Canadian Tire Corporation, Limited

Thank you for standing by. My name is Carmen, and I will be your operator conference 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 11 on your telephone keypad. To withdraw your question, please press star 11. 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 fourth quarter and full year 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 our website. It includes cautionary language about forward-looking information and the factors, risks, and uncertainties, which may cause actual results to differ materially from those expressed or implied, 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 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 will now turn the call over to Greg. Greg?

Thank you, Karen. Good morning and welcome, everyone. The quarter came to us as we expected, and we delivered the end of the year much as we delivered prior quarters. In an uncertain consumer economy, we controlled the controllables, architecting sales through strategic promotion and effective margin management, all while investing in our future. This continued diligence contributed to our return to growth and strong earnings performance in the fourth quarter. We achieved a normalized EPS of $4.07 in Q4, bringing our annual EPS to $12.62. This represents a significant improvement over 2023, aided by some one-offs, which Gregory will address. In a complicated year, the team performed well, and I want to thank them for their discipline and hard work. Before we unpack our results, let me give you our view into the current macroeconomic environment and health of the Canadian consumer. The short story is that, like our business, the economy is in a much better place than it was a year earlier. The long story is a bit more complex. Although consumer confidence remains low, it ended the year on an uptick. Interest rate cuts have had a distinct positive psychological effect on consumers, and we believe an economic benefit may follow. As you know, compared to other nations, Canada's economy is more tightly tied to interest rates. So for our customers, rate relief is real relief. Now, while rates have come down, there is a cycle of mortgage renewals ahead. which will hold shelter costs high. That said, we were keen to see a near 20% increase in home turnover in December, as historically, people turn to Canadian Tire when they move and set up a home. In terms of how Canadians are specifically shopping with us, although the gap between essential and discretionary persists, both sets of categories are moving in the right direction. For the first time in nine quarters, credit card spending was up in the categories in which CTR competes. What's more, triangle MasterCard spend at CTR increased by 2.4%. Overall, we see multiple green shoots, which give us cautious optimism for the future. Now, I'd be remiss if I didn't caveat this optimism with the looming threat of tariffs. I suspect the consumer confidence uptick that I mentioned earlier has now been substantially erased with tariff talk. While that threat may be on pause, we are conducting all the business assessments and preparations you would expect. We have also spent time reflecting on our brand purpose. We are here to make life in Canada better, as it feels especially relevant right now. We have already begun to try to insulate our customers from the risk of higher trade costs hitting our shelves. We are reviewing products and US suppliers and assessing alternatives to the inevitable inflationary pressure these tariffs would deliver. Know that we will continue prioritizing value for Canadians. Although this has always been a commitment of ours, it's been especially important these past few years. I also think there's a bigger conversation to be had. I applaud the provincial and federal government's unified response to the unjustified economic assault from our nation's longest standing ally. And I'm hopeful for an effective resolution in the near term. Longer term, we need a national plan to build Canadian prosperity. I've had the chance to meet with government and business leaders in recent months. We share similar concerns, and we also share similar ambitions. We believe Canada can be stronger and more productive. Locally owned since 1922, we're proud to be called Canada's store, and the nation is actually in our name. Just as we believe Canada must become a more productive nation, we must become a more productive company. our conviction manifest through our capital plans and a range of strategic growth initiatives taking shape. I will speak more to this shortly, but first allow me to provide you some color on our results. As I did throughout 2024, I'll focus my remarks on three forms of leverage, creating value and deeper relationships through our Triangle Rewards Program, maximizing our existing assets, and driving operating leverage with a constrained top line. Let's start with Triangle Rewards where we are successfully leveraging our customer relationships. In Q4, the delta between loyalty and non-loyalty sales grew, driven by more members joining the program and signaling that they continue to reap its benefits. Throughout 2024, members came back more often and spent more than they did in 2023. Remarkably, redemption of ECTM is now 30% higher than it was just three years ago. What's more, while full-year 2024 loyalty sales were up 1%, they grew 4% in Q4, and recurring revenue increased, driven by our ability to inspire members to move through our loyalty system. We continue to provide our customers with more opportunities to earn ECTM through personalized offers promotional activities at our retail banners and partnerships like the one we have with Petra Canada. This strategy is translating into increased cross-banner engagement, highlighted by the growth in members shopping across our banners and increased redemption across our family of companies. Our loyalty performance is a sign of good health, both for our business and our customers. Our flywheel is working. and members are coming back and spending more. Our flywheel is further propelled by our decision to retain full ownership of CTFS, which we announced in Q4. We learned a great deal through our comprehensive strategic review, particularly the fact that our bank accelerates Triangle eCTM issuance and that it serves as an incredible source of valuable data. This data is among the many reasons that our bank is a pivotal piece of our retail future. In the quarter, we saw a nice trend line in the amount Triangle MasterCard holders are spending across our family of companies. This is an important contributor to store sales and a metric that we will track more closely to monitor the bank's unique retail driving capabilities. To give you a picture of our progress in the last two months of the year, we saw a marked increase in Triangle MasterCard sales in our stores. It goes without saying that we are pleased to have retained CTFS's strong return profile and meaningful earnings. When we spoke to potential bank partners, it became evident to us that the bank strikes a skilled and strategic balance between growth and risk, supporting our mid-to-high 20s ROE, which is no small feat. All these factors are fundamental to our go-forward bank strategy, which we look forward to detailing for you as the year goes on. Moving now to our continued leverage of existing assets and investments. The value of our one digital platform was on full display in Q4. We weathered the Canada Post strike with digital promotions and leveraged AI to address the unexpected HST holiday. We had rock-solid website stability during the highest sales days of the year, and we grew important categories like automotive with online enhancements. To be frank, these achievements would have been impossible 12 months ago. They are a testament to the value of our investments as we move to a single, modern, cloud-based tech stack built for all of our businesses, not just one. They also illustrate our enhanced efficiencies, as this improved performance was delivered by a team that is both smaller and better equipped than it was a year ago. By honing and aggregating our digital capabilities, we have established a clear path to our targeted outcomes, specifically agility and scale. This will rely heavily on a streamlined execution across our enterprise, along with new technology and AI tools that change the way we work. While many organizations are still piloting AI projects, we have several capabilities in production and in use. I am amazed at how fast Gen AI continues to evolve, with thousands of our employees using our bespoke generative AI assistant to achieve better outcomes faster and more efficiently. Similarly, we are looking ahead at the next frontier of AI agents that we know will change our employee and customer journeys. We've seen the retail power of CT, our AI tire concierge. We want to scale that power by implementing platform systems, architecture, and governance across our company, not banner by banner. I'm excited about the work we have started and how it can drive a more personalized customer experience and internal agility and efficiency. In bricks and mortar, I want to highlight the success we're seeing at Markz, where new store investments are showing considerable returns. Our modern concept Markz stores are attracting new customers and in Q4, our eight stores contributed to half of Markz overall retail sales growth. At a time when the Canadian apparel industry is thinning out, Markz is extremely well positioned to continue winning over customers with another seven new stores set to open in 2025. In the $43 billion industrial and apparel sector where Marks competes, we have sub-4% share and are fifth in the market with considerable runway for growth. The success of Marks illustrates what happens when we target investments into our highest returning opportunities. It also shows that our banners are benefiting from our loyalty systems, getting results that would, quite frankly, be impossible for an individual banner to achieve on its own without significant deleverage. Together, our banners, partners, and Triangle Rewards loyalty program are becoming a powerful combination for growth and scale, and this is a lever we have only begun to pull. Moving now to operating leverage. Our continued efforts to reduce supply chain costs were a meaningful contributor to lower OPEX. At the same time, we are maximizing and enjoying the benefits of our three-year supply chain modernization with new technologies, facilities, and a network that has fully recovered from pandemic capacity issues. For example, our DC transformations in Calgary and Montreal drove $20 million in savings in 2024. Another key to our OpEx success was our workforce reductions in late 2023, which meant that in 2024, our teams were more efficient and better equipped and more ruthless in their prioritization of tasks. In an age of hyperscale competition, we must be efficient, tech-enabled, and clear about our tasks. While we made progress in 2024, I know we still have more to do.