Q4 2019 Earnings Call
[laughter].
All participants please stand by your meeting is ready to begin.
Good morning, My name is Lorianne I will be your conference operator today at this time I would like to welcome everyone to the Canadian Tire Corporation limited fourth quarter and 2019 year in results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question answer session. If he would like to Africa.
A question during that time simply press Star then the number one on your telephone keypad to withdraw your question. Please press the pound Keith we ask that you limit your questions you're talking to one question plus a follow up question before cycling back into the Q.
This morning's Canadian Tire Corporation limited release their financial results for the fourth quarter 2019, as well as the full year a copy of the earnings disclosure is available on their website and includes cautionary language about forward looking statements risks and uncertainties, which also apply to the discussion during today's conference call.
I will now turn the call over to Steven Wetmore, President and CEO Steven.
Thank you operator.
Good morning, everyone and thank you for joining us Alan and Diener with me this morning, as well and they'll come in in more detail on the quarter. So I'll keep my comments more towards the full year and solve our key initiatives.
As all of you who cover our business recall.
Got a number of issues that affected our results in the first half of 2019.
Which created quite a challenge as we looked ahead to our filed two quarters.
However, our organization has responded extremely well across all our businesses.
With consolidated comparable sales for the year at 3.6%, which has exceeded our published or published aspirations of 3%.
Ctr as topline growth was a highlight was comparable sales of 3.8% on a year and 4.8% in the quarter exceptional performance from our core Ctr business.
Earnings per share performance is also in line with our aspirations and reflects the strong contribution of her financial services business, which continued to execute exceptionally well in 2019.
Our two year average EPS growth is 10.6%.
And looking at our ROIC performance or return on invested capital I'm pleased that where we are you initiatives, we have announced a further our financial performance.
10% plus ROIC because the number we should end are striving to achieve to match our strong topline performance.
That's a good segue actually into the status of our operational efficiency program, which is well underway under Greg shakes. His leadership and we are tracking to plan.
Top down and bottom up analysis of our complete organization has been completed.
Initiatives assigned and coordinated and actions being taken.
Actually an exciting journey, we're laying out for all of us as we embrace a truly different way of working.
2019, also allowed us to increase or dividends or the 11th consecutive time.
With the current payout ratio 34%.
We continued our share buyback program and most importantly continued investing in our business through our extensive capital projects for the years ahead.
C. Read has also performed well we're very pleased with the investments they are making strong consistent profitability. They are generating we recently adjusted our ownership and we now stand at 69.4%.
The beat is now included in the S&P composite index capped read index and the dividend aristocrats index, reflecting the increase in its liquidity.
Their track record of distribution increases.
In terms of Helly Hansen total revenue in 2019 was 650 million.
Well almost 80% of that was generated internationally, our Canadian business is growing very well and inline with our expectations.
Alan will talk to you in a moment about the strong customer response to the brand across our Canadian banners.
Only hansen's leadership team is also making important progress developing key market opportunities.
Through improved brand awareness in the U.S. and new European markets.
And there is executed as and executed as planned on marketing investments to further build the brand, which also saw six point improvement to its already impressive NPS score in 2019.
There are significant growth potential for the brand globally.
Well update you on our progress during the course of becoming year.
Looking forward to 2020, we will continue to execute against our strategic agenda with focus on digital stores and product the fundamentals of our business.
And we are executing our critical operational efficiency program building marketplace capabilities.
Strengthening owned brands growing international and growing our Canadian tire credit card offerings.
These initiatives are the key drivers of our growth.
Invested in the talent and funding to drive them forward.
Again, Alan will speak more to the customer engagement initiatives shortly.
Our brand.
Culture and talent, our most important assets and I'm proud to say that in 2019 Canadian Tire Corporation was recognized was an abundance of awards.
Putting ranking first and lose your marketing's annual survey of companies Canadians admire most.
Recognition by brand finances, the strongest retail brand in Canada, and again being named a top employer for young people.
Our commitment to the community and building a sustainable organization. We're also recognized as we were named one of the global 100, most sustainable corporations in the world by corporate nights.
And listed on DJ ESI World part of the Dow Jones.
Sustainability indices, which represents the top 10% global companies.
Now a year ago I shared the news that our CFO deemed mccann would be retiring from his role.
Last month, we were extremely pleased to announce the appointment of Greg Craig as Dean successor.
Well, that's a hard Dr. Paulo.
Gregs career with Canadian tire positions them perfectly to transition to endure rules that I know he will accelerate.
And my guess would promising is diverse experience in finance in banking and his deep understanding of our retail business are great assets as he assumes his new role as president and CEO of our bank along with his continued role as chairman of Helly Hansen.
With that I'll hand, the call over to Mr. Mcdonald.
Thanks, Stephen Good morning, everyone.
It's a pleasure to be here with you when we have such a we ended the quarter on such a positive note.
Well our numbers speak for themselves. We also saw continued growth in are key measures of customer engagement.
In Q4, we had record participation or triangle rewards program.
We had $2.4 billion sales through our loyalty program.
Up over $200 million versus last year.
Active customers were up 5% with average spending increasing a further 6% in the quarter.
On our last call, we spoke about the value of growing the number of loyalty customers, who shop more than one of our banners and in Q4, nearly 3 million loyalty members shop more than one banner.
That's up materially from last year.
Our loyalty program has become an important contributor or performance and the growth, we're seeing bodes very well for the future.
Customers also visited us more frequently in store and online in stores, we saw increased engagement across the network from small communities to large urban centers. This was especially true at ctr.
Demonstrating the power of our dealers to serve customers in their local markets.
Now over the past few years, we've committed to building a compelling digital experience and a competitive omnichannel marketplace for Canadians.
In Q4, we sold our customers responded very positively.
We achieved our annual goal of exceeding a half a billion web visits and our work to approve the ctr yep.
Paying off with active customers growing 16% versus last year.
Last quarter, we shared with you that our previous 12 months of ecommerce sales were in excess of $500 million and throughout the fourth quarter. This trend continued.
Thanks to strong digital traffic conversion and the success of cyber Monday, our biggest online sales day in the company's history.
We've also continued to stress that our own brands investments are part of a strategy to have the most curated assortment for the jobs and joys of a lifetime in Canada.
In Q4, our own brand performance was up across all banners and accounted for almost 40% of or sales.
Our top 10 brands, including motive Master Denver, Hayes Wind River, Mastercraft and canvas delivered combined growth of 9%.
Helly Hansen has also been outstanding ramping up fast.
Sales doubling its sport chek year over year and nearly the same his remarks.
Now a few words on our banners results for the quarter I'd like to call. A ctr is exceptional 5% retail sales growth in Q4 and 4% for the year.
Well, there's there were some prominent growth areas sales were strong across our categories, which is an incredible achieve.
Not surprisingly ctr saw meaningful gains in its market share in the quarter.
Sport checks performance was above our expectations with a full year comparable sales growth of 3.3% in Q4 growth of 2% for all of its banners. The sport Chek banners, specifically achieved a strong 3.8% comp holding share in a highly competitive market.
These results are very encouraging improve the repositioning thats been underway a check is having an impact as the business continues to grow.
Marks full year comp of 2.5% and 1.8 in the quarter was on par with our expectations growth was driven by the strength of our hero categories. Despite another unseasonably mild December.
Now since we're in Q1 I thought it would be beneficial note some of the priorities we've identified for 2020.
We've outlined for you are one company one customer model, which is at the core of our strategy in Canada.
In this model strong retail banners successful owned brands and a connected financial services and loyalty offering come together to deliver a world class customer experience.
We have begun to refer to these assets as our Canadian tire marketplace.
Our focus for 2020 is to continue to build these assets, bringing Canadians the very best products and brands for the jobs enjoys of a lifetime in Canada delivered through compelling digital and in store experiences.
We will continue to develop our assortments and brands throughout the year, which means integrating party city and investing in growing Helly Hansen.
Our transformation work at sport Chek will continue and will evolve to include marks.
Focusing on new Assortments merchandising ecommerce and digital connections.
Triangle rewards will be our platform to engage customers across the marketplace delivering unique and interesting experiences to drive greater share of wallet.
Triangles success also provides an incredible source of data, which will guide decision, making across the enterprise as we integrate our AI and data analytics capabilities to new parts of the organization.
Many of these priorities will be enabled through our operational efficiency program.
In addition to taking costs out of the business initiatives within the program, our transformational and will change the way we work across the company.
Our operational efficiency program has over 200 initiatives, creating new capabilities and ways of working from how we use analytics secure eight assortments to adopting new ways of collaborating to reduce our impact on the environment.
It's an exciting time to be part of Canadian tire as we look forward to 2020 as another year of transformation.
Now looking ahead to Q1 after 23 quarters of consecutive growth at Ctr. The treat the team is driving to extend that streak.
Q1 is a small quarter, but they're up against a 7% comp from last year. So the challenge is on.
Finally here at Canadian tire, we have an expression that theres no such thing as an unassisted goal.
This of course means a person or companies achievements and thanks to many unsung heroes well in my mind that sums up Dean Mccann's contribution to Canadian tire.
I mean, you've worked tirelessly to make each and every one of a successful in our own right.
And you've helped make this the best company in Canada to work for thank you and congratulations my friend you will be missed.
Over to you.
Thank you on it so say something nice or that you now [laughter].
Greg Dona Ana I don't know if you guys have ever notice that when the quarter's a little short of expectations I asked him because a lot of explaining but when it's really good Stephen and Alan or more than willing to talk about it.
The way.
Things.
Before I get into the quarter I did want to make a few general comments that the financial strength of the company as we head into 2020.
As you know this company enjoys one of the highest credit ratings of any retailer in North America. We have earned that by carefully managing our balance sheet, our debt maturities and our multiple sources of liquidity.
Operating company with three distinct capital structure, right financial services and retail each independent independently and very conservatively positioned is something we've done for many years.
We had in fact use that strength to acquire acquire assets like Helly Hansen, along with a growing owned brand suite that will generate long term value and we are right on schedule with respect to our de leveraging plan host the healthy acquisition.
To preserve our very strong investment grade status.
Let me turn to the quarter and make a few comments.
As a reminder, we normalized our results for Q4 19 for cost associated with the OE program.
Some $6.5 million for seven store closure and program related expenses and $2.4 million associated with the acquisition of party city.
And in Q4 18, we normalized for the $50 million fair value adjustment related to Scotiabanks, 20% interest and see TFS.
So on a normalized basis, our diluted earnings per share were $5.53.
15.7% from last year, and our full year EPS on a normalized basis.
It was an increase of 9.1% versus the prior year.
As for the drivers of this performance fee things to note starting with our retail business.
Retail revenue, excluding petroleum increased 5.1% in the quarter and 4.8% full year.
Ctr, what's the driver revenue growth in the quarter.
As stated at the end of Q1, our stores came into the winter season, very clean and inventory, which you know we knew would drive dealer shipments once season, our advertising.
In Q4, which it did for at least a good portion of the quarter.
And despite weather being a mixed bag in the fourth quarter strong sell through that Ctr amended it ended the year meaner and inventory actually down compared to 2018.
The entire retail team also managed margins very well with retail segment gross margin, excluding petroleum coming in up 30 basis points in the quarter.
On a full year basis normalized retail segment IBT was down a couple of points year over year and while we are extremely encouraged by our topline growth and as to the stability of our pure margin performance.
Our impact earnings were impacted by the dealer merging sharing true ups and the first half of the year that we've talked a bit and the non operational foreign exchange losses that Helly Hansen, which we talked to you that in our last call.
And although those transient non operational impacts caused some built volatility in our quarterly retail earnings the fundamentals of our core retail business remains strong and our runway for future growth unobstructed.
Improvement in our Opex ratio continued this quarter.
Excluding I have for 16 and normalized op, our normalized opex ex petroleum and depreciation and amortization on a consolidated basis improved both in the quarter and the full year by 20 basis points in 16 basis points respectively.
But there are big lift on off on foundational capabilities, largely complete and spending having plateaued combined with the OE program driving toward our 200 million dollar target. We are starting to realized improved opex and the EBITDA margin ratios.
And finally, a note on our inventory position at retail, which is up year over year due to the planned increases that sport Chek did this position them to better meet customer demand at Helly Hansen to create safety stock to handle increased demand and the addition of party city.
Helly Hansen threat revenue growth for the quarter was very strong driven by the onetime impact of establishing a broader assortment, particularly its four check as well as the support of the initial sell through of Helly Hansen that sport Chek and marks.
Adjusted EBITDA in the quarter performed as expected, reflecting strong revenue growth and planned investments in marketing.
Financial services was a star in the year from an earnings perspective, delivering on an exceptional 19% IBT growth in the quarter and 5% on the year driven by continued guar growth and improved earnings growth as our portfolio matures.
I would point out that as we head into 2020 as Greg as mentioned in previous quarters, we expect that the rate of guar growth is likely to move towards industry growth levels and the return on receivables on the portfolio to stabilize that around current levels as a larger percentage of new accounts in the portfolio mature and season and the early right.
Das experience normal for these new accounts rinses through the portfolio.
I write off and allowance rates have come in as planned and we continue to see no signs of deterioration in the portfolio as our new vintages of accounts continue to track very closely from a credit performance point of view to historical norms.
So for 2020, we have taken the view that the economy in terms of growth and employment and consumer spending will continue to perform similarity until last year.
Briefly on capital spend.
Our operating Capex for 2019 was $444 million, which is in line with their expectations and at the lower end of guidance as timing is some projects shifted into 2020.
For 2020 as noted last quarter, we expect to spend 450 to 500 million on investments across our core assets, including rolling out Ctr as new store concepts foundational investments in our CTC marketplace as well as capital investments to support our OE program.
There are a couple of fairly straightforward things to keep in mind and modeling for the banners for 2020.
First is I think it will be a much less noisy year than last year, meaning I don't think there any big I FRS accounting change.
For us all to have to deal with you're welcome Greg.
Our annual tax rate is estimated to be 26% over the course of the year and as you know ownership in the read is now sitting at 69.4% and our EPS was negatively impacted by the increase in NCR related to the right to the tenant that eight cents this quarter and we anticipate a four cents impact per quarter through to Q.
Three 2020.
2020 is also a 53 week calendar year and you should expect quarterly earnings changes.
As the operational efficiency.
Initiatives are executed and earnings our normalized for those onetime impacts, but as I said thankfully no big IRS change changes to deal with.
And before I turn things over the operator I do want to thank Allen for his closing comments, but I wanted to say that's been an honor and privilege.
To have this well in this great company I'm very pleased to be passing the reins to Greg Craig and I know you will need to save hands going forward and with that I'll turn it over the operator for the acuity.
Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad. We ask that you. Please pick up the handset or step close to your speaker phone system. When asking your question and can limit your time to one question plus one follow up question well pause.
Just a moment to compile the question and answer roster.
The first question is from Patricia Baker from Scotia Bank. Please go ahead.
Thank you and good morning, everyone. So in Q4, we saw some welcome improvement in Opex in the quarter in both.
Steven and Alan did get some discussion of the operational.
Deficiency program, but I wonder if Greg kicks in the room and you can share with US since you are in charge of that program, where you've seen the achievements.
Anywhere in 2019, what we saw maybe in Q4, what we can look for specifically in 2020, and then lastly at what point do you think that the costs associated with operational efficiency will start to roll off.
So a lot I am in the room, Patricia a lot of stuff there to absorb let me.
Maybe I'll start with some context first.
And then give you a sense of how the pro programs unfolded and then.
Maybe give you some illustration so some of the things that we're working on from an action standpoint, So contextually as we've discussed since launching our one company one customers strategy, we've invested quite significantly in customer facing aerie areas in an effort to drive our long term competitive position and more we made the announcement.
Last year, the timing just felt right for us to look at our overall efficiently efficiency. So here's what I can tell you now that I'm a few months a few months in we started with some pretty extensive benchmarking I think we've talked to you about that virtually every function in the company and although her a fairly tough retailer to benchmark, we got a pretty good.
Good idea of where we're out of whack.
So we took this work has the driving force behind.
Very intense 10 to 12 week.
Assess that happened in the quarter it was bottom up it extended or reach well into the leadership of the organization and we're in a position now is Stephens said, where we've just laid it all out.
Listing initiatives that were already underway new initiatives the team the timing preliminary views to the investments required and how they might impact the income statement the balance sheet everything.
And the Great news from our standpoint is that the amalgamation of the bottom up is really a redesign of how we work as an organization and as we discussed on the last call. We really believe that this needs to be are intended outcome and I can tell you. If we deliver what's been identified in the current roadmap that we all position ourselves.
Yes.
No not only to be more efficient, but to be more competitive going forward. We've got lots of work to do on the initiatives, especially in terms of how they layer into our financial planning and know the pacing the capital the onetime costs et cetera, Dean always likes to keep the stuff close to two is vast so we'll see.
What we can do with the other Greg here and tried to get you a little bit more color on the he is.
On our next call.
That's very helpful Yep, and maybe some and some some examples of initiatives I understand from the pre calls this morning, everybody's looking for a little bit more granularity so.
Last.
Last call, we talked about focus areas in the program.
So why don't I use these to give you a little bit more color with some some initiatives. The first theme that we talked about was eliminating duplicative systems and processes across our multiple banners as we truly begin operating as one company. We've got quite a few large initiatives in this area. We've got complex initiatives that are.
Definitely going to take some time things like consolidating all of our digital website platforms until one common digital platform across all the banners or our implementation of a companywide transportation management system, but we also have a lot of less complex activity here to like the consolidation of our many customer E mail serve.
This providers across banners, and our marketing group and the in sourcing of our digital marketing capabilities across all over banners. So we've talked about this focus area being about doing activities once consolidating systems and processes and sharing best practices across banners and functions. The second theme was really about the decommissioning of.
Legacy infrastructure and processes focus area here, we have initiatives like the consolidation of sources of data across the enterprise into a a data lake in a mark for the organization supported by the right cloud based data systems.
Investing in new database processes for things like dynamic scheduling.
For our corporate owned stores.
Implementing a new procure to pay system and process across the company that will change very old legacy processes for how we do things like managing contract labor requirements and non merged procurement, which is a huge book of business across all of our Oliver Oliver banners.
Last the third theme, we talked about targeting improvements for both our internal and external spends and here. We've got a number of initiatives on the go Patricia mostly front end loaded that target reduction in a number of spend areas think about things like inbound transportation to call Center services distribution Center Automations procurement.
Initiatives.
This focus areas really but what we spend our money on.
And the organizational effort required to ensuring its productive or at links at least to our strategy.
Looking at our store assets I think is a great example, we see our store assets as needing to deliver not only financially, but also to drive appeal to our membership and the network of stores that we acquired with the paternal brand acquisition would be an example of store assets that we really didnt believe we're delivering on either objective. So we made.
The decision to shut these stores down in the quarter, So our initiatives run the gamut.
And the program management, we put in place enables us to track and plan.
Hopefully managing a coordinated manner at least that's what we're hoping in terms of the of the dedicated overhead we put into managed program.
Thank you very much I'll get back in the queue from my next question. Thank you.
Thank you. My next question is from Irene Nattel from RBC capital markets. Please go ahead.
Thanks, and good morning, everyone.
If we could just get some more color on me core Canadian tire banner and the strength in the same store sales in the quarter.
Certainly against the backdrop of rising ecommerce those are very impressive numbers. So can you can you walk us through.
You are approaching all of your categories and what we should be expecting on a go forward basis.
As already me again, you are looking for something more detailed than just great management Irene.
Well, Great management goes without saying, yes, let me.
If I had if I did narrow it down.
And I'd say, there's three big drivers to the quarter's performance number one we won with our triangle membership.
Alan talked about some of the metrics across all of the banners are active triangle member count grew by 5% and their spend was actually up eight an active families, which is just kind of the target for us which represent about 12% of our accounts was actually up $40 million in the quarter So drove 30%.
Of our growth. So we continue to be extremely relevant with active families number two I'd say, we won the the battle on digital customer acquisition.
Our digital traffic was up over 20% in the quarter, that's millions and millions of visitors Susan and her team just did a fantastic job and the traffic was tilted to big Q4 businesses businesses like winter tires Christmas kitchen.
And number three.
And really important I think for this quarter and important in terms of how.
The the organization plans on a on a regular cadence we won the must win promotional days in the quarter.
When you think about execution, especially in Q4 of these days you need it really needs to travel through key days in advance of ends like Thanksgiving in our case Red Thursday, Black Friday, cyber Monday, the days, leading up to Christmas boxing day et cetera.
And when we approached the planning process for this year, we had six less selling days between between Black Friday, and Christmas, which the team was a little worried about so we put extra effort into focusing day by day from an execution planning standpoint, I think it really paid off from an operational efficiency standpoint, if I put that how had on.
Most of this activity was done by without spending a lot more money in marketing to acquire these customers. So we are happy about that and I think Allen touched on the fact that our dealers just play such a role we saw.
Material changes even in the same market, where you've had 20 to 25 degree swings in weather day by day, and the dealers dynamically reacted by market with fresh merchandising and inventory.
For whatever our membership needed.
That's great. Thank you and just wondering can you give us an update on what percentage of transaction count and what percentage of sales are related to add triangle.
In aggregate.
Please.
I'd like to look at Susan for CTC or Alan.
Let's.
What I would do is give you some indicative numbers is.
It's always hard to give you a best in class because you get a general merchant and you can't really compare that to a grocer you can't really care model line.
But.
We would be ended about the 50%.
Range I mean, when you saw the 2.5 billion in sales you can kind of do the math, but.
In terms of.
Sales going through the card and personal transactions were about 50 in the in the 50% range.
Probably just like the leave it there.
Okay. That's helpful and finally, if I might just question on Corona virus, and where you stand right now in terms have merchandise and when the next critical windows are and what Adam contingency plans you might be putting in place.
Hi, everyone. It's Steven.
Okay just.
Let me level said, just just a little bit here. So you understand some of the fact surrounding this but.
As far as are our banners are concerned.
We don't have any active vendors in the quarantine area, it's kind of the epicenter of the virus in China. So just just so you and all that.
And in terms of activity in manufacturing activity.
We have always schedules a significant about pre the Chinese new year. So that was all done.
Quite some time ago.
It's really more of a Canadian tire retail story that is.
The rest of our banners, but.
We're not seeing any supply chain or logistics.
Systematic supply chain issues.
Rising at this point in time or ahead of us.
Keep in mind as well that.
We were well stocked here going through for a number of months, but.
We've done business in China and have a relationship in China that is probably.
As good as any retailer in the world, we've been there for decades and decades and decades.
Let's take us.
Back to our vendor relationships, our transportation within the country our relationships.
Supports the ability to move product from Fourq to Fourq.
Our ability to to get our our shipping lines to to access product at multiple towards et cetera et cetera. So.
We have many many people on the ground in mainland and in Hong Kong I've had for years and years and years. So.
We're monitoring this like everybody else in the World is monitored arena I think the becoming few weeks will tell us more about the longer term.
Implications to us.
But.
At this stage of the gains just.
We'll keep an eye on it but theres no systematic issues that we have to deal with.
That's very helpful. Thank you.
Thank you for next question is from Mark Petri from Sea RBC. Please go ahead.
Hi, Good morning, I, just wanted to follow up on the topic of E Commerce.
So obviously it was a good grower and strong web traffic growth, but what has been the impact on the piano.
And I guess.
Both on the fulfillment side I understand the model I think but any updated comments, but then also just with regards to sort of the opex spending behind the scenes.
To be able to execute to this point.
Do you feel like you sort of move through.
The most significant part of the investment or maybe you could just sort of talking about that and then I guess secondarily coming out of the big season for E. Commerce would just be interested to hear any insights you can share, but how dealers are approaching the opportunity.
Bob I can.
I will take a shot okay, I mean, one of them even more numbers.
On the kind of a leading edge of what we're trying to do on E com as the leader within the family but.
Obviously he comes more expensive goes without saying thats behind that.
We're trying a number a number of things and sport Chek is on our leading edge of trying those as well.
From free shipping to the dollar amounts.
Oh purchases to trigger it.
Tighten our credit card et cetera, et cetera to all to all these sort of options I think what happens to overtime.
Is that.
Which is why we're pushing sport chek so hard.
Is that you learned a tremendous amount.
If you are fulfilling orders from two different areas of the country.
It's called split shipments in here.
We're paying twice for the same for the same sale that simply means getting better at where you are.
Putting your inventory.
And understanding what skews are actually driving 75, Canadian 90% of your E Com business. So we've learned all that here.
Trying to get your picked costs down et cetera, et cetera. Those are all hitting your margins, there's no doubt about that.
But it's also trying to understand what happens when product flows back into your store and the opportunity to actually engage with the customer as product comes back into into the network. So.
Absolutely there is there is.
Extra costs associated with your with your E com business, but.
You become more efficient overtime, and you're able to handle it over time and.
You do it through your pricing in through a variety of other initiatives to drive.
To drive more transaction so.
From an E com point of view absolutely. There is additional many of many of what I just said doesn't.
Particularly apply in the community entire retail network.
It's a different animal altogether.
Terms of forward deployed inventory and other stores and.
Again.
The ability of our dealers to handle our business in local markets.
We could probably go on for an hour to have to tell you the advantages of having.
Local owner entrepreneur on the ground in a city. It means we pay less for snow clearing removal at our stores and we execute on E commerce, probably better than any of our competitors. So.
That concludes our retail is that is a different.
Different discussion point marks does not.
Selling as much online as fortune.
Yes.
But can learn so PJ and his team or just sort of steady and everything that while TJ flood takes his nox learning learning this and pges coming in right.
Behind them so.
I don't know was there a second part of the question I Didnt answer.
Yeah, I mean, I guess this and the second part was just sort of related to.
Sort of.
Changes in evolutions, you're seeing in terms of customer behavior and customer expectations, and then I guess, specifically with regards to the Ctr banner.
What are your sort of what did you see with the dealers in terms of them executing on home delivery versus third party.
And then what are your thoughts on free delivery at some at some point or in some form and how should we think about the financial impact.
Under the says yes, sure I mean overall, it's Greg Mark.
Overall for sure to Stevens point, the dealers are very very supportive I mean, they really see the benefit of choice at the customer level I mean, I often get asked.
About kind of the ecommerce business and the bricks business, it's really.
That's the wrong question because customers are engaging with us the same customer is engaging with us across multiple channels. So it's really about the customer the dealers see the benefit of providing the customer choice. So we end up every quarter extremely busy with the dealers on E. Commerce I think we collectively believe for.
Some of the reasons that Stephen just outlined that that in store pickup as content continues to be the best way.
For our customers to have the orders filled as it's always the the fastest and the cheapest.
Option.
You know, we we've had tremendous success with all forms of of E Commerce.
Our ship to home business was up almost double in the quarter. This is the first comp quarter of ship to home and ctr, but but we're really working with the dealers now on.
On rolling out more automated pick up solutions.
To really improve the customer experience on the dwell time for the customer. So you can expect to see lockers rollout to a few hundred stores and in 2020, we tested them in 2019, just a fantastic customer experience from an NPS standpoint.
And so we're really we're really getting we're really getting behind that.
As we as we move forward and 2020 from a from a free delivery standpoint, I know that's on on your mind there Mark.
We we have and continue to go to market with a eat or a high low strategy at the product level. That's our primary means for driving customer acquisition to the degree that freight is a more attractive.
Of acquisition tool.
Incentivize freight as more of a an attractive.
Tool than than discounting product I would imagine that's something that we're going to look at dealers, but at this point in time, we don't really see a need and I guess, we'll we'll keep you updated as those conversations progress.
Okay. Thanks for all that and then just quickly Dean you mentioned the dealer margin true up was there any impact in Q4.
No.
Okay. Thanks, a lot.
Thank you. The next question as from Peter Sklar from BMO capital markets. Please go ahead.
I just have just one question and that's on the credit metrics within the the credit card portfolio. So like if you look at the statistics the PD two was effectively flat.
But the net write off rate.
Inched up a little bit and Dean in your commentary you said that would be a natural expectation given the high growth you've had over the last number of quarters in terms of new account acquisition and growth and guar. So could you. Please explain why the creep up in the write off rate is something you would naturally expect.
Sure Peter it's Greg here.
If you look at this isn't getting higher specific you look at the industry a credit card acquisition, what you'll find is about month 12 to 18 for any new account is when they'll reached their peak in terms of charge off.
Just as Youre getting to learn the customer so what will happen as you acquire 100 customers as a set around 12 or 18 months and you will experience. The initial loss from those from that group or that traunch into accounts and it as we've used the word before it kind of rinses its weight. Your after that so as anytime we've acquired new accounts and they go back.
10, 15 years ago to what we just did with triangle when we have a period of great growth in new accounts, it's usually follows lagged a little bit by an increase in our charge off rate that's with Dean was alluding to but I just want to reinforce again, if you look at our new account vintage curves. So what that does is it takes a look at all the accounts we've acquired in their first month that behavior across.
Yes, multiple time periods, there's six month of behavior. There 12 month the behavior, we're not seeing any deterioration in any of their behaviors. So the customers were acquiring are very similar to their customers. We would have acquired five years ago nine years ago, That's that's pretty encouraging for us and and as Dean said, we're right in line with our expectations or what.
I would've thought would have happened both from a write off perspective, and an aging perspective as well.
So why did we not see for that vintage then that's now entered the 12 to 18 month window why would we have not also seen like first you would see a they would have gone past due so why did we not see a slight spike in the PD too which is effectively been flat.
We have to remember there's a couple of things that are write offs. There's different ways. You can charge off as you know so what you usually get with the PD too as he is accounts age they can't make their payments and after six months, we call. It a regular write off they flow through to charge off the other way you can write off is through bankruptcies and through proposal. So it's the combination of all the elements that drove up kind of the write off rate the aging.
As just what you're seeing the natural maturation you do see some accounts it will choose the bankruptcy route or the insolvency route is is how to answer your question.
Okay that was clear thank you.
Thank you. The next question is from this Michelle Schroeder from National Bank. Please go ahead.
Thanks for taking my question.
Just on the.
Comps.
A solid performance.
And I know management alluded to weather being a factor, but not the only factor and.
And I know the weather was uneven through the quarter. So I was hoping you could you could give me some context by banner to what extent you think.
The early winter weather might it might have helped just we can get a sense of what a more normalized quarter would've looked like if that makes sense what I'm asking.
Well take the shutdown.
I am still waiting for the normal quarter.
It seems like Theres always some either headwind or tailwind or last year. There were comping over that causes complexity and you know when you're looking at at weather.
Generally speaking it has an impact as you well no but.
You know at Ctr, if you give weather early that has a different effect and if you give whether late by category.
Then you have the you know than the non weather seasons like Christmas that ramp up in some kind of get sometimes get inhibited by snowstorms when people can reach the store.
Sport Chek and marks have a have a different.
Perspective on that but what what I would say is that.
Over the course of the quarter like every quarter you try to respond to it as best you can but it's really a category by category answer to be perfectly honest unless you have big anomalies like the last April where we had snow for the month of April I mean that that has far sweeping impacts, but this one wouldn't be a story about industry.
You're aware in Alberta, the impact of skiing and come back and winter tire sales at Ctr, you kind of get into that level of granularity.
Okay. So just at a high level would it would it be fair to say that across the.
Banners weather was generally favorable or is that not a fair comment.
I think.
I think the for the most part yeah, you whether whether it was generally favorable I mean, the business unit leaders here I don't know, Greg Davis as Craig Vishal I would just say one of the things that we've talked about over the course of many calls is just the health of our non seasonal business.
Which is a which is a really good book of business, so that 50% of our sales annually in the quarter that tracked.
Almost right on the aggregate compliance. So we were close to the 5% level. So there was a there's generally favorable I think is the way to to kind of extrapolate it for for Canadian tire, but we feel really good about that non seasonal business standing up tall in the quarter as well.
Charlotte, Steve and I look at a slightly differently than that.
You should look at it through whether you should look at as to whether the products that we have on for sale that if the market. If the general seasonal conditions are available. They can go to any retailer and pick them up.
What happens is they came to continue entire our traffic was up substantially our sales to our high value customers in our loyal customers are up substantially our web traffic is up substantially so all other things being equal up against the competition, we had to steal market share. So.
So the whole thing is it's not weather driven it's how successful your businesses against everybody else's.
So over time the reason, we put out a 3% comp figure is because over time, that's roughly what we aspire to.
And you're going to go up and you're going to go down.
But if we had fantastic weather in the fourth quarter and our banners didnt perform.
We would be extremely concerned and so therefore, and we did perform better I think than probably most retailers in the country.
Right absolutely okay. Thanks for the color.
Thank you next question is from Brian Morrison from TD Securities. Please go ahead.
Hi, Good morning, I just have a quick follow up question on financial services, just suspect with just with respect to color on leverage that you got both within gross margin and Thats DNA I realize there's got to benefit from volume here, but is this great leverage are you achieve has done a function to shift towards the county way from account acquisition taking place.
Yes, Brian its Gregory Thanks for the question. So as you know we had earnings growth of around 19% in the quarter versus Q4 year ago, and I point to the three things first and foremost we had continued strong growth in receivables being up 5% in the quarter certainly contributed to that to that to that income growth. The second thing you just alluded to is exactly.
Right around our operating expense ratio, who we improved fairly significantly from where we were on a rolling 12 basis, a year ago and and two components that one of course is as you said moving from acquisition, which can tend to be a bit more costly to kind of ongoing engagement certainly helped the operating expense ratio plus just generally as Greg talked about kind of the OE anish working its way through.
CTC I think Theres also a piece of that and the results as well.
In the third thing I would point to in the results also as relates to the allowance. If you think about it last year, we grew by 11.5% in the fourth quarter. So that's a pretty significant growth rates. So that had a fairly significant allowance growth that went with it given kind of IRS nine we had 5% this year, which was great. But then it's just not as not as significant of an allowance.
Builds would had a year ago. So the 19% would be kind of a combination of those of those three factors on a year over year basis.
Is it fair to say the says this trend continues in 2020, we should continue.
The improvement in operating leverage Greg.
Yeah, I think from the Opex perspective, I think we're going to continue we're going to continue on this gives engagement Jerry I think we've seen some early data that did indicate it's kind of working but it's early data and and my Haas and the team will continue to make that much better after after I leave I'm sure, but but it is going to be an area of focus going on going on into the into the near term I I think for.
Sure.
Thanks very much.
Thank you. The next question is from Derek delay from Canaccord. Please go ahead.
Hi, just one for me as well just in terms of on the retail margin, obviously had some nice growth.
When adjusted for Trillium can you just talk about what some of the drivers where that led to that margin growth and if youre seeing if you're getting any benefit or if you're seeing any any sort of pricing return returned to the channel.
Ctr, if you want it was up I undersea Terry Yes, I think generally speaking so in terms of margins.
Continuing.
Steven said to go after demand in the market and put up a really strong offering and when we talk about things like the value of our loyalty program.
Value of having a curated assortment the value of having a good balance between national brands that customers coverage and our own brands.
The digital experience the in store experience, which as we've put particular focus on the last couple of quarters. All of these things contribute to our ability to manage margin differently. The they contribute to our ability to to watch our promo investment.
To be able to commend you know strong reg pricing and ultimately have to be price competitive and experienced competitive in the market and when you are.
You get to see good margin contribution if you manage of wells. So I'd say broadly speaking, we're quite obsessive about that internally and working really really hard to make sure that we're able to to be market competitive in all of these areas and continue to grow the business.
Category by category, obviously, some are more competitive than others, but as a general rule everything that we're doing is really about being able to to maximize the margin benefit that we get from from the transactions. We have with their customers great. I don't know if you want to say anymore I think its funds here.
I just leave it there thanks.
Yes.
Thank you next question is from Patricia Baker from Scotia Bank. Please go ahead.
Thank you very much for taking my second question.
Kevin This is for you and I'm not sure that you're going to provide me with and answer but.
[laughter].
In your.
Our remarks in the press release, you noted that.
The the topline growth that you're seeing and you noted that.
Triangle is is it is driving and making Canadian Taiwan of Canada's largest ecommerce players now we know that your ecommerce sales or something north of 500 million is there any way you can provide us with.
At some.
Better contacts for me why you can make that statement. How are you number two number three how far how far ahead or are you have you know the players down the list.
Where are you with respect to the largest ecommerce player in China.
Well I think we could probably I'll tell you guessed Patricia the who the largest too.
Sure Yes.
In the country.
The.
The benefit of us trying to give a little bit more disclosure in the third quarter last year.
Was that when over the prior 12 months probably.
Questions. We're all over the plays in terms of whats the E Com, where are you going how well you doing.
Even challenges to.
To us in the in the press, saying I Wonder where Canadian tire will be given all this E com activity et cetera et cetera.
That point in time, primarily Susan O'brien, and John Coral We're building, what we believed to be an extremely confident and efficient.
Marketing and execution engine engine for for digital.
And so.
We thought the third quarter was a good time for us to try to tell all of you.
And everyone else listening that theres not many.
Retailers in the country that would be well in excess of 500 million on E. Com. So we are one of the top players in the country.
And.
And we tried to give you some color lost last month for that we are growing at industry or above industry rates.
We had a we have a large fourth quarter has a significant portion of it attributed to.
In terms of revenue to to E. Com as you know and we continue to believe there were a very significant E. Com player in this country and Thats the context of as opposed to saying, Here's a top 10 or more number six.
So that's I guess to give you some context, a wise said in the in the script.
Okay understood. Thank you okay.
Thank you. The next question is from Chris Lee from Day Chardan. Please go ahead.
Good morning, I apologies if you eventually this party on the call ready, but just taking a step back I just wonder if you can talk just a little bit about what you're seeing in terms of health salty Canadian consumer I know into pass you say you look at a few things like purchase of high ticket items are trading down will shift into repair and maintenance category. Just wondering if you can.
Comment on overall health of cutting consumer.
Well like I've, a couple of comments on my colleagues and jump in wherever they would like.
The there was some actually read articles across the national newspapers in the course of this week in terms of consumer confidence across the board and then the base, Canada for that for that matter.
And.
What everybody is talking about.
Continually in the press.
It's just not being seen within the real numbers economy. The economy is strong as far as we're seeing it.
Consumer demand is and so.
Across our businesses this wouldn't necessarily suppose Christmas would be a little bit of an indicator as oppose of any sort of weakness in the economy, which we which we didn't particularly see during the course of the summer we see a lot of activity when when the economy is in poor shape.
Repairing as opposed to buying new having said that.
We're just not seeing at nor are the other retailers are are the banks and nor is the bank, Canada. So we remain extremely optimistic and.
Can shed more light on it that we're looking forward to a very good 2020 year actually.
Okay. That's helpful. And then maybe just a question on on shipping cost one of the other large general merchandise retailer in Canada recently said that expect shipping rates to be up but the ship because partly because of IMO 2020 wondering if thats going to have any impact on you guys as well.
Yes.
It will overall, but I you know you have to.
You have to accommodated it's it's not dissimilar to.
When minimum wage rates went up.
Virtually every retailer except us.
Complained about it we just assumed it consumed it.
Continued to operate and now nobody talks about it and so with and things like this we're experiencing increased shipping rates right across the board in all our businesses around the world actually getting a product in not alone not just within the Canadian context. So.
Efficiency.
You know the the areas that I mentioned earlier on E com like split shipments, putting your inventory in the right place et cetera, et cetera, et cetera meet a tremendous amount to us so we're getting more efficient on that side.
And your continually and a headwind and fighting other increased costs, but I think we're not we're in a great position.
You will not see a material impact to us based on that in 2020, Okay. And then just my last question is given this year end I was wondering if you can share with US what was your own brand penetration for Ctr.
For the year and what was it the year over year change.
We ended up just over a 37% penetration for the year and it was up about 170 basis points.
The team has a well arkon architected strategy for the next five years, and we would expect that penetration pace.
Plus or minus 10 bips.
Here are there organically so we see a runway for another seven or eight points of penetration in the next five years.
Great and de now all the best retirement well deserved.
Oh, Thanks, Chris.
It is well deserved.
[laughter].
Thank you.
This will conclude today's call a webcast at the conference call will be archived on Canadian Tire Corporation Limited Investor Relations website for 12 months. Please contact Investor Relations. If there are a follow up questions regarding today's call or the materials provided you may now disconnect.
This conference is no longer being recorded no. This is putting all this it coffeehouse it does does.
[music].
Fair enough office depot.
Please note that this conference call has ended please disconnect your lines at this time. Thank you.
Okay opinion, because it had been.
Yes.
She was pending.
[music].
Okay fair enough on 50, though.
At this conference call has ended please disconnect your lines at this time. Thank you.
You know.
No.
Cushy with pending.
[music].
I mean, it sounds like 54.
Please note that this conference call has ended please disconnect your lines at this time. Thank you.