of the quarter, which improved in June as we cycled weaker comps and then saw the arrival of more seasonal weather. As Greg has highlighted, we were encouraged by the growth we saw in the Atlantic Canada region, where sales were up across each of our major banners and up 2% overall. We also continued to track the progress we were making with the customer, and we were pleased with the results this quarter. Strong engagement based on the initiatives we are undertaking continued to drive loyalty sales outperformance, with more members scanning their carts. Now, let me unpack some of the detail of how sales came to us by banner. Comparable sales at CTR were down 5.6% in Q2. Softer consumer demand was the primary factor, leading to a double-digit decline in the high-ticket discretionary categories, like backyard living, which typically drives sales in our most discretionary quarter. That contributed to an 8% decline in discretionary sales at CTR. As Greg mentioned, weather was unseasonably cold, particularly in the western provinces, including Alberta, where it snowed in mid-June. Across the country, it was also wetter, with more days of rain compared to last year. With cold and wet weather, fewer people came to the store for categories such as gardening and watering, and weather-associated baskets were down. Sales in home environment categories, including air purifiers and air conditioners, were also down compared to last year, when we were experiencing higher temperatures in many parts of the country. The bright light was automotive, where trips were stable. Essential categories and auto labor grew, resulting in an overall increase of 2% and our 16th consecutive quarter of growth in automotive. At SportCheck, comparable sales were down 0.9%. This was an improving trend over the prior quarters, and external data points suggest we outperformed the market. Although categories like cycling and casual wear were down compared to last year, SportCheck's performance were helped by strong in-stock positions and good sales as footwear, with lifestyle performing particularly well. Across our other categories, fanware and team sports also grew. We are pleased with where the team has taken the business in recent quarters. Refreshed stores are driving incremental growth with better positioning of key brands. The business has also been leveraging incremental triangle promotions and targeted in-store events to stimulate demand in a highly competitive environment. This included the Max Stack event during the quarter. At Marks, comparable sales were down 0.8%, as the lower traffic and weak consumer demand we experienced in March continued into Q2. Given the colder and wetter weather, Marks was able to deliver on its mission to keep Canadians warmer and drier. Outerwear sales were up, but were offset by declines in industrial and men's casual categories, with men's shorts in particular down compared to last year. Increased use of promotions were also key to driving sales in the quarter, and continues to attract new customers to CTC. Finally, at Helly Hansen, revenue was up 1%. In a highly competitive environment, the U.S. saw continued growth across all channels and market share gains. Outside of the U.S., wholesale was down as customers managed inventory. Retail and e-commerce sales declined, lapping major sailing events last year. Moving now to retail gross margin. Retail gross margin dollars excluding petroleum were down, reflecting the decline in retail revenue. However, retail gross margin rate excluding petroleum was up 36 basis points compared to last year at 36%. Helly Hansen contributed to the higher retail gross margin rate despite modest top-line growth. Lower freight costs across CTC were also a tailwind, which offset the higher promotional intensity in SportCheck and Marks. At CTR, investments in key capabilities, such as the margin nerve center we have built, helped protect product margin and create room for us to make optimal use of promotions to drive sales. While we continue managing levers to hold margins over the longer term, there will always be quarter-to-quarter variances driven by business performance and mix. In Q2, this worked in our favor, with margin coming in above our expectations. Turning now to SG&A. At a consolidated level, SG&A was down 6% on a normalized basis. In our retail segment, SG&A was down 60 million, or 7%, despite increased real estate and store operation costs as we continued to invest in the business. There were three main sources of decline this quarter. First, supply chain savings were partly due to improved operating efficiencies. Last year, we exited third-party warehousing facilities as we reduced inventory. with nine facilities still in operation in Q2 of 2023, and a further six exited over the course of Q3 last year. We expect more modest savings in Q3, given the timing of the exits last year. In addition, we also had some elevated costs in Q2 of last year for the temporary solutions put in place to cope with the impact of the DC fire. Second, in addition to slowing growth and sustaining IT spend, the second half weighting of IT projects contributed to lower costs in Q2 this year. We expect this pattern to reverse with higher costs in the back half of the year given our planned project rollout. And third, we continue to operate with lower headcount and prioritize resourcing needs, which has resulted in slower hiring contributing to lower personnel costs. Moving now to inventory. Overall, corporate inventory dollars were down 15% or $477 million. Active management of inventory across all banners contributed to the decline. CTR inventory was down as we continued to draw down in both non-seasonal and spring-summer categories. Dealer inventory was down 6% in Q2, with significant decreases in spring-summer categories. At the corporate level, we expect some modest growth in non-seasonal categories to ensure we're well-stocked ahead of our biggest selling season in Q3 and Q4. Let's now move on to the performance of the financial services business. Financial services performed as expected with IBT ending at $89 million flat to last year on a normalized basis. The 5% increase in revenue offset the increased funding costs and net impairment losses as well as higher operational costs. Gross average receivables was up 3.2% growing at a slower pace than in Q1. with the increase mainly due to a 3% increase in average account balance. For the first time this quarter, the impact of slowing acquisition in 2023 resulted in active accounts being flat, and we expect this slower acquisition and modest decline in card spend will continue to have an impact on the receivables growth rate. When it comes to credit risk metrics, these are continuing to a trend as we've expected. The write-off rate was 6.7%, up slightly on 6.4% last quarter. While the PD2 plus rate is at 3.3%, it showed a 35 basis point increase in aging relative to last year. However, it came in better than our expectations, and we are starting to see improvements in our earlier stages of aging. The allowance rate was 12.5% within our targeted range of 11.5% to 13.5%. Meanwhile, our strategic review to consider a range of alternatives for the Canadian Tower Financial Services business is ongoing at this time. While we are not in a position to provide a specific update, the review remains a priority for us. We will be assessing alternatives on the basis of how they can help drive longer-term value for Triangle and our retail business. In the meantime, our focus is on ensuring that CTVS continues to perform well and in line with our expectations, as it did again in Q2. Which brings me to capital allocation. We continue to fundamentally believe that a balanced and consistent capital allocation approach anchored on investing in our business for the longer term is the best approach. However, in the interest of protecting our investment grade credit rating, we remain paused on share buybacks until we go further along in our CTS strategic review process. As we normally do, we plan to update you on our capital allocation plans for 2025 when we report our Q3 results in November. Before I wrap up and hand the call back to Greg, I'll briefly highlight some considerations looking into Q3. The pace of decline at CTR slowed in July with sales down 2%. However, it's still early to call where Q3 sales will land with almost two months to go and the back-to-school season being an important driver of September sales. The weather has so far been working more in our favor, notwithstanding that it remains unpredictable. We're hopeful that consumer sentiment may improve on the back of Bank of Canada's recent interest rate cuts. However, we saw the cycle of mortgage renewals to come over the next few quarters. We are also keeping an eye on employment trends, which historically have influenced consumer demand and cardholder behavior. We'll be watching these developments closely, as will our dealers as they finalize their orders for fall and for winter. Right now, it remains hard to tell how the revenue will flow. but we expect to be more closely linked to consumer demand over the next quarter or two. In that context, we will continue to maintain our balance between managing our margins and controlling costs while continuing to invest in the business. We go into Q3 with an equal measure of optimism and caution. We feel good about our performance on a year-to-date basis and about how that positions us for the second half of the year, but remain conscious that softer consumer demand will not reverse immediately. With some tougher comps on OpEx as we come into Q3, we will continue to focus on managing our costs carefully. Our ability to navigate through these uncertain times and balance delivering short-term results with investing in the long-term is largely due to the significant efforts of our employees and our dealers. I want to thank them for everything that they continue to do. With that, I'll hand it over to Greg for his closing remarks.

Thanks, Gregory. Although Q2 was not what we wanted in terms of sales, we understand and sympathize with Canadian consumer caution. Ultimately, we don't control the state of household economics or the weather, so we controlled what we could. We created more value through Triangle Rewards, which drove membership, numbers, and recurring revenue. We offered a more seamless shopping experience across our channels, maximizing our digital assets and pushing our NPS scores up. And we did this while managing costs down. I'm proud of our results as they reflect our team's innovation, collaboration, and sheer hard work. Quarter by quarter, we are a stronger, more efficient operating company with a system of compelling components tied together by loyalty and a commitment to customers at the core. The engagement we saw this quarter reassures us that we are on the right track. In closing, I want to thank all our team members for their commitment to making life in Canada better. This includes being there for our communities when they need us most. Our thoughts are with those whose lives have been significantly disrupted by the Alberta wildfires. In addition to making corporate donations to the 2024 Alberta Wildfire Appeal and rebuilding efforts, select Alberta stores across our network are accepting customer donations on behalf of the Red Cross. I also want to thank our Marks team for stepping up to meet the first responders' urgent need for industrial boots, establishing supply lines virtually overnight. And to our customers, thank you for your continued trust in us and for generously helping us raise nearly $6.5 million during Jump Start Month so that more kids can overcome the barriers to sport and play. And with that, I'll turn it over to the operator for questions.

At this time, I would like to remind everyone in order to ask a question, please press star then 11 on your telephone keypad. To withdraw your question, please press star then 11 again. We ask that you limit yourself to one question plus one follow-up question before cycling back into the queue. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Irene Nettel with RBC Capital Markets. Your line is now open.

Thanks, and good morning, everyone. Thank you for all of the commentary on consumer demand. When we look at what you delivered at CTR and compare it to prior downturns, it kind of seems to be consistent. But you also have a whole lot more color now than you have previously on what consumers are doing in spending. So how would you categorize what you're seeing now? What is the best way for us to think about the evolution as we go into 2025? And what, if anything more, can you do to help deliver better results, even if spending remains where it is today?

good morning irene it's greg maybe i'll start tj may have some color too as it seemed to be a little more focused on ctr look you know i think as you suggest the the evidence you know is clear that consumers are still facing challenges um you know data from our credit cards show that spending is down in almost all external categories and in all markets uh across the country so ultimately the trends that we've been seeing for the past few quarters continue to persist. Consumers are spending less, they're focused on essentials and where they can really get value. And as you point out, I think with our data, which would be very different from where we found ourselves in the 08-09 standpoint, we can really dig deeper. The reality is the consumption patterns are less dependent on income level, and they're more dependent on household indebtedness. And indebted households, regardless of income level, are consuming much less, especially in discretionary businesses. And as I called out in my prepared remarks, the highest indebted households in Canada are in Vectom, and we're seeing a real performance bifurcation, a separation, between Vectom performance and non-Vectom performance, that hasn't been the traditional run rate for us. And it's growing, you know, it grew in Q2. So, you know, I think from our standpoint, these are the realities of the market. You know, we talked to you about our focus as we kicked off the year in 2024 with the three focus areas that I outlined today. Um, it's really, you know, the playbook as we, until we get a different demand signal, the playbook that we have for 2025 is exactly the playbook that we've been deploying here in 2024. Um, you know, it's about leverage, uh, leverage with our membership, uh, leverage in the assets that we built, uh, and, and operating leverage. And, um, you know, we don't expect to see material growth in the economy as we move forward. in the last six months of this year. I think that is broadly in line with the expectations of the market. And so we'll certainly let you know when we've got visibility in terms of how the playbook needs to change. But right now, as we try to really focus on the prepared marks, I want you, everybody to know that Our teams are working extremely hard strategically and tactically to grow this business, to learn more about consumption patterns, elasticity by category, et cetera. The models are getting smarter on that front as we move forward. And we're doing everything we can to stimulate demand. And as I said, I think it's more of the same going forward as we start to comp some of the activity, we would expect to see some relief on a go-forward basis.

That's really helpful. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Brian Morrison with TD Counts. Your line is now open.

Oh, thanks very much. So, TJ, question for you, please. I'll let others go through the gross margin and the SG&A, but I want to talk to you about the inventory position. It's down 15% at corp. I presume it's getting better at the dealer level. Can you just talk to us about dealer inventory levels and what the revenue retail mismatch stabilizes in this quarter? I assume you're going to have a catch-up and believe you exited winter at the dealers pretty lean last year. So just talk to us about dealer replenishment needs as we look out to the fall and holiday, please.

Hey, Brian, it's TJ. Thanks for the question. There's a lot in there, so let me unpack a little bit some of your question. As you pointed out, from a corporate standpoint, we continue to make significant progress in managing down our inventory during the quarter. And as you pointed out, we are down 15%. So that definitely helped us on the OpEx side. And given the change in consumer demand patterns, we're very focused on adjusting our buys and being surgical and strategic as we look to continue to manage our inventory levels well as we look to the back half of the year. And that means leaning more into essentials as we continue to see that gap between essentials and discretionary performance. So we're definitely surgically investing in essentials as we go forward here. And I did want to point out, we are buying for stronger demand in Q4, coming off a very tough Q4 last year. And we do expect, as I said, strength and essential categories. And a couple I'll give you a flavor for, automotive, household cleaning, and pet. Those are some of the areas that we're going to lean into. And just a reminder that Q4 is skewed more essential than is Q2 and Q3. So that kind of gives you a flavor on the corporate side. And then from a dealer standpoint, I think it's important to understand that after two consecutive quarters where consumption outpaced dealer buying, we saw dealer buying patterns mirror consumption much more closely in Q2. And so the dealers finished down about 6% in inventory year over year. And as we look forward to the back half of the year, we feel good about where they landed in winter categories as we finished off the winter in Q1 and they drew down inventory relative to how they closed last year's winter. And as I mentioned on the last call, we've got some early signals on Christmas dealer orders and they came in as expected as well. So as we look forward, we expect their buying to be more closely reflective of what they're seeing from a consumer demand standpoint. and we're not expecting them to deploy any build or burn strategy as we go forward. We think it's going to be a lot closer linked to POS. So that's how we see it. There's a lot in that and obviously a lot of quarter to play in Q3, and Q4 is big for us, but that's how we see it as we go forward here.

Okay, so it sounds like it's a little light going into winter. Follow-up question, or I guess partial question, but... Gregory, I want to look at CTFS for a minute. Your GAR is up, your write-offs are up, yet your allowance provision is flat sequentially. The banks, they're increasing their card provisions, but you appear to have this under control. I hope you can maybe share some of this relative outperformance and how sequentially your PD2 plus is down sequentially.

Yeah, thanks, Brian. I think part of this kind of comes back to how, you know, the CDFS team has kind of managed throughout, frankly, going back to COVID days, if you can believe it. I mean, if I take it back historically, you know, I think the team recognized, you know, there might've been a change in the temporary, you know, we go back to the CERB payments, but the reality was the underlying risk of the assets didn't change. So I think the team were a lot more conservative around kind of movements in the allowance down. And because I think we just fundamentally believed it was a timing issue and the risk of our customer wasn't different. So I think that's really how we've handled it from a CTFS perspective. And that's why when you look at it now, and I know it might sound counterintuitive, but I think some of those relationships you're talking about are related. So what I mean by that is the write-off rate being 6.7% now really is attributed to, frankly, kind of the credit risk and the growth strategy, the new accounts we had kind of 18 months ago, but that gets exaggerated because the minute you stop growing, you know, the white off rate is a, is a mathematical equation and you're starting to slow your denominator. So you kind of have a bit of a self-fulfilling prophecy around an increase in the write-off rate. And, and what we were trying to say on the call that we're, what we're encouraged by is the early buckets, the pre TV two buckets are actually looking, you know, better. Um, So I would say this is exactly where we would expect all these drivers to be, and the team's comfortable. The one watch item that I would say as we move forward, the unemployment rate has ticked up a little, and the team stands by to watch out what impact if that were to have on the bankruptcy and solvency side of things. But no, I think we're really pleased with how the team's managed this through the last two years to try to minimize, frankly, quarter-to-quarter volatility.

All right. That's impressive. Good quarter.

Thank you. Thanks. Our next question comes from the line of Jonathan Matuszewski with Jefferies. Your line is now open.

Oh, hey. Good morning. Thanks for taking my question. I wanted to zoom in on your observations regarding the promotional backdrop. It feels like promotions were higher year over year in retail. That said, your retail gross margin excluding petroleum was better than what we had envisioned. So just wanted to get your thoughts in terms of the promotional activity you're seeing in the competitive landscape and, you know, whether you're expecting, you know, based on, you know, some sequential improvement from May to June in terms of comp sales. Are you expecting a shallower degree of promotional intensity as we head into, you know, the back half? And was there any changes in promotional activity in July that seemingly helped to spur some sequentially better trends maybe versus the 2Q exit rate? Thanks so much. Good morning, Jonathan.

It's Greg here. I'll try and hit on the components, the large components of the question there. You know, in general, I think what we've seen from a promotional intensity standpoint is where our competitors have had bulges and builds in inventory, we've seen, you know, aggressive discounting to move that through. And I think about the sport check and Mark's business specifically in terms of where my mind goes to first. Any kind of branded D2C players in either of those businesses, I think generally speaking, had a build up in inventory that they've been working through over the course of the last 12, maybe even 18 months. And we've seen some pretty aggressive movements off-map pricing for some of these brands that have caused real consternation for us in terms of providing and stacking up value, especially in a business like SportCheck. We're seeing that real aggressive off-map, almost more marked down activity start to subside, not completely go away such that we're not paying attention or being concerned about it, but not as meaningful an input and watch out as it was last quarter or in Q4. So I would expect that to continue for the back half of the year. In CTR, I don't think I'd comment about any increase from a competitive intensity standpoint over, you know, on a year-to-date basis. I think inventory seems to be, you know, in line. And so it's more traditional, you know, traditional discounting that we, you know, we continue to watch. So I think the more important thing for us, Jonathan, is just, you know, how in an environment like this, similar to Irene's question, is how do you how do you ensure you're getting the most amount of insight from a demand elasticity standpoint and how your models are applying those discounts to your own categories as opposed to looking outward? There's always nuances by region and weather and other circumstances when looking at just a 90-day window. But in general, we'd say that there does appear, especially in Q2, to be evidence of demand elasticity across many essential categories, especially in non-automotive categories where our share is lower. And in general, again, there's less demand elasticity in high-ticket discretionary businesses. And we really continue to take it on the chin in CTR for that portion of our business. I mean, overall, I like the way our capabilities are showing up here in this environment. And I think the last part of your question was, is there any incremental stimulus that we deployed in July that would have changed that, you know, top line trajectory for us? And the answer is no. The only thing that we have, which is a, you know, a fairly sizable dollar commitment on a year over year basis from an expense standpoint is the Olympics advertising. But That, as you know, is more top of funnel and not really focused on generating demand at the item level. But it certainly has some halo effect in the country for us. But other than that, Jonathan, not much has changed from a stimulus standpoint. Just the model is getting smarter.

Really great, Collar. Thanks so much.

Thank you. Our next question comes from the line of Tammy Chen with BMO Capital Markets. Your line is now open. Hi, good morning.

Thanks for the question. On the CTR, the intra-quarter trend, could you just talk about, I think you said exiting out in June was better than the quarter average, but was that still a negative comp? And just listening to you talk about now at least to July of what you can see, yet you do sound more optimistic. And I'm wondering if that's purely from just a laughing perspective. And like I know Q4 last year was probably the easiest comp there. So I just wanted to get a sense and wanted to make sure I heard right. Are you saying for July, CTR thinks their sales right now is down 2%? Did I hear that right?

Hey, Tammy, it's TJ. Yeah, I think you interpreted that correctly. If you kind of map out those four months, the trajectory each of the months, April, May, June, and July were down, but the declines were improving over that time. And July was the month with a minus two, and that would have been the best of the four months. So you've interpreted it correctly. We are seeing a slowing in the decline, which provides us a little bit of encouragement as we go forward. And I think As you look to the back half, particularly in Q4, we are facing a lot weaker comps than we would have been in the first half of the year, and particularly in Q2. So I think you've characterized it appropriately.

Okay. And my other question is on the retail growth margin. So you listed a couple of things. between Heli Hansen, the year-over-year freight dynamics, all of that. And so I'm wondering if you could talk about what were the biggest factors to this strong result? Was it predominantly that year-over-year freight dynamic? And specifically at CTR, I mean, when we think about the mix, you know, you talked about how discretionary was weaker, and that's usually, I think, higher margin. So again, just a very surprising result. You can specifically talk about the margin at CTR, too, that drove this result. Thank you.

Yeah, it's Gregory, Tammy. Maybe I'll start and TJ or Greg want to jump on. I'm sure they will. I think what I would say is in terms of the margin, we did call out, frankly, the two biggest impacts. Like, you know, Helly Hansen, although we said it was a modest kind of revenue side of things, it did contribute positively to the overall gross margin. And you hit on the second one, which was freight. And freight was across all businesses, is clearly the most significant in CTR. And as we've talked about, there was a big freight impact and big freight benefit in Q1. It was in Q2 as well. But we expect that benefit's going to dissipate a little bit over time. It's going to get less and less as we're comping off it. And there's always, as every quarter we seem to say this, but there's 1,000 levers in margin. So for every freight benefit, there's an FX cost going kind of the other way, which in my mind is why I always try to take us back to kind of what our long-term aspiration is, which is to kind of maintain the gains we had during the kind of that COVID period, recognizing any quarter, there could be quarter to quarter noise. Um, but, but you talk business mix automotive was up in the quarter. That's our high, you know, higher margin business. And I, you know, it's actually might sound counterintuitive, but are actually the margin profile and the essential business is much stronger than you might think actually kind of helped us in the quarter. So, Look, I put all this on the benefit of having this focused effort around this margin nerve center. And we're just really kind of pleased with how the teams continue to develop that capability and balance all these elements off. But again, I come back to my every chance you give me, Tammy, I'm going to say it. There's always going to be some risk of noise in the quarter to quarter, given what can happen. But really pleased with kind of the long term posture. And frankly, the capability that we built, I think, is going to serve us well as we as we move forward.

Thank you. Thank you. Our next question comes from Chris Lee with Desjardins. Your line is now open.

Good morning, everyone. Maybe I'll start with a high-level question. I was wondering within the CTR, when you look at some of the third-party data, when you look at the sales performance at CTR, is it outperforming the industry? I'm just trying to get a sense of are you gaining market share during this challenging environment. Thank you.

Hey Chris, it's TJ. Yeah, we try to cobble together market share data with a bunch of different sources and there is at times a bit of a lag to that, so we track it relatively closely. If you look at the categories in which we compete and you look at our credit card data, There's a lot of tough numbers out there. If you look at the home improvement market as an example, it was tough sledding. We do think the category of the TAM in which we compete actually declined in 2020. in Q2. And in some businesses, we felt like we did a better job on market share like automotive than in others. So it was a tough quarter given the weather and given the economic situation for the categories in which we compete. But we look at that really closely and we continue to try to do what we can to invest in the business, whether it be our better connected strategy with the new store rollouts or investment in our triangle membership to try to continue to try to drive market share where we can. But it was overall for the industry, it was a tough quarter.

Okay. No, thanks for that. And then maybe just a follow-up question for Gregory, just on your answer about the gross margin. I just want to maybe drill down a little bit. So, you know, on a four-year basis, you're assuming four-year gross margin to be hovering around that 36%, which is a step up from the COVID period. That would imply second half gross margin will be a little bit less than the first half. So I want to make sure if I'm sort of interpreting that correctly. And then if you can also call out a little bit more sort of what are the key puts and takes on gross margin in second half. I know you called out free cost benefit being less in the second half than the first half, but are there anything else that we should be aware of in the second half? Thank you.

Yeah, I think, Chris, it's Gregor here. I think your commentary is fair. You know, that's why I do like looking at this on a longer-term basis versus on a, you know, a quarter-by-quarter isolation. But, you know, that is certainly our target is to maintain the gains every year. And I think we've done a great job in giving all the price increases, inflation, you know, everything that's been thrown at us to have all the merchants and supply chain teams kind of maintain the gains. We might have been down 10 basis points in a couple of years, but really kind of pleased as to how we've kind of managed our way through that. So, I don't think that changes that idea. So if there is a bit of a gain on a year-to-date, then my expectation is we're still committing towards that idea kind of in the balance for the full year, I should say. Last half of the year, look, I think there's a bunch in there. You talked about, we talked a little bit about the freight benefit is going to start to minimize a little bit over time. I've shared with you where we are in FX, and the reality is as we kind of get deeper and deeper, the FX, the hedging program we have gives us a glide path, but eventually we get ourselves to the new exchange rate. And that's, I think, part of the reality as well. And look, we want to be prepared and keep our powder dry, as Greg talked about. I mean, you know, it's a difficult, competitive environment. I think we want to make sure that we have the ability to promote if we felt the need to. And some of the businesses felt more of that need in Q2. For example, Mark sent a check and CTR didn't. So that's how we're thinking about this kind of overall is, is you know there's there's always going to be noise quarter to quarter and and but you're right to say kind of i like that notion of kind of a full 12 months what we're what we're kind of striving for thanks very much thank you our next question comes from lou cannon with canaccord genuity your line is now open

Thanks. Good morning, everyone. I wanted to ask a question on the new products that you have in your assortment. It seems like that's a lever that most retailers are looking to pull, introducing new products as a way to stimulate demand and traffic. And I believe you had mentioned that new product sales we're up four percent so can you just share with us one i mean are you are you looking to i know i've asked this in the past are you looking to accelerate the the rate at which you deploy some of your newer own brands or products within those own brands in the market and then maybe also secondly your your national brand partners are you noticing a trend from them uh looking to create and introduce new products into the market through your your shelf space as well

Maybe I'll start. It's Greg and TJ can weigh in too. I mean, own brands, you know, in general, you know, we've talked at length about, you know, how excited we are about our capabilities. We really believe they are privileged and we had some great successes across a number of brands today. in the quarter, and we're even more excited about the pipeline of innovation that we have on a go-forward basis. I think we may have quoted last quarter somewhere in the neighborhood of 20,000 new SKUs in various stages of development. And listen, there's always a little bit of competitive tension in categories where we have national brands and own brands. We think that is a healthy dynamic, and in a tough environment like this where the industry is suffering as TJ suggested, in the categories in which we compete, there's much more focus on innovation and newness and selling in for channel distribution. And so that just all ladders up to what I had suggested in my prepared remarks around how busy this organization is right now. um and i mean we could wax poetic about some of the excitement across you know 15 to 20 brands um right now uh in terms of of you know what the teams uh are working on so we haven't we haven't stopped the foot has been you know on the gas uh you know accelerating and trying to elevate more vitality in our assortments uh and we're just pleased to see with that four percent growth rate um we're getting some traction with the customer. As you can appreciate, when you're trying to draw down your inventory in the manner in which we have for the course of the last many quarters, you've got to be surgical in terms of where you allocate incremental inventory. And so now that we're getting that inventory um you know right size you can expect to see even more you know innovation and newness in terms of how we go to market and we feel really good right now that we've got a strong balance that's standing up well in front of the customer thanks and then for my my follow-up question here gregory maybe this one's for you i just wanted to to clarify the commentary on on freight being less of a tailwind for the back half of the year is that more indicative of

going up against tougher comps from a freight perspective? Is that more indicative of the freight environment being a little bit more expensive now? Is that a combination of both? Maybe just sharing what's underpinning that.

Yeah, thanks, Gregory. I would say it's more the former around the idea of what we're comping off of, but you know we hedge a lot of our containers, but the reality is where we did need to get to spot, it would be more expensive to your point year over year, but I would I would just say it's more of a comp issue if you have to weigh the two than what we're actually... But it is both, to be fair. Okay. Thank you.

Thank you. Our next question comes from Mark Petrie of CIBC. Your line is now open.

Hey, good morning. Thanks. A couple quick ones, I think. First, just on the dealer inventory, I'm curious if you are seeing... any variation in the dealer inventory positioning by region? I mean, you highlighted Vectom as sort of underperforming in retail. I'm just curious if you're seeing that echoed in the dealer behavior.

Hey, Mark. It's TJ. There's not a lot of material change by region that I would call out. I would simply say after, as I said a bit earlier, after two quarters of kind of shipments dialing back a lot faster than the consumption patterns were, that dealers are kind of reacting more to demand as it comes versus a build-burn strategy. But there's not a lot to highlight from a regional perspective on that front. As you get through the summer season, you may see some slight differences as we get into spring, summer next year, just given some of the weather patterns. But by and large, as we go into the back half, there's not a lot of, nothing really material to point out there.

Okay, fair enough. Thanks. And then just second, on SG&A, obviously retail SG&A specifically, obviously some nice year-over-year decline, particularly in Q2. Could you just contrast the lower dollar spend in Q1 and Q2? The pace is significantly more material in Q2. And just give us a sense of, you know, what shifted exactly and then how to think about the sustainability of those year-over-year declines.

Hey, Mark, it's Gregor here. I'll take that one. I think we tried in the prepared remarks as well, you know, on all of our disclosures. You recall in Q2 of last year, we incurred some additional expenses related to kind of the fire, right? You know, the inefficiencies around shipping and shunting and things along those lines. And that wouldn't have been present in Q1. So when you're looking at Q2, we got a little bit of an additional boost in that savings, if you will, because we were comping up a cost that disappeared as an example. And as I said, I think some of the IT costs have kind of shifted a little bit as well, more into kind of that later timeframe than we had initially. So I think that's kind of what you're seeing. And I want to take it back kind of up a level. I mean, when we started talking about the year and you know, this is always a great question that folks had for us, you know, Greg, I, TJ, all of us talked about this notion of it's an unpredictable consumer demand environment. So we're looking at control the controllables and what we said, but not for the full year is we're looking to kind of maintain our operating expenses within that full year, given kind of that operating environment. And that objective, frankly, hasn't changed. It's frankly, probably as important now as it, as it would have been in December. So, you know, um, you know, quarter to quarter, as you've pointed out, there's going to be some noise in the comp due to when 3PL is closed this year versus last year. But similar margin, I take you back to kind of that notion of the full year and what our overall objectives are around how we want to manage the place. Because you got to remember, we haven't stopped building new stores. We haven't stopped incurring kind of additional leasing costs and rent costs and store operations costs. So anyway, that's how I think about it kind of overall, Mark, is, you know, I would have expected, you know, given kind of the DC element, kind of that gain more in the second quarter. But I'd encourage you to think of this kind of, again, on that full year basis.

That's very helpful. Thanks a lot, Gregory, and all the best, guys. Thanks, Mark.

Thank you. This concludes the question and answer session. I would now like to turn it back to Greg for closing remarks.

Thank you for your questions and for joining us today. We look forward to speaking with you when we announce our Q3 results in November 7th. Bye for now.

This will conclude today's call. You may now disconnect.