Q3 2019 Earnings Call
All participants please stand by your compensation, we need to begin.
Good morning, My name is salary now will be your conference operator today I.
At this time I would like to welcome everyone to the keeping entire Corporation limited third quarter earnings Conference call.
Oh, I said at least on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.
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This morning can be an entire corporation limited released financial results for the first third quarter.
2019, a copy of the earnings this quarter is available on their website includes cautionary language about forward looking statements risks uncertainties, which also apply to the discussion during today's conference call I.
Well now turn the call over just the then what more president and CEO Steven.
Good morning, everyone.
Have a fair amount to cover this morning, So first a few comments on our financial performance.
In general was in line with our expectation overall.
And your great performance from financial services, both guar growth at 7% and in earnings growth.
The which are on track for the year with no signs from ardito, a weakening economy or credit card portfolio.
Comparable retail sales grew 2.7% in the quarter, we are tracking over 3% year to date I had overstated aspirations.
It's performed as expected in the quarter given they were Comping were very strong 2018.
Peter started to initial snowfalls in the west.
Sport Chek led the way this quarter, what comp sales of 4.6% continued strength in ecommerce growth.
Excellent progress on their key initiatives in digital and in store customer experience.
Ctr continues its impressive quarterly growth this quarter and I know Allen is going to comment on the strength of our core asset in a moment.
Following its 22nd straight quarter of comp sales growth.
I'm also very pleased with the progress that Helly Hansen team is making both internationally and what their Canadian colleagues and meeting our growth targets for Canada, and our long term expectations remain very strong [noise].
We also formally closed our party city acquisition and transitioning is on schedule.
And in September we reduced our ownership in CTG reach to 69.3% as part of our overall financial plan, which in addition, strengthens the reads public float.
Earnings per share performance in the quarter on a normalized basis was on plan and on par with last year's results.
Adjusting for the accounting changes that financial services in the third quarter 2018 translates into a 10.2% growth.
Year over year basis.
This is all led to our announcements today on our updated capital allocation plans.
Over the course or 2020, we are targeting or general operating capital spend to be aligned with our estimates for 2019 spend reflecting investments to drive our strategic initiatives and maintain the health where network.
In addition to our general operating capital. We've also set aside funds for the commencement of our Toronto distribution Center remarks, and sport Chek approximately $100 million.
In relation to our operational efficiency program, we've allocated $50 million of Capex, but I would caution that this is a very rough estimate at this point.
And with a view to balancing investments with returns for our shareholders. We also announced our intent to repurchase $350 million of our shares by the end of 2020.
I have increased our dividend by 9.6% per share.
I'm pleased to say is the 11th increase in the last 10 years.
I talk to you last quarter, but operational efficiency.
Last three months have allowed us to finalize our program launched the program internally and engage our entire organization behind our approach and what success looks like.
Well the last number of years have benefited from our focus on maintaining the strength of our margins.
We will obviously contender continue under this program.
We're now in a position to introduce enterprise wide initiatives to reduce our existing cost structure.
This morning, we announced our operational efficiency savings target of at least $200 million.
Annualized savings by 2022.
A portion of these savings will or will flow through in 2020 and 2021. It will be the 2022 fiscal year that will benefit fully from our 200 million dollar plus savings target.
Our operational efficiency program is part of and enabled by our enterprise strategy focused on a one company and one customer marketplace.
It allows us to be more focused and effective by doing things once Andrew eliminate redundant costs.
Centralization under one company enables critical functions, such as marketing procurement sourcing et cetera. They have one view for our company and our multiple banners can operate with common systems and processes, which provides opportunity to systematically decommission or older and costly legacy systems.
So literally hundreds of initiatives that we haven't motion.
Seven Dennis.
I'll be placed in an organized structured program for execution and tracking.
And of course, we're continuing our extensive programs targeting internal and external expense reduction.
In order to support the operational efficiency program and realize these savings we will need to invest both opex and capex over the next few years to accelerate the program.
We expect to record onetime costs recorded reported quarterly as an adjustment to EBITDA.
We recorded the first of these costs in Q2 2019.
And expect to continue to incurred costs through 2020 and 2021.
We will update you regularly on the program on a coupon our quarterly calls and disclosures.
With our loyalty program, and our data management and analytics stronger than ever.
Great products on offer supported by our digital and in store experience and I believe we are in a powerful position to grow and compete.
Now just before I hand off to Alan.
Search for Dean successor, as Chief Financial Officer is on schedule and we are following our timelines at this point.
We will be closing out the fiscal year and be with us where our fourth quarter call. So we will obviously update you on at the appropriate time.
And with that I'll hand, the call over to out.
Thanks, and good morning, everyone Stephens said, we delivered a strong third quarter in our retail businesses and we're continuing our growth in sales and gross margin across the banners.
Investments in key building blocks that we've had historically like triangle rewards digital and owned brands.
Delivered meaningful results in Q3.
With 9 million active loyalty members close to 70% penetration Canadian households.
Triangle rewards program provides us with a single view of our customers and the ability to engage them in a more personalized way, which is happening regularly through our 5 million weekly email and App communications. So our focus is on growing share of wallet.
And engaging customers to shop more categories and banners, knowing that the more they shop, the more loyal they become and the more they spend with our family of companies.
That was an example.
A customer that shops across five banners.
Spends 13 times more per year than a customer who shops just one.
And in Q3, our number of customer shopping more than one banner increased by over 20% or.
This is a sign that our triangle marketplace is resonating with our customers.
Next is digital in E Commerce, we've reached some milestones on this journey.
In Q3, we had 100 million visits to Canadian tire Dot CA alone.
This makes Canadian entire dossier, one of the most visited retail sites in Canada.
We've also invested achieved a milestone of $500 million in annual e-commerce sales across our banners.
Underscores just how effective our marketplace of stores and great digital properties has been.
And engaging our customers in growing the business.
In Q3, we relaunched our ctr mobile app.
With enhanced search functionality for automotive customers.
And now we have over 500000 monthly visits.
At sport Chek, we rolled out mobile point of sale in 60 stores.
With the plan to expand the entire network by Black Friday, or this is enabling our associates to check out our customers anywhere in the store decreasing lead times and enhancing their experience.
We've also been testing free shipping at sport Chek per month triangle Mastercard members, we've seen encouraging results, including an increase in the number of transactions made with our credit cards and more sport chek customers applying for triangle Mastercard's online. This is another great example of the power of our marketplace and the collaboration between retail and financial services.
To summarize our recent success in digital we put together a video which is on our Investor Relations website and I'd ask each of you there have to look at highlights our progress and how we're attracting and retaining the most loyal and profitable customers.
Lastly, our owned brands performance, which is another critical building block to our success exceeded our sales and margin expectations for the quarter with owned brand penetration continue to increase up 185 basis points from last year.
Our own blend brands play an important role in growing share of wallet and increasing frequency with our high value customers.
A great example is the introduction of pet and wholehearted premium pet food offerings.
That is growing 13% in the last year.
And we're very pleased that 54% of the customers are new to the category.
Sure investments really paying off in this regard.
Hello enhancements Canadian business grew at a remarkable 60% versus last year.
This was our plan all along capitalizing on opportunities that sport Chek in March as they built their inventory positions for key fall and winter seasons, and introduce fantastic new displays and merchandise.
And we have high Hello, Hi, hi, expectations for Sally Hansen's continuous success, especially with the ground on the the grabbing white here in Toronto This morning.
In Q3, we completed our acquisition of party city officially cementing our position as candidates funds store.
As of mid October customer shopping with the triangle credit card can now earn Canadian tire money. It's already said I'm incredibly pleased that our triangle marketplace has once again the world.
And as Stephen just spoke.
About our operational efficiency program and the 200 million dollar plus an annualized savings we started to pursue.
Linkedin, though that the team and I are incredibly energized by this challenge.
It's a challenge to do things differently to do them once and to strive for simplicity in everything that we do know, it's a big job, but we have a track record of taking on big jobs and executing them very effectively.
Like repositioning ctr.
Resetting sport Chek.
Launching delivered a hole.
Reinventing, our I clinically iconic loyalty programs.
These are just a few examples of what we've been up to and why we're confident this tool the in great success.
So we all look forward to updating you on our progress over the coming quarters, but with that I'll hand, it over to date.
Thank you Stephen and Alan and good morning, everyone wanted to start by addressing a few items that are important to outlining our results this quarter.
We have normalized for severance store closure and consulting costs associated with our operational efficiency program.
And costs associated with the acquisition party city or combined total impact of $22 million NSG nay costs in the quarter.
Year to date, we the normalized $30 million at all you costs and as Stephen said, we continue we expect to continue to encourage these charges into 2021 as we implement the program to realize their stated savings target of 200 million plus by 22.
As a reminder, in Q3 18, we normalized earnings for the Helly Hansen acquisition costs at $22.4 million.
IBT normalized for these items is $329 million and EPS is $3 and 46.
Essentially flat to last year. However, our earnings growth for Q3, 19 is 10% for IBT and 10.2% creep, yes, when we consider the two accounting items that financial services, we highlighted last year that bump the comparative by $36 million.
We also absorbed in our earnings for the quarter non operational foreign translation loss.
Hello, Hansen of $15.8 million related to the depreciation of the Norwegian Krone Nok.
We have been working with the Helly Hansen team on exchange management over the last year and while this level of movement that C. Sub sea level is not all that significant we do not anticipate seeing it impacts of this magnitude going forward.
If we were to adjust for this exchange shift our retail segment IBT goes would be well north of 10% and EPS up another 20 cents on the quarter.
Retail revenue, excluding petroleum increased 1.2% or banners individually saw strong revenue performance with increased shipments to dealers that Canadian tire and higher revenue at check marks and Helly Hansen.
Revenue growth was slightly diluted as we take credit at the consolidated level for intercompany sales from Helly Hansen to or check it marks only once the product is sold to the ultimate retail customer.
Therefore, there is a delay in the recognition of revenue in the retail segment, which bodes well for us going into the fourth quarter.
Retail gross margin, excluding excluding petroleum continues to be well managed up 19 basis points pure product, Matt margins were up in all businesses that sport Chek, we continue to experience higher.
Freight costs related to our strong e-commerce growth and are making progress on that front as part of our operational efficiency program.
The depreciation has been Norwegian krone that I mentioned earlier somewhat mass very strong performance that Helly Hansen delivered.
As Alan noted Helly Hansen is Canadian revenue growth was extremely strong and on a constant currency basis. There foreign revenue was flat compared to 18 due to timing and timing shift as shipments.
Our opex ratio continue to improve.
Normalized dry eye for a 16 retail opex, excluding petroleum depreciation and amortization improves 73 basis points in the quarter and 77 basis points at the consolidated level.
The improvement reflects the benefits of lower share based compensation and marketing expenses and the content contribution of the cost containment initiatives already underway.
Financial services services delivered strong performance was 7% guar gross including a 2.5% growth inactive accounts.
4.5% average balance growth.
The latter is a strong indicated that the value of the card is resonating with their customers and our focus on customer engagement is paying off.
Our credit risk and aging met metrics remain healthy and stable with PD, two plus flat versus last year and better than planned.
The 6% write off rate is right on plan and as expected given the strong growth in active accounts, we experienced in 2018.
We are constantly monitoring the risk metrics and making adjustments to our credit model parameters based on the performance of our portfolio and customer behaviors that we see.
Last year, we adjusted our allowance model in Q3 for $15 million. This year, we made a smaller tweak and while the allowance remains within the target range at 12.5%. There was some redistribution of allowance compared to the prior year in prior quarter due to the continued refinement of our model assumptions.
ROIC improved slightly versus last year to 9%.
As always this is our most difficult metric to achieve the combination of our outlook for the business as well as operational efficiency has met we continue to drive towards this target ultimately.
Capital spending for 2009 team will come in at the low end of our 2019 disclosed range up to 475 to 550 million, primarily due to timing of our planned a timing Atlanta real estate projects and with that I'll turn it over to the operated for the Q.
Thank you I'm, just fine I would like to remind everyone in order to ask a question. Please press Star then number one on your telephone keypad.
We ask that you please pick up the handset or close to your speaker phone system. When asking your question and can limit your time to one question plus one follow up question.
We'll pause for just a moment a compound the Q any roster.
Our first question is from R&D Netapp with RBC capital markets. Please go ahead.
Thanks, and good morning, everyone.
Just start with the operational efficiency target at 200 million can you give us.
The cadence is it going to be like 20, 520 550 in terms of the targeted savings and how much of that do you think is going to slow down to the bottom line.
Hi oriented Steven.
Many of the program initiatives are obviously underway the the.
The structure all that we wanted to wait until we had the program.
Designs here so that.
When we could we could not only track, but assign all the work streams individuals and then start the proper cadence in terms of initiation of it so.
You'll see a lot of it obviously, obviously starting in 2020.
And.
In order to ramp up to a full 200 million by the end of 2021.
Then much of the programs have to be kind of in place.
End of 2020 in the early part of 2021 to tell you the true the more complex ones will be.
On a 12 15 months from now in terms of the full effective decommissioning certain systems and things like that but.
We're going to push very very hard.
It's we would very much like to tell you wouldn't be able to explain to you that.
There is X amount happening in this quarter and X amount happening in that quarter, but as we proceed through the next two or three quarters. We can probably give you a little bit better idea on on obviously on our progress and as you see us taking.
Some onetime charges and individual quarters that we'll certainly give you an indication of how fast we are moving as well so it's really.
We're looking at full kind of $200 million or the savings by by the end of 2021.
So full 200 million by the I'm trying to anyone and.
How much of that do you think youre going to have to reinvest Stephen or should we be actually looking at 200 million falling down through the pn out.
Sorry, I read that was the second part of your question.
I guess the way.
We've tried to explain it here internally so that everybody understands it.
If in theory, you could stop our company Tonight and implement every one of these initiatives that we currently have on our plate.
More morning, we'd be operating a $200 million less cost structure.
So it's taking money out of our current cost structure.
And as far as reinvesting we.
The reinvesting part is just normal course operations as far as we're concerned. This is this is to eliminate these costs out of our current cost structure.
So if we implemented them overnight and they'd all drop to the bottom line.
So then.
Sort of putting words in your mind, Stephen we should see a significant portion of the 200 to the bottom line.
Oh, that's sorry, yes, absolutely that's our that's absolutely our 10 Irene Yeah. It's.
We are investing at the same time, you're saving and obviously, we'll we'll try to.
Take you along that journey, but.
If we.
If we continue the way we are invested in our and our our new areas of business and and and our distribution centers. All these sort of things.
And Didnt do this program.
Then our PML going into 2022 would be hurt by more than $200 million. So we.
So this is an aggressive program to take a cost of their current structure.
And that's that's very helpful. Thank you and then on the E Commerce revenues in excess of 500 million can you talk about how you're seeing that building across which banners and what kind of growth rate is reasonable to expect from here on out.
Yes.
Hey, how are you sound.
Choking on the other into the phone.
Not because your question.
We're seeing it across look as you would expect where we're seeing the ecommerce revenue build.
And I look at it from a couple of different angles. One is by category you would expect obviously sport chek is lends itself very well to e-commerce growth.
As those marks and and a lot of categories, but not all within Ctr. We've said over the course of time that we're using sport chek as our sort of bellwether and our innovator around e-commerce . So.
Not surprising thats, leading the pack.
In terms of.
Growth I would say growth is reflective of engagement, we don't have a strategy necessarily to grow the e-commerce revenue.
We have a strategy to grow the engagement in the marketplace and the customer share of wallet and customer engagement and we're using both channels to do that so we're not targeting a specific growth rate and as you would expect does the number gets bigger the growth rates going to get smaller even though the dollar value continues to grow so I'd be hesitant to put a number on it it's not hard to.
Grow a 25 million dollar e-commerce business by 100%, but a 500 million dollar one growing by 100% is going to be pretty pretty substantial so I'd say that you should expect it.
To continue on the trajectory is on today, we think it's going to be really really obviously important as we go forward.
And it will grow in line with the rest of the business.
That's very helpful and so I guess, let me ask the question a different way Alan.
Categories that lend themselves to e-commerce .
And where we're seeing more and more serve as a shift toward E. Commerce. How would you say that youre banners are doing in those categories and do you expect that ecommerce penetration for you guys in those categories will rise to market level.
So I'll go back to something I think a sudden last analyst call and that's we're not going to relate to any share we're not going to give up Sharon categories that are important to us. So you can expect Canadian tire and I'm talking about the corporation here.
Vigorously defend and continue to grow its share in those categories and if they lend themselves to E. Commerce, that's exactly why we put the investment in and what you're seeing its four check is exemplary of that so that's a cat business thats been obviously more disrupted by e-commerce than some of our other categories and we.
Four and a half growth this quarter, we're not only defending our share we're continuing to grow at an E. Commerce is planning important role in that so you should expect Canadian tire Corporation to show up.
In categories, where they lend themselves to a digital channel.
And be fiercely competitive the same way, we wouldn't bricks and mortar.
That's great. Thank you.
Thank you.
Our next question is from direct delay with Canaccord Genuity.
Yes.
Yes, Hi, just sort of following up on that line of questioning the.
You mentioned that there's going to be.
Some cost associated with the operational efficiency program, so and again around 20 million in cost this quarter. It should we expect something similar in the upcoming sort of near term quarters. As you look to drive this cost savings initiative.
Hi, I know you want to forecast [laughter].
And and we would to actually be able we'd like to know how fast we get certain programs up and running in certain initiatives, but.
Paybacks.
Yes, when you invest in operational efficiency are extremely.
Robin.
And so.
The 2020 year will have its share.
Of onetime costs.
Even.
Operational efficiency programs that generate 20, and 30% return on invested capital.
Our extremely extremely valuable so you can.
Look at other companies you can look at other.
Retail organizations to see what their paybacks are too but.
It's a very it's a very rapid rapid payback.
No and Derek just at the way I think about this is.
And we know we knew there would be that the quest to try and model. This solid reality is it's going to be lumpy right I think thats, what we all feel and that the energy as Alan said right in terms of.
Business, taking this on rate and Greg Hicks very involved in that point in terms of the leadership of it who is the biggest user actually these ESG services. So that that's not lost on anybody is Stephen as pointed out many times, but.
These initiatives there is theres some there's literally hundreds of them. So it's going to be lumpy right and the good old days of being able to put a big prevision away and drawdown on it are gone right. So you basically have to realize the cost record the cost and Stephens said, we'll give you a sense of what the benefit is the payback period is where where that's doable.
And there will be awaiting obviously the more complex ones are going to be later in the program right. So.
So it isn't all kind of just to being able to bid just perfectly model it out, but there will be cost involved in.
And it's energizing I think for the organization to be able to get at some of the things that we've always wanted to get added from efficiency in.
Point of view.
And I think that will be energy energy energizing for employees in the organization to finally get out these things, but it will be that lumpy I don't that helps or not but no doubt it does.
I just wanted to clarify.
One thing so you expect to be at 200 million sort of run rate cost savings at the end of 2021 is that correct. So for 2022 you'd have the full benefit.
Yes, that's what we're targeting.
Okay, great just in terms of of the overall retail environment. The promotional environment I mean did you see with highly competitive.
This quarter. It have you seen any price inflation return to the to the market at all.
Well, yes, it was competitive.
In terms of price inflation like we're very pleased with with what we're things are going in terms of the product margin.
Nothing noticeable and looking at the business unit presence that are here in the shaking their head I mean, you. These things tend to really gradually when they happen at all but generally speaking.
We're we haven.
That's a disproportionately invest in problem as you would have seen by the results and continue to maintain and grow our share so.
Yes, it's Greg speaking I would say that.
Coming off our our conversations on the last call given the late start to the spring.
We would have indicated on the call that we were starting to see a little bit of competitive activity in some key seasonal seasonal businesses, but that seem to really level out in the quarter and.
And to Alan's point, especially in big businesses and seasonal seasonal and garden gardening. In particular, we were able to appreciate our margins and had a very strong quarter on the top line. So.
We we downloads point really didn't see inflation at the cost base and we were able to compete very effectively.
Okay. Then thank you and just one more if I could answer switching gears on to see GFS.
You've had exceptional guar growth over the last few years really and.
We've seen that the return on receivables come down into into the high six level, which I think previously with was that sort of target of your so how do you think about the balance of guar growth and return on receivables going forward.
Thanks, Derek said, it's Greg Craig I think we've talked about this before we started the journey a few years ago with kind of integration on the retail side of things.
We didn't really have lot car growth cycle back to two three years ago. In fact, we were flat and when you're flat with guar growth you're going to see your ROI as youve as you've mentioned kind of get it to an elevated level that wasn't really kind of our sustained run rate. We really wanted to kind of put more energy to getting that integration back with the retail banners.
Getting that traditional growth rate back up and running for receivables and we expect it fully expected that to the impact on our would be to diminish. So we're really comfortable at the level that we're at.
Like I said in the last call our color too I think if I look ahead, a little bit we see ours, our receivables kind of going more or less back to kind of industry growth levels as we focus more on engagement with our customers versus just kind of that upfront acquisition and it takes a little bit of time for kind of the the efforts from an engagement perspective to really.
Weve their way into through the portfolio. So I would expect you see kind of the the garden member moderate a little bit to be pretty much at industry levels and on the are probably would be relatively flat over the next low while as well.
Great very helpful. Thank you very much.
Thank you our next question from Mark Petri with RBC. Please go ahead.
Hey, good morning spent a lot of noise in the retail gross margin over the last couple of quarters and in Q3, you noted the 19 basis point improvement, but could you just give a bit more context in terms of the various puts and takes that impacted retail gross margin percentage.
Yes.
Well.
Yes, I'll start.
Yeah. It was it was nice not to be talking bit Emmis AIDS in the quarter over quarter kind of impacts of that a.
As I mentioned, many times I think in the last couple of hours here.
But.
I think the things that really stood at least from my perspective, and I will now I'll turn it over to the Alan Greg in the guys. But is is that we we basically had good product margin growth across all of the businesses.
GL included an LTL little little hair cut right and mostly a function of obviously the continued growth of E com, but thats a good thing is I think a lot of the initiatives at the guys. It put in place to two over the over this sort of turnaround period that down and TJ been driving I shouldn't come to fruition around inventory Alex.
And those kinds of things, but it was a very clean quarter I think with respect to margin is the way I would describe it and as Alan and Gregg said earlier, we didn't see.
If you will deterioration margin at all from a competitive point of view, so I'll, let Greg had what he wants but I would describe as very clean quarter kind of quarter, we'd like to have with respect to margins and we're continuing to compete without without ceding share as Alan said, So you guys.
Mark and Ctr I'd say margin management was the real at highlight for the team in the quarter, we were comping large rate increases and margin dollar growth in the quarter last year.
And margin rates were stronger on the backs of owned brand mix sourcing gains and they offset some headwinds that we had in the freight and foreign exchange line. So I'd say, we continue to be bullish with respect to the team's ability to manage our margin rates and still drives the topline.
Okay. Thanks, and then I just wanted to follow up on the E Commerce discussion as well obviously.
This is going to be allergic component of your revenue going forward at the same time you noted the margin pressure that came with that growth.
Check.
So going forward, how do you sort of expect the increasing percentage of ecommerce sales of total sales to impact your profitability and and maybe I don't know if you can talk about it by banner.
Hey, Mark as Alan.
Well I mean, there's a couple of things there I mean.
We have all kinds of different products that have.
Our products very in terms of merger and velocity greatly across the board. If you could as you probably appreciate everything from Los leaders to high margin categories. So when you think of this as a channel as a sort of 500 million dollar revenue stream as it stands today, it's no different than than any of the rest of it. So it's a blended it's part of our blood.
Ended merger first of all the second thing is because some of this is operating cost I mean, the fact of the matter is a distribution fulfillment in Canada as expensive.
And its scale place. So we've got a lot of work to do as we continue to build scale to make sure that and this is part of operational efficiency by the way to.
To make sure that we're capitalizing on opportunities it scales presents when it comes a fulfillment and spend freight so thats really in front of us. So our job is to make sure that when you look at the whole marketplace and our product Assortments that we've got a blended margin than we're happy with.
By the way, we don't mind growing categories that have a different merger profile than our average that's fantastic specialty grows engagement.
But the other piece is making sure we're doing a really really efficiently and we've got some work to do there that just hasn't been our it hasn't been available to us because we just didnt have the scale and that's that's going to still take some time.
Okay I appreciate the color from.
Thank you.
My next question is from B cells from there with National Bank. Please go ahead.
Hi, Thanks for taking my questions just on the operational efficiency initiative.
I know, it's early days, but how should we think about the benefits in Cogs and yesterday is it more weighted towards yesterday.
Yes, it's more weighted towards M&A, but we.
Primarily Greg I guess, the great fix and his team have initiated this but we've had a focus on our.
On very specific complicated.
Cogs reduction exercises and initiatives going on.
I would say in general there, probably 40 or 50% implemented at this stage of the game so.
Over the next couple of years, there will be fully fully implemented so it helps with.
With with margins and the efficiency of the product and as a variety of different angles, but primarily what we're trying to do.
And some of our supply chain costs are obviously incorporated in our Cogs, but.
Big areas of.
Spend in an organization, our cogs, including supply chain.
<unk> costs marketing costs et cetera, so right across the board we've got a initiatives at this stage of the game I'd wait to more heavily on us DNA than I was on on Cogs.
Okay and.
And it off the top you just.
And the team talked about execution ability and large projects the retail landscape is.
Theres. Many stories is decommissioning are implementing new I T systems and things go awry.
Just given the complexity of the systems Nowadays so how does management I thought about that as a decommissioned these systems and in order to protect the ongoing operational business.
Well, we've got our head of technology here too I didn't kick in if he wants here, but I.
One of the one of the reasons, we did not attack a lot of this over the last couple of years is for that reason.
We are really layering on.
Within technology the capacity.
And capabilities for us to execute and so.
The amalgam of our data.
Et cetera, and designing it all was it was a big deal for us and putting in all the new tools to be able to access that data for.
For customer purposes, and marketing purposes and sales.
We did not want to start decommissioning big systems during that period of time.
But he and his team have a.
Very comprehensive.
Kind of road map here of how we will go about this win what we can turn off what we have to do ahead of time.
Change the applications that are running on those legacy systems.
Some of them are relatively straight forward because you can turn off two or three because we're putting a one company approach to things but.
As far as actually changing the way that you do business.
That's that has to be structured and that's why we waited for for this program. So.
It is it is complex, but we've done many many other initiatives that I would classify as more complex than decommissioning software leg of these legacy operations.
Okay.
On a kick in if youd like to.
Yes. This is a this is the and Kennedy.
Further to what Stephen was saying.
There's a lot of pre planning that has gone in over the last couple of years as it relates to looking at strategic investments and setting up the environment in a way that would allow us to actually consolidate simplify integrate and then decommission and part of that process. As I've said has been underway for some time, but I think we're uniquely positioned now to start actually implementing some of those.
Initiatives under the operational efficiency umbrella and the timing actually works over the next two years well for us. So the preplanning aspect of this the risk mitigation side of this equation and then the careful planning going forward over the next 24 months or so are very important we do this and that would risk mitigated to those kinds of changes.
Okay. Thanks for that and just in terms of the cost that your.
Segment, how we'll hold the cost be separated out as as you go through the quarters implement these initiatives or will that be some cost that.
That you're just going to have to incur in order to.
Decommissioning systems may be extremities for period of time or or consulting costs or what have you.
Well the guy.
It's our intent through the ones you know the costs that we would disclose during the quarter to give you some idea of where the costs are coming from as has been has done with some of the.
Yes that we've incurred in 2019, so the best we can we'll try to.
Levered into big bigger buckets for use so you can try to understand it understand better if thats what you mean, we're not.
You don't want to go.
Yeah, I mean, those adept here that it doesn't.
And it's not really giving you that much information, but we'll do our best to try to say these are the areas that we've kind of invested in in the quarter and what are onetime costs are.
Okay. Thanks, a lot.
Thank you. Our next question is from Peter Sklar with BMO capital markets. Please go ahead.
Changing topics to other matters can you talk a little bit about Helly Hansen. So you had the.
Very strong growth.
As you shipped into your Canadian retail banners.
Indicated that.
Your international sales were flat, so what's going on there and what's what's the strategy for Helly Hansen as it pertains to non Canadian tire customers.
Okay, I'll start a bit.
Susser too if he wants to kick in but the Oh, yeah, the selling in Canada as a gallon covered it very very well we're extremely encouraged about this the selling.
And.
Internationally, Holly is performing exactly where we had expected them to perform as good growth rates in key markets.
Though on a comparison basis on a year over year basis, Kelly's ordering pattern change slightly so more heavily weighted last year to Q3 versus.
Q4. This year, that's just the nature of some of their their customers.
And.
So that shifted a bit in terms of their international performance and it being flat but.
Major markets key markets U.S. markets as such are all.
Performing to expectations I don't know mild weather of missed something you want to comment on bookstore, yes, but of the year over year is related to they're not getting allegion currency depreciation.
Adjusted for that I mean, you will see in constant currency reserves, you will see a growth the U.S., the especially really pleased the level of growth in the U.S. Mckim.
Okay.
And then the other thing too.
Changing topics on triangle.
You are seeing a lot of growth in triangle, both and.
Subscribers to the loyalty program number of transactions, you're collecting a tremendous amount of data can you give us an update on what you're doing with all of this data.
Todd.
In terms of your.
Assortment in terms of.
Targeted offers I don't recall seeing any targeted offers that I've received so we could have an update on what Canadian tire is doing with all this data.
Susan O'brien's here, so and she knows 10 times more than the rest of us. So she is going to handle.
This question, Okay, Hey, its season.
So it's a great question, obviously I love that you pointed out.
And the quality of the data we had.
A number of initiatives happening on how we're using that data number one from a business perspective we've.
Started two segments the data so we understand better who that customer is on.
I'm working with them.
All of the business unit heads to help them identify who their customers are and using our business to will help cats, which is category analysis tool, we've been able to help them understand who is buying in the category. They can keaton and so from that perspective, they are starting to be able to develop a better assortments and that.
Could attract a customer maybe they don't have in their categories today.
And second from a marketing perspective, we're using that data in a significant weight to be able to.
Personalized communications and I know you mentioned you didn't get any bank, we set up 5 million unique to meet and John we're seeing a massive return on.
Investment so.
This I guess as you'll get one next week.
10.
So we're seeing inefficiency that weve never seen before in a personalized communications we doubled it.
In Q3, we went from 41 efficiency up nine to one so we're really pleased about that and we're also looking from a segmentation perspective that lifetime value of our customers, which we've never done in the past and that's going to enable us to fund the marketing perspective to be able to choose which customer group and most interesting and profitable to us.
And then allocate our marketing investment against that.
So a number of initiatives underway, we're really pleased with the progress I think we have a fantastic team in place data science team, helping us make way better decisions on our marketing investment in as Alan pointed out from an operational efficiency perspective. This is helping us meaningfully use that marketing dollar better than we used to in the past.
The only thing I'd add is at a summary level Peter the.
The number of customers you you're absolutely right in your sort of your question. The number of consumers, we're attracting I mean, we're at 70% of households today. So that the number can only get so big.
But assuming suited pointed out we're transitioning to one of our key priorities being how much we're engaging these customers.
Share of wallet, how many categories, they're shopping how many banners their shopping how many visits we have in their average basket size. These are metrics that are going to be transformational for us in the future and this is how we're going to be thinking about the business. So as Susan rightly pointed out there's a ton of stuff going on here and we'll continue to talk to more about in the coming quarters.
Susan I just don't understand you.
Something you talked about three to one growing to nine to one I didn't understand that yeah. So when we send out to personalize offer because.
It is customer level, we're able to do a hold back and we do on every offer every week. So we send out 5 million offers to our customers we hold back at percentages customer base and so we're able to measure how much return did we get on that marketing investment so.
When we started the program here around four to one that was sort of.
Thanks dollar to offer a customer something you would get $4 back. We are now based on using that data developing really strong algorithms to predict what a customer might want we're able to make an offer that returns when we invested dollar to communicate it we get back $9.
Is that margins are sales.
Brett sales.
But obviously with the data we have today, we can start making decisions on which at the most profitable customers as well so as we think even through search.
To be able to pay pay to get customers can or website. We can now start to figure out which customers are more profitable than others and seeking to see as time goes by you start getting far more efficient plus.
If it's more personalizing customized for the customer overall, they're going to be more engaged as Alan said, we're getting at that flywheel effect as you know me better therefore, I come to the more often therefore I get more data and I can make them even better offer. So it's a great flywheel effect, you get with using customer data.
Okay. Thank you.
Thank you.
Our next question is from Patricia Baker with Scotia Bank. Please go ahead.
Good morning, everyone. Thank you for taking my questions.
Got to come back to the operational efficiency and I, just wanted to understand a little bit better Stephen or Alan.
The process that you went through to get to that 200 million dollar <unk> dollar some cost savings.
You benchmark your SD overall SDMA against other global retailers and come up with what you've pristine what you believe to be an optimal SGN a rate for the size of your business or do you really come about as you've built up this one company and you know now that you got one company you identified.
Areas, where you didn't you didnt need to have duplication.
Thanks, Hi, Patricia Steven Hi that Greg Greg six has gone through this whole exercise and the.
She is.
Budding, it's a bit to answer [laughter] I know all handed off to okay. Yes, So Patricia maybe maybe I'll try and give a.
A little bit a deeper deeper color in terms of what we've been up two cents since the last call over the course of the last 90 days.
I'd start by saying that we're trying to ensure from the outset that this is not business as usual program.
And for that reason, we tried to ensure our approach delivered on on this objective. So we're attempting to make this a transformative effort on effort involved that involves the entire organization. So we've approached the assessment of the opportunity to run our business more efficiently and the manner in which we think in investor would.
It's important to note that we aren't starting from scratch like we've talked about the last three months. We've spent organizing our current activities into a coordinated program across the enterprise and engaged in a leadership.
Around where we're going with our strategy and its enablement of across company effort like this so concurrent to setting up the necessary coordination and tracking mechanisms.
We have conducted very thorough benchmarks to your point.
We did that by function, we had outside kind of assistance to help us to do that to benchmark cross the worldwide industry and that's enabled both the trajectory trajectory in the full potential and I'd call. This work akin to an.
Got it investor due diligence approach.
This combined with the work, we already had underway and care at key areas of the business like I T and supply chain gave us the confidence in disclosing the cost targets that we that we announced today.
There we've.
We have subsequently set up a program structure with leadership throughout the organization by function to work at the opportunities from a bottom up standpoint.
Where to Stephens opening remarks, we now have hundreds of initiatives identified in size and then over the course of the next many weeks, we're going to look to develop an implementation roadmap that looks for unlock and looks looks horizontally across the business as opposed to vertically.
We will work to properly sequence all the activities will map, our dependencies and developed a much better understanding of the sequencing of costs and benefits associated with the program. So the organization has been fairly busy over the course of the last 90 days.
Sounds like it thanks, a lot Greg and I just ask.
How does this project the size and scope of this project compared to the multiyear productivity initiatives that you are that the company was engaged in several years ago.
I mean from my standpoint.
It's much more far reaching because where we're reaching across the entire organization I think Stephen alluded to the fact that most of our work effort previously was focused on our Cogs base with a lot of that traveling through ctr.
And this is trying to punch every every key on the keyboard and the PNM Elena travels across the enterprise. So from that standpoint alone I'd say, it's a it's a much more involved work effort and like we said and involves the entire leadership of the organization.
And Greg I, just I don't want to put words in your mouth, but actually these are words that you said to me and I just want to remind you. So you know with this operational efficiency I think you you mentioned that at the end of the day, what you want to see if more of the topline dropping to the bottom line and this is Steve This is be group to get there.
Yes, I mean, I think Steven kind of hit on our objectives in terms of what we're trying to accomplish we we want to make sure that when we come out of this we have a better kind of competitive framework as well. So I'd say those are the two two big objectives. If we can.
Deliver the types of returns we would expect to provide to our shareholders. But also ensure that this company is set up.
Effectively to compete going forward I think we'll all be extremely happy with the efforts that we put forth.
Thank you very much.
Thank you all right next question is from key talent the gentleman security. Please go ahead.
Yes, that's a question on the supply chain.
In terms of your ecommerce fulfillment and can you discuss whether you're looking at.
Dedicated facilities for any of the banners or is it all multi.
Purpose.
Do you season supplemented or.
By deliver from store.
Hi, This is a in Kennedy, let me answer the question if I may be.
From an ecommerce perspective in a supplement perspective, you know, we're utilizing multi capability distribution centers.
Across the country in terms of how we handle that and so it's actually an integrated part of the.
Process flow, we have for supply chain that uses you know enhance material handling and Anthony data and analytics in terms of looking regionalization of inventory and other things such as that.
Actually tunes, the available inventory and the speed to delivery accordingly across the supply network, it's very much core to what the supply chain team does today for bricks and mortar store replenishment as well as quite frankly e-commerce fulfillment as well.
So we'll be a difference when you.
Build the new marks.
Sport Chek DC.
It's a great question. It's one of those distribution centers that we are investing a little bit more in some level of automated material handling.
That's core to it just in terms of pick pack unit of one in velocity, but at the same time the efficiency gain within distribution center for E comm fulfillment actually benefits.
Bulk shipments that we would make to physical stores as well and so the combination the to actually has tremendous value and integrating them into the same facility is actually very beneficial as well.
In addition, this particular DC is one that we're consolidating eight distribution centers into one.
And the utilization of technology and process flow efficiency in an effective way enables us to consolidate those eight into one and actually gets cost savings efficiency gain as a result of that so it's very powerful for us.
And then just in terms of the.
Are there any learnings for the Canadian tire network from the marks.
Ill or will it remain.
Exclusively store to home for Canadian tire.
Hi, Steve.
Look every one of our batteries that we're pushing hard benefits.
The rest of our batters scale and E com.
Is extremely extremely important so at what Ian just described as the scale of a going into one and so therefore, we have scale heading out award on you fulfillment basis.
Understanding how to.
Fulfill orders and not split orders across the country.
Is very very very important trying different methods of enticing customers.
To pay for certain freight costs et cetera is all very important with this too.
The efficiency, though of going across this country with the number of retail stores that we have.
We've always said has given us a great great advantage so.
Canadian tire retail itself is performing very very well and and and so from that aspect of it it's not it's not a pick costs related issue.
It is really just getting kind of more volume for Ah for freight costs as opposed to anything else.
I think TJ, and ER and PJ with marks and.
Sport Chek, Kevin has some different issues in terms of picking and being able to pick from store and supplying from stores. So the centralization of some of our you fulfillment centers will benefit them tremendously, but this is going to be an evolution I I would say that Canadian tire retail at the moment.
It is very efficient actually and what they do and I think the rest of our organization.
We're inefficient.
I don't know how soon describe it.
We're putting too much for pick costs.
We haven't got all our.
The efficiencies lined up yet and so many of those are part of our operational efficiency program and we're working extremely extremely hard at it but.
But it will have a much.
Greater beneficial effect on our margins through on marks and sport truck.
As we become more and more and more efficient that as a it's it's a difficult but I think.
Sport Chek with TJ. His leadership is really leading the way and I'm telling us.
Things that work and things that don't work trying to be more efficiently sutra across the board the new equipment that in as referencing will all all help with with the pick costs.
We are investing a lot in freight efficiency. If you will so and sport checks doing a tremendous amount of work for us on on that side. So short answer is yes, but that gives you some color as to how how they affect each other.
Thank you.
Thank you Sir our next question is from Brian Morrison with TD Securities. Please go ahead.
Hi, Good morning, just a couple of housekeeping question now they have the completion of the acquisition of party City now complete how should we think of the integration and the timing of his presence within the dealer stores.
Yeah, Brian its Greg.
The deal closed as we talked about October onest. So we've been very busy getting to know the team members up here in Canada visiting the stores all those traditional things you would expect.
Planning.
Category launch.
Into Canadian tire stores for 2020.
We think that we can have a meaningful presence in a large number of stores as we head towards Q3, not not a full assortment, but akin to the way we would do a regular category reset where we're getting into a category. We believe that there's opportunity for us to shoe horn.
A pretty good representation of a party assortment into the majority of our Canadian tire stores and make that our 201st category. So that's that's what we're working towards so you can expect.
See sprinkles of product more product an item focus over the course of the next six months, we're launching it a couple of new year's Eve celebrations skews into the network.
As a as a first fast step.
But but seeing the category show up more materially in stores as we move towards Q3 of next year.
Okay. Thank you and then just from a capital allocation perspective, Im trying to understand the disclosure the reasoning for capex to be towards the lower end of the range. This year and also the limited participation and then see I'd be in the quarter.
Brian as Dean.
Well the on the first part with respect to the Capex I mean, I think we highlighted that it really just comes down to planning as real estate projects, which we'd like them all to be.
Perfectly kind of scheduled but it doesn't quite work at that way.
And there is an incredible diligence at the retail guys go through in combination with the real estate team around.
Each project and what we expect in terms of returns out of that so that kind of discipline. I think is very very good thing and as has been practice in this organization for a long time, it does lead sometimes to taking a bit more time.
In terms of executing against any of the projects on that on the NC IB I mean, the three to 400 million. We said three to 400 million I think we ended up just south of 320 something like that.
We react right and put a target in place of 350 so.
We would start to execute against that I think we want to be very.
Targeted right in terms of as I say executing against that program and we still view very strongly that or are the valuation of our stock is a is well on your guide in terms of what we see.
And we'll act accordingly over the course of 23 2020.
Thanks, Dan.
Thank you.
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