Q1 2021 Canadian Tire Corporation Ltd Earnings Call
[music].
All participants please standby your conference is ready to begin.
Good morning, My name is Valerie and I will be your conference operator today at this time I would like to welcome everyone to the Canadian Tire Corporation Limited first quarter results Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time simply press Star then the number one on your telephone keypad.
To withdraw your question Press Star then the number two.
We ask that you limit your time to one question plus a follow up question before cycling back into the queue.
This morning, Canadian Tire Corporation limited released their financial results for the first quarter, a 2021 a.
A copy of the earnings a disclosure is available on their website and includes a cautionary language about forward looking statements risks and uncertainties, which also apply to the discussion during today's conference call I would like to turn the call over to Gregg Hicks, President and CEO Greg.
Thank you operator good morning.
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I'm joined today by our CFO Gregory Craig.
T J.
Canadian tire retail who will be participating in the Q&A portion of a call.
As we continue to navigate the COVID-19 pandemic Q1, once again share.
Or do you need.
Including significant restrictions across our store network.
Near 40% of our Ctr and sport Chek stores and only 60% of a remark stores were opened at the start of a year.
We returned to full operations across the business in March we still face strict restrictions today across many parts of Canada.
But relentless as COVID-19, maybe we keep overcoming the ongoing hurdles as proven by the sustained momentum of all of our businesses and unprecedented results from the first quarter.
Including over a $3 billion in retail sales and consolidated comparable sales up more than 19% across our banners.
Normalized income before taxes was up more than $200 million in retail and $56 million in financial services as a result.
<unk> delivered first quarter normalized diluted earnings per share of $2 57.
Equally important to what we achieved in the first quarter is how we achieved it.
Over the past year, I've, often referenced our purpose of being there for a life in Canada.
And how that has served as our north star throughout COVID-19.
And as the pandemic persists, so too does our purpose and that is thanks to our people.
I want to thank all our team members for their unwavering efforts in helping foster our culture of connection.
Our incredible results would not be possible without our distribution center in contact center teams, along with our store store associate dealers and corporate employees, who continue to be there for each other our customers and our communities.
Together, we are making life in Canada better for our customers.
<unk> category assortment across all banners continues to prove integral to meeting the demand for products in backyard living outdoor activities at a home projects.
By continuing to grow our digital capabilities, we are enabling customers to shop with us in the ways that work best for them from ship to home buy online pick up in store to curbside pickup.
But as you've heard me say before being there for Canadians is about more than the products. We sell are services we provide.
It means supporting our communities when they need us most.
Through jumpstart, we've accelerated our efforts to help kids reconnect with sport once it's safe for them to do so in.
In Q1, we committed an additional $12 million to the jumpstart sport relief fund and to date $3 to $5 million had been dispersed to more than 300 community support organizations.
Our authentic connection with our communities helps foster and reinforce our connection with our customers and we have the results to prove it.
With that let's dive into the specifics of our Q1 results.
Given the patterns, we normally observe in the first quarter, we were impressed to see both our retail and financial services businesses deliver such strong results.
In the face a considerable restrictions in the first six weeks retail top line was a resilient and coupled with solid operating leverage delivered strong bottom line.
Financial services gross margin and income were up significantly reflecting strong portfolio, a risk metrics, along with encouraging customer spend and payments trends.
Gregory will provide more detail on a financial performance of each of the banners, but before he does.
I want to speak to the retail landscape in a quarter and outline how we continue to evolve our omni channel offering on our engagement with our customers.
With ongoing stay at home restrictions and Canadians unable to travel for March break vacations. It should come as no surprise that our credit card spend data showed a shift away from travel and entertainment categories in Q1.
But Canadian consumer spend was healthy in Q1 and significant COVID-19 spend substitution and the average Canadian household benefited us and helped us gain market share.
We continue to see tailwind around our key categories with the move to a one stop shopping.
Our staying power and a strong owned brands across canvas backyard living products kitchen and tools at C. T R as well as Helly Hansen industrial workwear. It marks helped us capitalize on what customers wanted to buy.
In addition to sales being up across all our banners sales increased within every division a C T R.
Over 70% a categories that ctr, a group and over 60% of them had double digit sales growth.
Spend in our credit card portfolio was up 7% across our 2 million cards.
With an early start to spring in many parts of Canada customers quickly shifted to thinking about outdoor sports equipment for spring and summer outdoor living and bikes.
As such we saw an increase in purchases of items like patio sets and products from our backyard fun and gardening categories.
Driving an increase of more than $100 million across our seasonal living in playing divisions.
Automotive categories that Ctr were up as Canadians prepared for a summer at home or on the road in Canada.
Given the tremendous demand for bikes last year Ctr dealers ordered aggressively.
In merchandise earlier this year.
Our ability to reliably source stock and assemble bikes puts them within easy reach of customers.
This is proving to be a differentiator for us in the market and contributed to increased owned brand penetration.
Across our cycling categories that Ctr and sport Chek, our bike business was up over $50 million compared to last year.
Our timing was perfect for the launch a rally our newest on brand and C. T. R N diamondback, our own brands for bikes accessories and apparel at sport Chek.
As a restrictions once again impeded customers' ability to shop in store.
Look to our e-commerce channels to fulfill their jobs and Joyce.
As a result, our websites saw a 167 million digital visits representing an increase of more than 60% over last year.
Compared to the same time last year, we had $1 4 million more customers signed up on Canadian tire apps.
We saw a 13% increase in customers engaging with us in our owned audience channel such as email as we grew our list and increased the personalization of our offers.
We also increased our ability to engage with customers through a triangle program, which welcomed another 400000 new members this quarter.
Customer controlled channel remains important and we were able to flex and adapt to better serve our customers on.
Operating multiple ways for them to shop with us, including buy online pick up in store curbside pick up and deliver its a home.
In Q1, we handled almost three times the volume of e-commerce orders compared to last year.
A total of $4 5 million orders across our largest banners.
That translated into almost $450 million of ecommerce sales for Canadian tire a this quarter with total ecommerce sales approaching $2 billion since the start of the pandemic.
Around three quarters of orders placed where for in store pick up and we have significantly sped up a fulfillment times since the beginning of COVID-19.
In Q1, the average Ctr order was ready for pickup with a three and a half hours and the average sport Chek order was ready to collect within one hour.
So a further our efforts in this experience, we're increasing the number of ctr stores with pickup lockers from 25% of our stores, having lockers at the start of Q1 to 40% by the end of Q2.
We know the amount of time, a customer has to wait to pick up their order matters. When we improve wait times, we see an increase in our net promoter score a measure we use to evaluate customer experience.
<unk> of lockers at Ctr is playing an important role in ensuring less friction and a pickup process ultimately, creating a more seamless experience and improved customer satisfaction.
Customer experience continues to improve as we focus on our critical omni channel capabilities, and we remain confident that being able to execute across a range of channels will continue to be important for our consumers long after the pandemic.
This morning's a G M I'll be speaking in more detail about how we are translating our rich customer data into insights to connect with our customers in a more meaningful way.
No we won't succeed by doing things the way, we've always done them.
Which is why we are no longer waiting for customers to engage with US we are proactively engaging with them across all our channels.
Let me give you a concrete example of this.
We attracted 1.8 million new members into our triangle a rewards program in 2020.
The old Canadian tire way would have been to take our chances on line on whether any of these new customers would show up the following year.
Now we are actively managing these one 8 million new members using cut a cutting edge agile methodologies to develop more relevant and personalized marketing.
And reduce disengagement after the first purchase.
So far this personalized marketing appears to be paying off.
We attracted over a third of those 1.8 million customers back to us for an average of four visits in Q1.
We're also working on how we transform the digital engagement experience with a credit card holders.
Customers, who are among some of our most active triangle members.
With that I'm pleased to announce that I asked PURA will be joining us on June 1st as President Canadian tire financial services, and President and CEO Canadian Tire Bank, assuming the leadership of the bank from my hats away from a single.
I asked has significant experience in a knowledge of digital transformation and we look forward to welcome welcoming him to the company and benefiting from his skills and leadership.
And with that I'll hand, it over to Gregory to take you through the financial highlights of the quarter.
Thanks, Greg and good morning, everyone. As Greg has said it was a great quarter for CTC, both from a sales and a profitability perspective.
We were pleased with a reported diluted EPS of $2 from 47.
Compared to the 22 cent per share loss from Q1, a year ago.
And after normalizing for $9 million in operational efficiency charges, our normalized diluted EPS was $2 57 in the quarter.
As a reminder, last year, the COVID-19, pandemic and related market disruptions had significant impacts on our business.
Our consolidated earnings by $94 million and our EPS by approximately 96% in Q1 2020.
In addition, 2020 was a 53 week here.
Consistent with our past practices and to ensure better comparability. We have provided a comp sales growth on a time shifted basis. This means that sales from week, one this year or compared to sales from week two in the prior year. In contrast, retail sales growth is calculated without any adjustments this day.
Some difference between retail sales and comp sales results in the quarter, particularly at marks and sport Chek banners.
With this let me take you through a few of the financial highlights in the quarter, starting with sales and revenue.
In the first quarter, we grew our retail revenue by $566 million or 27% excluding petroleum.
Ctr revenue growth was a real standout increasing $489 million or up 35% in the quarter, surpassing comp sales growth of 19%.
Strong dealer demand remains a primary driver of this quarter dealers ordered in response to the continuing consumer demand and to rebuild inventory is seasonal and non seasonal categories and through a strong vendor relationships, we were able to secure inventory and meet their needs.
More than 60 per cent of the dealer shipment growth was to support spring summer outdoor activities with products, such as patio furniture inflatable pools barbecues and bikes all categories with a strong sell through last year and dealers also continued to replenish life at home categories, such as kitchen tools and paint.
A sport Chek revenue increased seven 2% while comp sales were up 18, 7%.
Exceptional performance in March accounted for 50 per cent of the total sales as customers returned to the source and again against a late March a year ago when stores were closed.
With the early arrival of spring, we saw a record sales in cycling as well as strong demand and fitness related categories, such as athletic footwear and kids apparel.
At marks revenue was up 15, 3%, while comp sales increased 22% with leading performance in the industrial categories.
Additionally, we had good traction on our young adult segment with brands, such as Levi's, Carhartt, and Saks driving growth in mens and ladies casual wear and accessories.
With respect to ecommerce demand, we're very pleased with a contribute the contributions of the buy online pick up in store channel across all of our banners.
While there has been a staple of ctr for several years. The channel was not available at sport Chek remarks until its introduction in Q3 2020.
And in Q1 and accounted for 57% of the E Commerce order orders at marks and 19% of the orders that sport Chek, a strong indication of its relevance with consumers.
And at Helly Hansen, we were pleased with the internal revenue growth a 12%.
Driven by strength of the e-commerce channel, which more than doubled compared to a year ago and double digit increases in our footwear business.
Retail volume drove gross margin dollars, which were up a $191 million or 25% excluding petroleum.
Normalized gross margin rate, excluding petroleum was down 62 basis points, primarily due to a shift in the mix of sales between banners with ctr, our lowest margin rate banner driving a predominant share of growth.
The retail gross margin rate also reflects higher freight cost in part due to higher ecommerce penetration rates across the banners.
These headwinds were partially offset by improved margins at sport Chek and marks due to lower promotional activity and higher regular price sell through.
As we navigate through Q2, we believe the ongoing store closures will continue to drive a higher e-commerce penetration rate and throughout the balance of year, we expect the impacts of higher freight and commodity costs to present. Some headwinds. However, the merchants have a number of leavers they used to manage margin rates as we have demonstrated previously.
Let me turn to some of the financial services business drivers now the business continues to operate with resilience posting strong credit metrics, a 7% credit card sales growth in the quarter and a $56 million improvement to the bottom line at the ITT level on.
Although credit card sales were strong receivables declined 11% from the quarter.
The reduction in receivables was driven by lower customer acquisition, the ongoing trend of customers paying down their balances at a higher rate relative to historical norms and the industry wide impact of lower credit card sales in the prior year.
Despite a revenue decline a $45 million were 13% in the quarter gross margin improved $62 million compared to the prior year, including a $21 million allowance release, reflecting the improved credit risk of the portfolio.
This quarter's impacts compared to a $45 million of incremental allowance recognized in the prior year related to the higher economic uncertainty associated with the pandemic.
The overall credit risk profile continues to be strong as evidenced by improvement in the operational metrics such as a PD two plus rate at $1 nine 8% down 109 basis points and a net write off rate at 528% down 107 basis points compared to the prior year.
As a percentage a percentage of receivables the allowance rate is elevated a $14 nine 3% largely due to the approximately $600 million reduction in receivables compared to the prior year.
We will continue to evaluate the level of allowance on our books in response to changes in a receivable balance our credit performance trends and the macroeconomic environment.
Looking ahead account acquisition and balance building programs will be deployed as appropriate with employee and customer safety being a key decision point specifically for in store acquisition.
With respect to Opex, we saw a savings in the quarter from our operational efficiency initiatives as well as lower personnel expenses as we cycled last year's $42 million Mark to market adjustment, which resulted from a significant share price depreciation at the onset of the pandemic a year ago.
While volume related supply chain cross drove some opex growth.
Our consolidated normalized Opex rate improved 520 basis points, reflecting the double digit growth in consolidated revenue.
Amid the ongoing global demand and widespread shortage of categories, such as bikes and exercise equipment access to inventory has been critical for us and has been the fuel that's powered our sales and our shipments in recent quarters.
At the end of Q1, our inventory was in a strong position up a $128 million versus last year the.
The increase is partially driven by a higher sell through and need for replenishment and spring categories.
And also as a result of ensuring access to key non seasonal categories that continue to experience strong consumer demand.
With respect respect to our financial health, our balance sheet and earnings power or in a strong position. This was recently recognized by S&P and D. Brs as both rating agencies reaffirmed our investment grade credit rating.
And S&P revised ctc's outlook to stable.
In light of the ongoing uncertainty related to the pandemic, we still don't believe it's appropriate to provide forward looking information on capital spending or to resume our share buybacks beyond anti dilutive purposes at this time.
Rest assured our focus remains on investing in our business be that critical real estate projects or key digital initiatives.
And evaluating the efficiency of our capital allocation decisions, we continue to be guided by a retail ROIC measure and I wanted to highlight that we have made a change in methodology to align to a change in <unk> 16, accounting that came into effect in 2019.
Using the updated methodology, our Q1 retail ROIC reflects a rolling 12 months was 12, 2% and is approximately 100 basis points higher than the value, we would've calculated through our old methodology.
But putting the change in calculation a side, we are very pleased with a ROIC performance up 260 basis points versus the prior year and reflecting the strength and a retail business over the last 12 months.
A detailed summary of the updated ROIC methodology is included in the quarterly earnings presentation on our Investor website.
While there remains uncertainty in Canada due to the pandemic. We are very pleased with the results in the quarter.
And I want to Echo Greg's comments around I want to thank our employees and dealers who continue to be there for our customers with that I'd like to hand, the call back to Greg for his closing remarks.
Thanks, Gregory before I close I want to give you some insight into what we're seeing so far in Q2 and.
And how we're thinking about the balance of a year.
In April we continued to see strong demand and some of the categories that drove our results in Q1.
Quarter to date sales, a ctr up double digit and revenue is strong.
We're seeing solid top line momentum in all corporate banners as they lap more significant closures in the comparable weeks of Q2 last year.
And as Gregory mentioned, we have robust inventory levels in place to meet the current demand.
We expect spending in some categories to ease as we move through the third and fourth quarters and as we cycle, a very robust Q3, and the highest Christmas on record in Q4.
Although we all hope the end of COVID-19 is insight there is no telling when we'll reach the other side of this crisis.
<unk> a uncertainty around how quickly the current restrictions on retail will be lifted.
As part of our ongoing efforts to help mitigate the spread of the virus, we're providing our team members with paid sick leave and giving all employees paid time off to be vaccinated.
As a company that recognizes widespread vaccination, that's the best way to reduce virus cases, and rebuild our communities on the economy.
We are actively supporting community vaccination efforts for example, we donated a large exhibition space at play sports expert to be used as a vaccination site by the Laval region Health Agency.
And we're committed to working with public health on a per.
<unk> government to establish an on site vaccination clinic, and a priority region for our employees and a community.
I know everyone feels more than ready to be done with a pandemic on.
Unfortunately, it's not done with us not yet anyway.
Although we continue to find ourselves operating amidst a high degree of uncertainty and volatility in consumer shopping behavior. What we do know is that a brand isn't an extremely strong position, we have fantastic assets run by great people.
We are well positioned to create value over the long term.
No matter how long it takes we will stay connected to our purpose of being there for Canadians.
And protecting the health and safety of our employees and customers will remain our top priority.
Trust that we will be there to support Canadians in a rebuilding of our economy and our communities.
With that I'll pass it over to the operator for questions.
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 limit your time to one question plus a one follow up question.
I'll spend just a moment to compile the Q&A roster.
Our first question is from Irene Mattel with RBC capital markets. Please go ahead.
Thanks, Ed and good morning, everyone first of all thanks for all the color on share trends and category performance.
Just wanted to drill down a little bit into that so obviously very strong in Q1 and can you give us some color around the sort of a category performance.
Quarter, two two day, which in your commentary on double digit sales growth is really interesting given the restrictions, particularly in Ontario. So anything you can provide there would be very helpful.
Well, maybe I'll take that Irene.
I know and reading all of a preview reports.
We had a pretty good idea that our looking forward expectations a was.
The most topical a forever one.
So why don't I spend a little time here.
So everybody can get better a better sense on how we're feeling a bit.
The business and what we're dealing with and if we need a double click on any categories or what have you.
Between the three of US I'm sure I'm sure. We can provide provide more color if I don't hit the mark.
When we when we think about looking forward Irene we think about it on two timelines a.
Post pandemic.
And right now while we're still in it.
I'll start with how we're feeling post pandemic because I think it's important.
I mean look I feel really good.
Really good about the fact that we have a competitive omni channel offering.
I think there was some question about our ability to compete in a digital world pre pandemic and I don't and I don't think anybody should doubt our ability now.
We're run rating for an e-commerce business north of $2 billion, we engage customers with many options for fulfillment across all banners.
And can offer the customer more control over their online orders, our digital marketing capabilities are strong our own brand portfolio was strong and growing.
We have traction around cost leverage and a more disciplined way about us with regards to expense control.
Our customer analytics with triangle, both credit card and base loyalty are evolving rapidly.
We have tremendous reach with Canadians and I think we're making great strides from a social impact standpoint, our cultures in a great spot as is our relationship with her associate dealers, we're attracting and keeping strong talent and we're in a strong financial position I mean, there there's a lot to like right now.
And although there has no doubt been short term tailwind for the demand side of our business.
We do feel confident that some of the trends we're seeing here have staying power if.
You look at the strength of the housing market and home turnover.
The unprecedented level of household savings the secular focus on wellness. These should help bolster demand for our categories, even one spending on travel and entertainment starts to bounce back.
We believe we're continuing to build market share, especially as we acquire and engage new customers to a triangle and Canadians are reintroduced a Canadian tire. So we feel confident in our ability to continue to grow share in the top line in the future and emerge from the pandemic in a stronger earnings.
His position than when we entered it.
But as I said in my prepared remarks, COVID-19 has not done with us yet.
It's still obviously very difficult to predict the future right now so lots of uncertainty, we arent a food or drug retailer. So unlike others, who are providing visibility we're dealing with significant restrictions on closures impacting.
Our business right now.
Today, So I think I would start in the more short term.
With the biggest understatement I could deliver a and that it's really hard to forecast. The top line looking forward I wouldn't have forecasted the restrictions we find ourselves and if you asked me a few weeks or months ago. So asking me to comment on a few months out is near impossible.
Look here's what I know a we.
We had a strong April a which we called out in our remarks, but we have more than two thirds of a second quarter in front of us in terms of sales.
And the numerator gets much bigger as we are now comping weeks, where stores were reopened and had large sales increases last year and I don't I still don't know when our stores are going to open in Ontario, and it's 40% of a revenue.
So this is why it's a difficult you've heard me talk about the fact, we plan on seasons and we're doing the best we can to try and plan as close into customer demand activity as possible what I can tell you with certainty.
Is that we are buying inventory to support incremental growth in the business we're on.
Already in the dealers are ready.
And I think that's just what you need to do to be ready for in this type of environment.
We're really good at sourcing inventory.
Using all of our capabilities, we are using our relationships and our track record with vendors to buy and be a strong channel and partner for them.
You can give them growth and reliable payments, which is pretty attractive right now.
But figuring out the staying power on the top line is the toughest and most critical.
When decisions like shutdowns are still on or amidst volatile sales activity is what.
Results. So hopefully as we move through Q2 here and we have a few region. So you pick a region like D. C. As an example, or Ontario, when it reopens, where the comparative periods have less noise, we should be in a much better position to glean more insight in terms of customer demand patterns and unpack some of them.
That color for you in our next call.
That's really great really helpful. Thank you and just a follow up if I may which is obviously now with triangle and sort of a credit to the credit card and membership you have a lot of very granular data. So what is your granular data showing you a boat the perched.
<unk> patterns of your customers in your opening here and also a sort of your share of consumer wallet in key categories versus other other retailers.
I'd say one of the things that we're seeing.
That is that's interesting Irene as the debt.
Towards the end of the end of the quarter the a.
Spend heat maps and our credit card.
By category started to go Green a M.
In a in categories that had been red for 12 months to 14 months when you look at a <unk>.
<unk> categories like auto.
Spend categories like travel spend categories like a dining.
A dining in restaurants so.
That is most likely that those are a national a heat map. So it's my most likely being driven by regions outside of Ontario, but I think those are interesting trends in terms of what we're seeing from a from a customer pattern standpoint, I think we called out the fact that what's different for us.
This quarter is we're starting to see a good rebound in the automotive business.
And it seems to be preparation for travel.
A tire business a strong when you think about a rooftop carriers, a outdoor recreation et cetera, we're seeing good balance in those in those categories right now so.
There would be some of the nuances and some of the Windows. We would have that would indicate that there are different mindsets emerging.
With a with Canadians right now and as you point out.
We do have those nice day to windows.
With some of them potentially being lead indicators for us as we start to play on the rest of the year.
That's great. Thank you.
Yes.
Thank you. Our next question is from Mark Petrie with CIBC. Please go ahead.
Yes, good morning.
Greg I just wanted to follow up on on one of your comments there obviously, it's impossible to predict.
Retail sales patterns, particularly into the second half of the year.
Given the big comps that you guys are going to be lapping, but the comment with.
With regard to buying inventory to support growth was that was that you are towards the second half because that's a sort of timeframe you're talking about.
Well I'd say, it's just our overall mindset and approach to the whole business.
Market.
It certainly as we talked about before was the way we.
Again, we keep talking about planning the business in seven seasons is the way we plan for the first few seasons here that helped here in the first quarter.
The way, we would a plan.
And in terms of our approach for Q2.
And it's the way we're planning for a tier three in Q4.
As we as we move forward here, we'll get some some indicators from our dealers in terms of how bullish they're believing some other categories.
How bullish we are on some of the categories, where they ended up quite lean last year T. J can probably speak to this I would say, they're there they have very bullish mindsets I mean, they are continuing to order in.
And they find themselves as we alluded to a in our Q4 a call.
Pretty lean and simple.
Important categories for a Q3 Q4 businesses as we approach the a.
As we approach those a approached those seasons on T. J, if you want to add any more color to that yeah, hi, Marc It's T. J on one other piece a I'd like to just kind of a highlight when youre contemplating our investments in inventory as we had significant growth last year.
Kind of multiple years of growth happening in one year and for us whether whether you look at it from a corporate side or from a dealer side effectively we've had a step function change in terms of the size of our business and we have to inventory up in order to continue at that pace and grow beyond it so youre seeing Us Act accordingly.
And buying quite aggressively and you're also seeing a.
The dealers do the exact same thing they recognize from a dealer perspective that inventory is a fuel that drives our growth and they've been very aggressive year to date coming off a year in the spring summer categories, where we depleted a lot of inventory the consumer demand last year, just a far outpaced.
The supply that we had even despite the fact that we brought in as much as we did last year. So overall, we're kind of in this position of right sizing the business so to speak from an inventory perspective, and we're going to continue to buy aggressively because what we don't know is what restrictions are going to happen.
Those types of things book, but what we do know so far is that is that when we're unfettered our consumer demand is still a strong and we want to put ourselves in a best position.
On to deliver against whatever consumer demand is there. So that's the approach we're taking.
Okay. That's a that's very helpful and I guess just to just to clarify I mean, obviously there are some categories, where inventory is really leaned in the market.
It sounds like you don't expect that to be a material headwind for you at least in the next.
Or basically through all of this year is that a fair statement.
Yeah, I would say that there are definitely some categories that we continue to chase.
And that there is demand that's outpacing our ability to supply, but we are aggressive on chasing that inventory we're a.
A couple of categories that have continued to kind of a really push hard even into Q2. After a strong in Q1 would be like backyard furniture and things like that so we're still trying to be aggressive to buy those so I wouldn't say we're out of the woods on on supply entirely and Theres certainly some categories that we're going to be chasing but we're feeling like we.
We've put our best foot forward in aggregate to a to drive to drive growth.
Thanks, and lots of discussion about higher costs, there will be a commodity freight labor. Obviously the model gives you a ton a flexibility to navigate that type of volatility a cross promotions loyalty assortment.
But where are you seeing the greatest movement in your costs, and obviously FX I guess would offset some of this depending on timing, but generally speaking or is most of that most of the higher cost being pass through or are you absorbing it or maybe you can just talk about.
That's helpful. Thanks.
Yeah, why don't I, why don't I take that a mark.
It's Greg.
We certainly.
And inflation is is pretty topical.
Right now I think Greg alluded to a Gregory alluded to it.
And.
In his prepared remarks, there was no.
Speak about Q1 first there's no material inflation impact to our Cogs in Q1.
Nor do we expect any material inflation for our Q2 receipts.
The two big drivers right now a commodity inflation and global supply chain demand driving freight costs. So on.
Don't think those are new to anybody but given this we do expect to see modest impacts on or a cogs receipts in the back half a varying significantly by category.
Products largely comprised of plastics would be the extreme cases.
And looking forward. Our expectation is is an expectation that commodity prices will remain elevated through the first half a 2022.
And then will likely taper off and a retreat as demand normalizes with changes to consumer behavior and spending patterns, but there are offsets to the headwinds posed by the commodity inflation first the Canadian dollar has appreciated against the boat both a U S dollar and the Chinese RMB, which is favorable.
Now as you know we hedge so are a glide path to benefit here isn't immediate but we do see our effective hedge rate improving as we move to the back half and into 2022.
And on the freight side, even though the ocean freight spot market is.
A record highs.
A large percentage of our container volume a mark is protected at contracted rates.
This is a real benefit for us a relative to smaller importers as they're dealing with not only massive cost increases, but availability and space issues as well.
So given what's going on we feel like we're in a good we're in good shape a to make it much less material than what it might look like for others, we have solid capabilities and relationships.
And we're definitely using them.
To our advantage right now.
The.
T. J has talked about the fact that we're not going to give an inch a competitively so trying to forecast what will maneuver its way through to the customer will will kind of be determined by that competitive intensity, but.
Hopefully that gives you some some flavor in terms of how we're thinking about dealing with it.
Very helpful. Thanks, a lot on all the best.
Thank you.
Next question is from Patricia Baker with Scotiabank. Please go ahead.
Alright, Thank you and good morning, everyone.
Wanted to talk a little bit about that.
A strong sales in the quarter, which were a phenomenon as you noted unprecedented and I guess in part that's a <unk>.
And really I.
So I guess, a favorable assortment and you referenced the fact that you are seeing market share.
So I'd be curious a you could talk a little bit about where you think those share gains are coming coming from.
Why is it.
Primary reasons, you think you're gaining share and then trying to square that a little a bit with T. J a comment around.
Inventory it certainly sounds like a corporation and the dealers feel that those share gains based on T. J.
A comment or something that is sustainable and do you expect that.
We will continue to.
Keep those going.
Okay.
Yeah, Hey, Patricia it's T J I'll talk a little bit of a share in Q1 overall by all measures we measure share in various ways with various outside.
On a parties as well as our inside data, we feel like we gained market share in Q1.
That despite some significant store closures early.
In January into mid February.
I think theres a lot a substitution spend that we're benefiting from a.
Greg alluded to earlier, a lot of kind of spend a traditionally might have gone into travel or entertainment is heading towards a categories in which we compete is as folks are hunkered down in their homes and book.
For a ways to entertain themselves with boredom busters and things like that.
I do believe and our dealers do believe as well that.
Net inventory has helped power a lot of our share gains.
We took aggressive stances as we went into Q1.
We went back all the way to September of last year, understood, where a consumer trends, where we're heading and we are we bought aggressively.
Knowing as well that we had a bunch a pent up demand. So I think there was a lot of kind of execution elements that drove our share gain and we believe that we have the ability to sustain the share what we don't what we don't have in our control is what restrictions we're gonna be up against what we know is when we're in omni channel.
Retailers are fully opened with both our E comm capabilities on our stores, we do extraordinarily well.
And we think we have the opportunity to continue there just given given the trajectory we've been on so I do believe we think we can continue to drive those share gains.
Okay. Thank you for that and then my second question a follow up question on financial services. So.
Comments on financial services Gregory.
You mentioned, the fact that we will continue to a.
Work on acquiring new customers and you had a lot a new triangle members.
In the first quarter.
Where do you think ultimately in terms of penetration of Canadian households.
A.
Membership either.
And on a customer acquisition.
Or the credit card.
Is there a limit on where where that debt.
But that should ship to net.
Net out.
Yeah.
Yeah, I'll take that Patricia because it's wrapped up in triangle to we.
We do believe.
With.
Our capabilities.
And the value proposition that we have a meaningful opportunity to grow the total active file or a.
Card base.
In financial services, where you've heard us talk a lot about integration between the bank and a retail being critically important.
We believe that wholeheartedly.
Moving forward, our best customer acquisition vehicle right now is the stores.
So you know that hampers, our ability to to grow the card base in a material way and now having said that we're quite happy with card acquisition in a quarter.
Which was quite strong and we set aggressive targets for ourselves and.
In terms of what that looks like for this year.
In terms of total household penetration and a were sitting in that kind of a 10 to 10 and a half range right now in terms of on active file.
I think you heard me talk about on our own to audience.
Putting a lot of a focus on effort on owned audience.
Now that's a that's a $12 million.
A $12 million, so theres more reach on our own audiences. Those are people, who have opted into our app a R. E mail from a notification standpoint. So we do believe there's an opportunity for us to grow total household penetration of a triangle membership program and a more.
Kind of a universe of Canadian households that are a part of the program.
It's a it's a pretty good acquisition a lot.
Lead.
For the credit card I know a gregory wants to weigh in here too.
I wanted to emphasize that last point Patricia is if you think about it I mean as you know the store is the main source of acquisition, it's just such a rich pool of.
A customer is fit for financial services and for all intents and purposes. We've been we haven't really been in the store for the last 12 months in a scalable manner. So when we feel comfortable that we can go back safely for as I said customers employees I think theres lots of.
Availability to grow in a and I just wanted to echo Greg's comment around.
A really healthy way to grow the card business is as well the convert loyalty customers to credit card customers and I think as we continue to integrate triangle, even more I just think the pool for the financial services Division to continue to bring more customers other ways to earn Canadian her money is even faster. So I think the opportunities are there it's just.
We just again I think we want to be careful about not going too quickly with a store acquisition side of it. So it's I think we're still a little bit away from that Patricia but once we get through and the world is knock on wood back to some sense a normality again I think we're very optimistic about being able to grow that card file again.
Okay. Thank you both.
Yeah.
Thank you. Our next question is from Brian Morrison with TD Securities.
Please go ahead.
Yes, thanks very much.
Gregory can I stick with financial services here, you've got this allowance release again this quarter, you've got commentary on improved savings rates.
And then I would say with the improved economic outlook should we expect this release trend to continue throughout the year. So the allowance provision is still well above the pre pandemic levels in car is lower and then just following up on that it's very encouraging to see a seven 1% increase in card spend can you just kind of total.
Mine for Us where card spend is relative to the relative to pre pandemic levels.
Yeah, So Brian it's Greg let me take that one I'll start with the allowance first and foremost.
You know how we do this which every quarter, we take a look at what the allowances and all the factors and make assessments on on as we're looking forward because it is a lifetime loss estimate it's not losses in the next 12 months, a lifetime and where we ended the quarter, we feel very good and very comfortable we have a simple way to look at it is look at the allowance dollars looks your.
Last 12 months, a actual write offs, we have over three years of losses kind of on the balance sheet right now in our allowance. So we feel pretty good about that from a coverage perspective and I just want a.
I know, there's lots of questions about releasing more allowance et cetera, et cetera, I would just point you back to the data that was just released on unemployment what about a week and a half ago, where it didn't surprise us where given the restrictions the unemployment rate I think went from seven five in March to eight one in April now.
Now again, given restrictions on what that did to job loss, we werent surprised but I just I think Greg said I don't think we're through this yet so we watch the trends very carefully the macroeconomic ones. We're very encouraged by the credit risk metrics, but it is really a quarter by quarter assessment on on getting through what this day to looks like and that's.
Probably the best I can give you a round where we are we're very comfortable and we will continue to look every quarter and take the appropriate action when we when we get a sense of what that information it looks like.
And in terms of card spend I think maybe I'll answer. The question. This way I was thrilled with seven 1% growth in the first quarter.
The team is focused on is more the active accounts side of it. So if you take a look our active accounts would have been down 4% versus Q1, a year ago and that gets to what like Patricia was asking and you've asked as well previously around what are we going to start kind of be able to get that acquisition engine humming again, so look if we could get a 7% growth in card spend per active member.
That's a pretty strong it's the focus I think really is going to be on again when can we get that channel in store channel open safely and I think a continued integration with retail will just drive both of those numbers I think there's a chance you could see higher than say, a certainly an acquisition and potentially even on the sales per account side.
Okay, and then follow up question on the retail maybe for a T J on for Greg.
And I'm not sure you can answer this question, but you've talked about how demand at ctr remains off the charge. The dealers remained very bullish you've had this great variability to last several quarters with respect to revenue and retail.
When can we expect that there should be back in equilibrium like should we expect that in coming quarters or are we still going to have this revenue growth in excess of retail.
Right. So this is Greg.
You're right that is difficult to answer.
Listen I've I've been around the Ctr business for a good amount of time and it's tough for me to assess a model in my mind. So I appreciate how difficult. It is for you for your models.
I think the most important thing to ground on is as what T. J said before is the fact that we're trying to support a step function change in a revenue.
And in order to support a much higher water line in revenue, we need to buy for us.
So.
While they're really difficult thing going forward as a as I said earlier is what's going to happen with a customer in terms of demand when we get back to normal.
One thing I feel strongly about is that we will eventually settle into similar inventory turns profiles.
Ideally, we get some efficiency, we're seeing that relative to 2019 right now.
But the so called plug in a bottle if there is one.
Especially for the dealers are turns.
So I think about these factors when you're modeling out revenue.
There is certainly what I would call. Some initial fill requirements. This year, given where we ended the season last year.
So there's a there's buying for a heightened rate a sale, but also to fill the pipeline.
And what I know is that this is for sure the case on the short term.
This initial sell phenomenon, what I also known as the debt if we filled a network up.
And then sales fall off that this will impact your modeling for revenue in 2022.
So from that standpoint understanding the model in a relationship between sales from revenue.
As a as pretty easy so all that to say I think the key.
Customer is going to dictate the volatility.
Going forward and we're we're just gonna be ready in the short term.
From a from a demand standpoint, so hopefully that's helpful a little bit.
Alright, thanks, very much for that color.
Thank you. Our next question is from Peter Sklar with BMO capital markets. Please go ahead.
Okay.
I'm just wondering if you could talk a little bit about the performance of the Ontario Canadian tire banner store. So my understanding during the lockdown.
Would have been that.
You would you would not have a loud store pickup so the customer was not allowed to come into the store to pick up. So you were limited to curbside. So earlier in your discussion points you were talking about how how well.
A pickup is doing so if my description of what a.
What was.
What you were allowed to do a non allowed to do is correct can you talk about how the Ontario stores did given that they were limited to curbside.
Yeah, Peter It's C. J I can take that one you are correct in your assessment for how the Ontario stores had to operate a.
A pretty much starting boxing day rate until mid February we were only open for a curbside service through our E Com channel and.
Also by appointments within auto service so during that timeframe.
Our sales were I would call them resilient, we were obviously down.
Comping, what we would've we would've been fully open.
But then we also saw a kind of pent up demand phenomenon when we open back up in March.
And finished the quarter very strong in Ontario, as you go into Q2, it's a little bit different from a comp perspective because of the restrictions are there.
But up until a couple of days ago, we had similar restrictions last year. So right now as we're sitting in Ontario.
We've had quite strong sales in Ontario up until the last couple of days because now we're starting to comp a beer.
<unk>.
Being opened last year, not only open but open with massive pent up demand after being closed for a for a month. So a lot of variability in performance when you're opening and closing like that but hopefully that gives you some color on a on how we performed.
I get that that's good and then my follow up question is.
Like as you know due to the.
Generous benefits that are being offered by.
The federal government.
In terms of.
Wage weighted supplementation.
Are the dealers, having any trouble getting people to come into work is that is that an issue for them.
Yeah, Peter It's T J a.
Over over time since the pandemic started.
Labor is always something that we're levering up and down and I think as the demand a Canadian tire.
Went up extraordinarily.
On a very short period of time, there definitely were some challenges getting labor across the country.
And but our dealers do an extraordinary job extraordinarily strong job of managing their business very tightly that way.
Up their recruiting efforts and those types of things, but I think it's safe to say that that labor has been a.
In certain markets, particularly a.
And some of the markets out west and in Ontario.
It has been tough at times to get labor.
And it continues to be as we go forward here.
Okay.
Thanks very much.
Thank you.
Our next question is from Michelle's from <unk> with National Bank. Please go ahead.
Hi, Thanks for taking my question.
Just wanted to debt.
Effective on the margin sharing arrangements with the dealers that ctr give.
On the large comp in Q1 should we expect a favorable true up in coming quarters.
Related to that agreement and if so when should we expect it on and.
Can you offer us any help on how we should think about that benefit if it in fact is expected.
Okay.
Hey, it's a Gregory here I'll take that one vishal and you can see you can ask a follow up hard to accounting question for T. J a.
I think as you know the complexity with a margin sharing arrangement is when our dealer year ends are right. So they they they're not all in one day with a 492 dealers they kind of vary throughout the year. So to answer your question.
When we do the accrual were doing a kind of based on yearend and projections. So we actually get a true up this quarter.
For our estimate.
From from that we made in Q4, because we had some more dealer return year ends come in and we did actually increase.
The the crew a little bit so we did increase a margin a little bit relative not anything near what we would've done to Q4, that's why we really didn't call it out because it wasn't.
Nearly a significant as it would have been in the previous quarter, but but there'll be a there'll be an adjusted in Q1 and there might be a small adjustment in Q2, depending on the returns that kind a cascade in as it relates to what we'll book in Q4, a this year theres lots of time left so so yes, it's a it's a it's a good start to the dealers with a comp that you've seen but theres lots.
Have a lots a year left and.
I think we'll be in a better position to talk a little bit more about that maybe kind of certainly Q3 Q4, but it's it's it's early to talk about kind of what we'll think about for MSA a in the fourth quarter at this stage I would say.
Okay.
Just in terms of a heuristic of it.
If there's.
Retail sales come in.
Rather than a PTR plan.
Those are a true up going back to the corporate is that a.
Fair way to think about it.
It's broader than just sales REIT think of dealer profitability. So it's you got to remember they've got a managed margins they've got they've got inventory they've got personnel costs et cetera. So you have to look at the overall kind a four wall profitability is how I would say it. So so the fact that sales are up let's not kid ourselves, that's a great sign, but but there's more to it than just sales being up just so.
We're all we're all clear.
Okay. Thank you for that.
In terms of the owned brand strategy.
There seems to be continued traction with that and I'm wondering how management as a flex upon that strategy on.
If anything has changed and should we expect more acquisitions of brands looking forward.
We're really happy a vishal with a performance of own brands like we called out the.
Performance in a quarter, we saw great penetration rate increases the tune of I think.
250 basis points from Ctr, we're seeing continued penetration momentum and in sport Chek.
A.
We called out a bikes as a as a shining owned brand example in sport Chek.
I think we've talked to you about the fact that we feel good about a national brand owned brand mix.
And marks on an ongoing basis, so the real benefit for a creative penetration is going to come through sport chek and through Ctr and we have multiyear plans by category.
In terms of both of those banners for further penetration in all levels of architecture.
In the in the assortment.
As it relates to acquisitions I think you've heard a say before we've always got our ears open.
If you asked me that question three years ago, I would have identified gaps in the Canadian tire assortment and in categories like bikes.
At the good kind of architecture level.
On our kitchen business at the better.
Architecture level and now those gaps have been plugged by acquisition. So I'll, probably stop short of telling you the categories, where we where we believe we have gaps.
But suffice it to say, we do and we're always on the lookout for fulfilling them in and hopefully they end up being screaming successes like a like rally on Diamondback.
Thanks for the color.
Yes.
Thank you.
That is all the time, we have a quick question I will turn the call over to Gregg <unk>, President and CEO for any closing remarks.
Thanks, Valerie and thank you again, everybody for joining us today I hope. The next time, we speak were all well on a way to widespread vaccination.
Finally, reaching the other side of this pandemic will speak to you in August Goodbye.
Thank you everyone. This concludes today's call you may now disconnect.
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