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.