Q3 2022 Canadian Tire Corporation Ltd Earnings Call

All participants thank you for standing by my name is Atlanta, and I will be your conference operator today welcome to the Canadian Tire Corporation earnings call. All lines have been placed on mute to prevent any background noise. If you would like to ask a question simply press star.

Star then the number one on your telephone keypad to withdraw your question Press Star then the number two.

Now I will pass along Jay Karen Keith head of Investor Relations for Canadian Tire Corporation Karen.

Thank you Elena and good morning, everyone welcome to Canadian Tire Corporation third quarter 2022 results conference call with me today are Greg Hicks, President and CEO, Gregory Craig Executive Vice President and CFO and T. J flood president of Canadian tire retail.

Before we begin I wanted to draw your attention to the earnings disclosure available on the website, which includes cautionary language about forward looking statements risks and uncertainties, which also applied to the discussion during today's conference call.

After our remarks today the team will be happy to take your questions, we'll try to get in as many questions as possible, but we do ask that you limit your time to one question plus a follow up before cycling back into the queue and we welcome you to contact Investor Relations, if we don't get through all the questions today.

I'll now turn the call over to Greg.

Thank you Karen good morning, and welcome everyone.

Hi opened our call last quarter by stating that we would enter that challenging environment. Today. There is no question. We continue to operate in a dynamic economic climate.

As we're all aware interest rates have reached their highest level since 2008 and inflation continues to impact the cost of living for Canadian families.

In general we continue to see overall strengths with the Canadian consumer.

This perspective comes predominantly from our analysis of the more than $5 billion that Canadians spent on their Canadian tire credit cards in the quarter.

Sales at our core our cards were up 14% so an aggregate spend remains strong.

What we are seeing is a mix shift in that spend.

Spend appears to be softening and non grocery merchant sales and remained strong across grocery gas and services.

At GTC specifically.

<unk> spend in retail sales in Q3, while slowing relative to Q2 growth remained well above their pre pandemic levels. In fact, Q3 retail sales were up over $700 million relative to 2019.

Gregory will cover the numbers in more detail, but before he does I will touch on some of the trends we saw through the end of Q3 and provide an update on the progress we're making against the pillars in our better connected strategy.

As I mentioned in my prepared remarks last quarter, we saw good movement on our spring summer products in July once the warmer weather arrived.

Demand was strong in the early part of the quarter trailed off in the Middle and then finish strong in the last few weeks of September so overall consumer demand across the quarter can best be described as choppy.

The two year stack for comp store sales in Ontario was strong at 24%, which contributed to us being down 4% in the province for the quarter.

Outside of Ontario, where the comps were easier we saw good, albeit slower growth than 2021.

As I'm sure you can appreciate we've been analyzing our business performance in depth, given the intensifying narrative of a looming recession and.

And we have identified three new insights that have emerged in the last 60 days or so.

First at Ctr, there is evidence of more performance separation for essential and nonessential categories.

Consumer demand is shifting to our essential product categories, such as tires automotive parts plumbing and pets.

This shift is more pronounced among our non loyalty customers, who have decreased their spend and non essential categories, such as outdoor cooking exercise equipment electronics and furniture.

Second our triangle rewards loyalty members are driving the majority of our sales growth and our best members are driving a disproportionate share of growth.

And third.

[noise] loyalty customers at C. T R R.

Looking for a discounted value as our percentage of baskets in which all items in the basket or discounted is on the rise.

Although these insights are relatively new and not yet trends they will inform our tactics and resource allocation as we move forward.

Being a resilient retailer means being equipped to respond to unpredictability.

We are focused on running our business well and in the short term, we will use our analytics capabilities and expect to double down on leveraging insights gleaned from our triangle data to understand engage with and provide real value to our customers.

At this time as I have in previous quarters, I will discuss the progress we made against the pillars of our better connected strategy in Q3.

Starting with the customer.

In Q3, we effectively engaged our loyalty customers and loyalty sales grew to $2 7 billion an increase of 4%.

Overall loyalty sales outpaced nonmember sales in the quarter a trend we expect to continue so we are increasingly laser focused on driving member engagement and we know the number one driver of engagement just registration.

Registration provides valuable first party data that enables us to cultivate stronger more authentic relationships with our customers and.

And registered members are more engaged and participate in more components of the program, including our one on one offers.

Although the percentage of registered members is a solid 73% across all loyalty members, it's only 39% among the new to CTC members those who have joined the program in the last 12 months.

We believe that early registration has the potential to unlock considerable additional sales.

A registered new to CTC members spend two five times more than a non registered new member.

In the first 12 months post registration.

Armed with this knowledge, we recently created a new cross functional team to design and implement specific tactics to improve registration.

And so far we've been successful with 200000 more registered members than last year.

Given our awareness of the emerging trends that further reinforce the importance of our triangle members. We will continue to adapt our playbook to put the requisite amount of required focus on driving registration.

We're also honing our ability to surface the value that matters to customers and one of the ways. We're doing that is through offer widgets on our websites.

As you May recall earlier this year, we tested a widget on the C. T. R website that encourage customers to activate a triangle rewards offer by dynamically showing exactly how much bonus E. C. T M they'd earn if they purchased a specific product.

Now we've scaled this program to include mass promo items, and we've learned that by displaying the E. C. T. M dollar amount to be earned on the product display pages drives results for both one on one and mass offers.

We will continue to investigate ways to leverage the widget for future brand and category multiplier offers and identify new and innovative opportunities to meaningfully engage with their customers.

Moving onto our investments in our stores and customer experience.

Our investments continue to be aimed at delivering a better omnichannel customer experience and we're making excellent progress.

We recently opened the first two remarkable retail stores in Ontario, what.

In Welland and one in Ottawa.

These new stores represent the next generation of Canadian tire is large format retail store and they are truly remarkable.

We've connected the digital and physical worlds, enabling both channels to complement and amplify each other.

Ultimately delivering an enhanced customer experience through an expanded assortment and seamless omni channel shopping options, including click and collect curbside pickup and delivery to home.

For example, our new 135000 square foot store in Ottawa has a six car customer pickup canopy area for our customers to collect their online purchases as well as in store technologies, such as electronic shelf labels employee facing devices for real time information and scan and by technology to help with bulkier.

Items.

With our well and and Ottawa stores have fantastic merchandising displays that proudly showcase our own brands and highlight our key national brands, bringing our products to life in an inspiring way.

In Welwyn specifically.

Over 1100 items on display which allows customers to see the breadth of our assortment and $3 8 million data points were considered when allocating space at a SKU level in the store.

This store also features our most automated store warehouse with over 550 feet of conveyors advance products sortation capabilities, new wearable technology to improve efficiency and the capacity to hold over 170 full truckloads of product.

We also recently opened a replacement store in Chilliwack BC the store.

<unk> has been expanded from 45000 square feet to 94000 square feet and is now our largest store in British Columbia.

The store has been outfitted with our full concept connect store design and our sales results to date have been fantastic.

<unk> has been the number one store in sales growth in the country and top three in absolute dollar sales the last two weeks.

It's a great representation of our brand and a significantly enhanced omnichannel experience for our customers.

Overall, we expect to complete 36 projects and we'll update just shy of 10% of Ctr retail square footage and add more than 350000 square feet to the network by the end of this year.

And we're just getting started.

We have 22 projects that we expect to complete in the first half of 2023, and we have another 28 projects planned for the second half of next year.

But as you know providing better experiences and our physical stores is just part of our Omnichannel investment story.

We continue to invest in ensuring customers have a seamless shopping experience no matter, which of our channels. They choose for example, we have installed pickup lockers now and close to 80% of our ctr stores and.

And of course, our supply chain is critical to our ability to provide a seamless customer experience.

As we mentioned in our last call. We took possession of inventory earlier this year costs related to our ctr inbound volume were up 15% in the quarter and ocean rates were up more than 20% relative to last year.

The associated costs impacted both our margin rates in our opex in the quarter, which Gregory will speak to in more detail.

We continue to incur incremental expense as a result of using <unk> to process required throughput and the longer lead times, we've built into our purchase orders.

We see the magnitude of these expenses subsiding, both as a result of where we are investing and as some of the pressures ease organically.

Starting with our investments we expect relief to come as we fully operationalize our expansion in our Montreal D C and repurpose to Central D. CS, which have traditionally supported marks and sport chek to Ctr. All of this work will be completed by January 2023.

And to better service, our ctr stores in B C. We recently signed a lease for a new DC in the Vancouver area, which we expect to be operational in 2024.

Our new fully automated G. T. A D. C was operational in Q3 processing small runs of both inbound and outbound as well as storing inventory.

This will continue throughout Q4, as we head towards full scale operations in Q1 of 2023.

As outlined at our Investor Day, we continue to focus on the modernization of our supply chain with the investments required to support the growth of our business over the long term.

In terms of the organic relief, we're expecting freight rates started to come down in September and have continued to drop through the early part of this quarter.

We are negotiating our contracted rates with carriers for 2023 as we speak.

We are also seeing evidence of lead time shrinking based on modest improvements in the operations of the port of Vancouver.

Moving onto our product assortment, we are confident that our unique multi category assortment sets us up well in every economic environment as it provides us with considerable flexibility as customers' shopping habits change.

As mentioned earlier, we are seeing changes in spend and nonessential and essential goods triangle members continue to increase their spend across both essential and nonessential products. Nonmembers. However are decreasing their spend on non essential products.

The essential product portfolio is a big part of our overall business and you can expect us to adjust our resource allocation strategies to put more focus on this segment of our business going forward.

We expect outpace growth in the automotive business, and we will advance strategies to catalyze opportunities for our essential portfolio I.

I will illustrate this using our execution plans for our pet business as an example.

Pat is currently a $4 9 billion dollar market in Canada.

For CTC, it's a growth category and an essential trip driver that has considerable runway for us.

We've started rolling out an enhanced petco shop in shop across our C. T. R store network and so far the 31 stores with these new experiences have delivered P. O S. Great growth rates of 19% in the category as well as a 34% increase in customers shopping pets with us for the first time.

We've worked with our associate dealers to accelerate our plans and by the end of January 2023 over 80% of our Canadian tire stores will feature this enhanced petco experience.

As you can see Pat as an opportunity for growth and it's just one of many essential categories, where you can expect us to increasingly add emphasis.

Our own brands portfolio performed well in the quarter and in Q3 sales increased as we continued to demonstrate our in house innovation capabilities.

We are really excited about one of the newest products within our own brands portfolio. The power part a universal battery system that powers, a variety of exclusive brands, including Master craft indoor and outdoor tools motor Master and Simonize car care products as well as woods camping gear.

Finally, I know you've heard me talk about forward a lot. These past few quarters, but it's important to note that forward sales have reached $14 million since its launch in April 2022.

Further proof that we can continue growing our successful owned brands portfolio.

At the same time national brands continue to play a critical role in ensuring we have the right products for our customers and in Q3. This was especially true at marks were standout brands like Levi's Carhartt and Timberland pro.

Finally, as we discussed at our Investor Day, a key objective of our better connected strategy is to make life in Canada better for our shareholders by delivering strong capital returns.

This is a critical component of our value creation program.

And as I'm sure you know today, we announced our 13th consecutive year of dividend increases with the annual dividend increasing to $6.90 from March 2023.

Along with a quarterly dividend increase we announced in May. This takes this year's cumulative dividend increased to 33% and continues to position us as one of the best yielding dividend stocks in the sector.

We also announced the renewal for our share buyback program and our intention to repurchase between 500 and $700 million by the end of 2023.

We are investing in our company because we have confidence in our future and our ability to achieve long term growth through our better connected strategy.

And with that I'll pass the call over to Gregory.

Thanks, Greg and good morning, everyone before I take you through the details of the quarter I'm going to start with the EPS numbers reported diluted EPS of $3 14 per share included <unk> 20, or $16 million of operational efficiency program costs.

Normalizing for these costs brought normalized diluted EPS to $3 34 per share.

Within that normalized EPS again this quarter, we had an impact from foreign exchange losses, driven by continued movement up the knock compared to Helly Hansen operational currencies equivalent to 15 cents per share.

The difference in EPS relative to last year traveled through higher revenue in both the retail and financial services businesses, but it was offset by lower retail gross margin rate against the strong margin last year at Ctr and sport Chek and as we absorbed higher freight costs this quarter.

I will elaborate on these items a little later, but before I do I'll start with how the customer behavior. This quarter translated into retail sales growth.

Q2 was another strong top line quarter with retail sales continuing to run 20% above pre pandemic levels.

And the petroleum business, although volumes were down higher prices at the pump translated into higher revenue.

Retail sales growth, excluding petroleum was just under 1%.

On a regional basis, we saw higher growth outside of Ontario.

As Greg mentioned, Ontario was down against a strong quarter in 2021, as we cycled last year's pent up demand with the reopening of stores and a strong back to school season in that province.

Now, let's look at the highlights for each of the banners starting with Ctr.

At Ctr comparable sales were up 7% with half our categories growing in the quarter.

Seasonal and guarding was the strongest division as summer weather arrived in the second half of the quarter across most of the country.

And we were well stocked with tools and pool maintenance products patio furniture and gardening automotive.

Automotive remained strong this quarter driven by maintenance.

Our living fixing and playing divisions were down in the quarter compared to last year due to supply challenges in areas like vacuums and portable power tools and demand for some home items and exercise equipment also slowed.

This was partially offset by areas of growth, particularly in camping and in paint.

Sales in all divisions remain well above 2019 levels and on a year to date basis comparable sales at ctr were up almost 3%.

Revenue was a highlight at ctr up more than 5% in the quarter as dealers ordered for Christmas and replenished winter in non seasonal categories. After a strong end to winter last year.

On a rolling 12 month basis, both revenue and sales were up.

Revenue growth is leading sales growth by approximately 150 basis points driven by strong revenue growth this quarter as well as in Q4 of 2021.

As you know given our dealer model sales and revenue can be out of sync in any given quarter and over the long term. However, the growth patterns for revenue and sales tend to converge.

At sport Chek Q3, comparable sales were down 1% as we cycled an 11% comp last year. When we benefited from pent up demand as customers returned to stores in Ontario and team sports resumed.

This quarter growth in cycling and casual clothing, partially offset the decline in athletic clothing and footwear against last year.

<unk> growth was led by sales of our own brands Diamondback enacted Bureau.

Strong sales in Quebec resulted in a higher mix of franchise sales, which contributed to a lower margin relative to last year. When we're in a low promo environment and customers were shifting back to in store shopping and inventory was less readily available.

Mark was a positive contributor to retail gross margin in the quarter and recorded its ninth consecutive quarter of positive performance.

Comparable sales were up 4%, despite the tough comp of 8% benefiting from growth in industrial and casual or demand across most provinces.

Sally Hansen had a strong quarter with revenue growth of 8% on a reported basis and on a constant currency basis revenue growth was up 19%.

North America, and Scandinavia were the strongest regions up 35% and 28% respectively.

From a category perspective, Helly Hansen sport was the strongest contributor to growth.

Now I'll return to our retail gross margin rate, excluding petroleum, which I mentioned at the start of my remarks.

On a year to date basis, we continue to be pleased with our retail gross margin rate that is running a little behind last year. The team has done a great job managing through product cost product cost and freight headwinds.

Margin rate in Q3, however was down against an extremely strong margin rate in Q3 of last year as we were operating in a less intense promotional environment as we came out of Lockdowns in Ontario.

Consistent with what we saw in Q2 of this year freight cost and cost inflation, where our biggest headwinds in Q3 freight.

Freight at C. T. R had a negative impact of around 200 basis points on our retail gross margin rate a bigger impact than any other quarter. This year due to higher fuel and ocean rates.

Me explain why we see these headwinds.

He's starting in Q4, our biggest quarter.

First we had an elevated comp freight costs beginning in Q4, 2021, so we'll be cycling an easier comp.

Second based on what we're seeing in the market Ocean spot rates are meaningfully lower than they were last year fuel prices are coming down and product costs appear to be stabilizing.

Major margin rates may vary from quarter to quarter, and I want to be clear the decline we experienced in the quarter was not related to a shift in our promotional strategy to stimulate demand or incremental markdown activity to clear activity.

As we set our Investor day, our goal continues to be to hold and protect our retail gross margin rates over the longer term.

Striking the right balance between demand creation and being price competitive as needed.

Now I will move on to Opex.

Normalized consolidated Opex ratio as a percentage of revenue was 25, 9% on a year to date basis or around 63 basis points higher than 2021.

Normalized retail opex growth continue to run above retail revenue growth at the end of Q3 with retail normalized opex, excluding depreciation and amortization expenses up 11% on a year to date basis as we continue to invest in the business.

In the quarter higher supply and higher supply chain and marketing costs were partially offset by operational efficiency savings.

In terms of what drove drove the elevated opex first as was the case in Q2 marketing and store operating expenses were elevated compared to last year higher supply chain costs were due to the inbound volumes that Greg mentioned as well as inventory volumes, which were running above 2021 levels.

Second our it spend increased as we rolled out our strategic and sustaining investments in our digital platform.

Including our transition to a cloud based infrastructure.

A major milestone was the implementation of Workday, which went live in Q3.

The Workday implementation is an example of a significant OE initiative that contributes to the full run rate of $300 million plus by year end.

Workday connects more than 32000, and CTC employees across our retail banners distribution centers contact centers and corporate functions and.

In addition to the cost savings achieved by replacing eight individual platforms workday fundamentally helps us run a better company by enabling a single source for employee data and analytics, better and more streamlined processes as well as more functionality for our employees.

I will now provide an update on the financial services business, which had a good quarter.

Pretax income was $140 million on the back of solid operational metrics and increased customer activity.

Credit card sales and average receivables remained healthy compared to last year, both up 14%, although the rate of growth in car sales has slowed.

Ending receivable also continues to grow but at a lower rate than the average receivable growth as we slowed new acquisition account.

Compared to the first half of the year.

We also experienced slower car sales and elevated payment rates.

Employment, a key indicator remains robust and the portfolio continues to perform well overall, despite ongoing economic uncertainty.

Given the higher inflation and interest rate environment, we continue to monitor our key indicators very closely.

The PDQ plus rate and write off rate ended the quarter up over last year at two 8% and four 5% respectively.

We expect write off rates will start returning to more historical levels as the increased investments in new accounts, a key strategic initiative that we outlined at our Investor Day works its way through the portfolio.

There was no change in the ECL allowance this quarter given the modest growth in receivables over the quarter the existing balance adequately covered the risk in the portfolio.

The allowance rate was 12, 6% in Q3 and continued to be within our target range of 11, and a half to 13, 5%.

Operating capital expenditures were just over $200 million this quarter and 500 million 514 million on a year to date basis, we continue to invest in our store network, our supply chain and the capital element of the transformation that I mentioned earlier.

We did see the timing of a few projects shift into 2023 and as such we now expect full year capex spend to be a little lighter than we had previously guided to around $750 million and we expect next year's operating capital expenditures to be in the range of $850 million to $900 million.

Now moving on to inventory our inquiry levels were up compared to last year, mainly as a result of higher prices consistent with last quarter early receipt of fall and winter products and for Ctr. Some carryover in spring summer inventory drove some volume increase.

And as it happens from time to time in the Ctr model, we and the dealers and it's somewhat heavier spring summer inventory concentrated in a few categories, where we had good sales once summer arrived.

However, we did not sell through as much due to the late arrival of summer in many parts of the country.

We expect to manage through that inventory and we anticipate this to result in lower spring summer sell through to dealers next season.

Before ending I, just wanted to touch base on capital allocation.

As Greg said earlier, we are pleased to be announcing our 13th consecutive year of dividend increases with the annual dividend to increased to $6 90 per share from March which represents a cumulative increase of 33% this year.

We also renewed our share repurchase program and are targeting to buy back between 500 and $700 million in shares by the end of 2023 under our existing and CIB.

The share buyback program, we announced today is based on our belief in the long term prospects for this business.

In addition to the plans laid out as part of our battered connected strategy. You may have seen our recent application by CTC overseen on our behalf by C. T read for the redevelopment of our flagship the entire store are young in Davenport.

He intersection Midtown Toronto.

As most of you know this is only an initial step in a multiyear process and at this stage. There is no guarantee that the project will be approved.

That being said we are really excited about the plan. We've put forward for an innovative mixed use development, including residential towers and a new Canadian tire store on the ground and second levels. We expect this plan will be undertaken in conjunction with partners.

As we move forward with our better connected strategy, we expect that there'll be more opportunities to work with Cte REIT and other partners to unlock value through selling obtaining entitlements or redevelop existing properties across Toronto, Ottawa, Montreal, and the Calgary markets.

We looked at sports sharing these with you in due course.

I want to close with something you've heard me say before.

We are a more resilient company now more than ever.

Evidenced by the growth that our triangle program enhancements to our assortment architecture, our supply chain capabilities, how we operated with agility during the pandemic and our stronger balance sheet.

Whatever the economy brings and we continue to watch all of our data carefully Canadian tire is a well prepared resilient company.

We will balance controlling what we can in the short term with investing in our long term initiatives, which we believe are important in building even stronger company.

With that I'll hand over to Greg for his closing remarks.

Thanks, Gregory before I close let me touch on what we're seeing so far in Q4, which as a reminder is our biggest quarter.

Overall, I'd say that the new insights I mentioned are continuing early here in Q4.

As you all know seasonality plays a critical role in Q4, and we're seeing declines in our fall winter businesses, given the unseasonable weather where.

Winter weather has shown up as it did at West last week, we have been very pleased with the bounce back.

Finally, I want to provide a quick update on the community pillar of our better connected strategy as I mentioned last quarter Canadian tire Jumpstart cherries charities as one of the first two national recipients of the federal government's community sport for all initiative, a $6 8 million dollar grant that enables jumpstart to help an additional 50% more grassroot sport.

Short organizations then in September the Ontario Ministry of Tourism culture, and sport committed $1 million per year over the next two years to jumpstart further evidence of the public sectors Trust and the charities work.

This funding combined with jumpstarts healthy reserves will enable the charity to continue making life in Canada, better for kids and families across the country.

And as families find themselves increasingly stretched by the impacts of inflation. They should know the jumpstart can and will be there to help kids overcome the financial barriers to sport and play.

Just as they have since 2005.

I'll end my prepared remarks, this morning by saying, although we continue to manage and dynamic times, we have the capabilities to weather any storm in the near term, we will face into changing consumer behaviors and a dynamic economic environment with confidence.

We know that the market sentiment is that we're going to get back what we gained since 2019.

We don't look at our business compared to 2019 beyond trying to challenge that sentiment, we have grown market share and we'll continue to focus on running the business well.

We are resilient have plenty of operating levers at our disposal and harder and insight and perspective from which we can successfully operate our business in difficult times.

We will always plan adopt and manage for different consumer demand environments, we will not take our foot off the gas with respect to our better connected strategy.

We will continue to invest our capital in the priority areas identified at our Investor day to create a more modernized and seamless omni channel experience, we remain confident that by continuing to effectively invest the cash we generate into our long term better connected strategy, we are well positioned to serve our customers and create value for shareholders.

And with that I'll pass it over to the operator to open it up 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.

Withdraw your question by pressing Star then the number two we ask that you limit yourself to one question plus one follow up question before cycling back into the queue, we'll pause for just a moment to compile the Q&A roster.

The first question is from Irene <unk> with RBC capital markets. Please go ahead.

Thanks, and good morning, everyone really helpful discussion around the consumer insights and some of the shifts you're seeing in consumer spending behavior.

How would you describe the current behavior relative to let's say what you've seen what you saw in prior downturns 2008 to 10 for example.

And what are you thinking and how should we be thinking about how demand develops in Q4 and next year.

A higher end, maybe I'll take that.

And what we tried to do is provide.

Emerging insights I think as I as I tried to suggest in my prepared remarks, its too easy too early we believe to extrapolate these to trends.

Although as you did hear me say it we do believe that we need to contemplate and take action with operational tactics that that react to the insights that we're seeing.

You know I think I'll, just reinforce what I said in my prepared.

Remarks, I mean household spend is still robust.

Which I think his net different than 2008, you know.

Grocery gas dining travel every things services related I mean, everything from hair, and nail salons to fitness and wellness services, all showing real strength.

What we do see as I said, our spend shifts from industries with more durable goods and.

And so for us.

We have the most amount of data with our triangle membership credit card and base and.

And as you can appreciate we're trying to really get a handle.

Looking back to 2008 and nine if there's any bifurcation in spend.

Antibody for a bifurcation in spend.

From an income level standpoint, and what you what we know to be extremely different between where we are now in 2008 is as employment.

And and how employment hits different income levels and so.

We've looked everywhere, we can with respect to teasing out any any differences in spend.

From a from an income standpoint and you.

You know it all income brackets within our known customers both credit card and base continue to grow their spend with us in the quarter. So it's it's tougher to tease that out with our nonmember sales as we don't have much data on them and are nonmembers.

You know the index on being being you know much younger so.

As we've talked about before a very different picture.

Our spend in C T R to think about.

You know it from an internal perspective, it does really rely on unemployment and.

And the employment picture is completely different.

Then what it was in 2008, so hopefully that gives you a little bit more color probably not everything you were looking for but but that's what we're seeing in the business right now.

Yeah. That's helpful. And then I guess the related question is if we think about the increase in the inventory level.

And again the impact next year. So you said I guess that Greg Gregory said some of it is carry over what percentage of the increases carryover should we be thinking about that as sort of an offset to whatever we might have expected and the sell through to them.

The shipments to dealers could be and how comfortable are you that the inventory that you do have on hand, right now is appropriate given some of the shifts in behavior.

Well, so what why don't I started that T. J can give a little color because it's it's really related to ctr why don't I contextualize inventory first in three buckets for you.

First is Gregory said is the inflation impact and the inflation impact represents 50% of the increased inventory levels on the balance sheet.

Second our lead times are as we've discussed we continue to manage with significantly increased lead times are in.

In the height of this last quarter Q3, our lead times from F O B Asia through the Port of Vancouver, We're three times longer than pre pandemic lead times every purchase order. We cut we continue to add the required safety stock to account for this and third again as indicated in our prepared remarks, we have as you.

Suggests more carryover in spring summer inventory and C. T R than we would like in a few few categories. So the dealers are overstocked in these categories as well T. J can talk to the categories and the impacts with the dealers.

But but in aggregate, it's not them at an amount of inventory we're overly concerned about there's there's very small if any obsolescence issues for us to be concerned with.

But why don't you know T. J why don't you just give a little bit more color. Yeah, I think hiring it's T. J I think just add a couple of things I think Greg kind of nailed. It if you look at dealer inventories they're up <unk>.

As last year, but slightly less than we are.

And that inflation is obviously, playing a big role there and when you look at where Theyre heavy it is in some of these spring summer categories.

Yes.

I ask and barbecues and outdoor furniture, so that's kind of where we are today and I think what's important is looking ahead. There's a couple of things that I think are important to point out in the first is.

Given how the dealers did end the season.

We do expect this to affect revenue in the first half of the year on on these spring summer categories. So and as you know a lot of these shipments are in those types of categories, whether its bikes are kayaks or barbecues or outdoor furniture. They happened in Q1, So we are expecting.

Some revenue impact for us in Q1, and the second thing that I think is important.

Find out is that we are starting to see some signs of the congestion at the Vancouver report easing.

And I think that's important to note because that will hopefully allow us to reduce our lead times, and which will allow us to bring down our overall inventory levels and Greg said it well in his upfront. There is things that are organically happening to us like that and things that we're doing ourselves to invest in infrastructure in the supply chain.

To manage our costs as we go forward. So despite all of this dynamic kind of backdrop, we're managing inventory very tightly and this is what our teams are really adept at doing so that's how we're going to manage it as we go forward here.

That's really helpful. Thank you.

Thank you. The next question is from Vishal Schrader with National Bank. Please go ahead.

Hi, Thanks for taking my questions I just wanted to follow up on this inventory.

Our issue in and thanks for your explanation so some impact in each one relates to sales, but how about margins as you try to move through inventory and your dealers already higher heightened on inventory in those categories and you are as well.

Yeah, Vishal, it's T J, maybe maybe I'll take that one as Gregory pointed out it's very important to recognize that some of the margin impacts we had in Q2 Q3, we're not related to markdowns.

We operate with and the inventory profile, that's much different than some of our peers in the industry.

We don't we're not food that goes bad and we don't have fast fashion and most of our categories. So our response to inventory as to generally carry it through so we're not expecting any impact on the margin line, where it does where it does affect US is as I described earlier is on the revenue line forward looking so when were higher in that in the spring.

Summer in dealer land in particular.

You can expect to see some shipments.

Kind of.

Impact as we look into Q1 and Q2 of next year.

Okay. Thank you for that how do we think about the impact of FX I know in the past tire has managed it well, but now there's so many challenges hitting from every angle. It's just another thing to contemplate.

So.

What is management's perspective on the impact of FX.

<unk> zone still the change.

Hey, Charles It's Gregory here, Yeah, I think let me separate that in a few different components. I think you know we have a very well established hedging program kind of on the in the existing kind of domestic retail businesses.

And I feel very comfortable with what that what that is and you know what as healthy a glide path with the right kind of ends up being so I think we're very comfortable with with kind of what our hedge position is in and the practices that we've followed for frankly, a number of years in that regard I will say theres been more noise as we've kind of brought into the fold and we've started.

Hedge accounting with with with with Halle more recently, but but it's not every day, we kind of experienced the knock depreciation that's been experienced in the last two quarters. So you know I think.

I'm not going to give you a crystal ball on what's going to happen on the gnocchi versus the U S dollar, but but hopefully that starts to subside as we move forward and then.

We feel we'll be in a good kind of running will be in a good run rate I think was once that once that element does calmed down a little but but again, a very comfortable where we are with their overall hedge program specific on our domestic businesses.

Okay, I appreciate that and you.

You gave us some color on the mismatch between sales and SG&A growth and this is Ben.

It was an issue last quarter as well and just wondering when we should anticipate starting to see some favorable operating leverage at a tire and come through as a result of all these initiatives, culminating in starting to bear fruit.

Yeah, I'll take that <unk> its Gregory here I think what we tried to explain again.

Back to Greg's comments around what we experienced and well frankly as the year as it relates to supply chain, you'll have to run more three pls, we've taken more inventory sooner that the duration of the lead times are getting pillows out. There I think is some of that starts to come back to more normal and it's not going to be tomorrow, let's be clear I think it's not going to be tomorrow, but I think we.

See a path through to kind of seeing supply chain costs kind of fall over time, we're putting on new capacity as well I think that will also help.

I think kind of our marketing costs are kind of at a run rate that we are now kind of comping off of I I would suggest I think the element that as Greg mentioned that certainly for the for the next few quarters until we comp through that we're going to continue to invest to support our strategic initiatives. So I do think you'll see kind of the Itu spend get bid out.

Elevated over the next few quarters again, as we continue to support what we laid out at Investor day, and given some of the as we now invested more cloud based I think you know this by now vishal, but it causes a different recognition. So we basically expense more versus capitalizing putting on our balance sheet. That's also kind of in the mix a little so I would start to.

We're seeing this you know the cloud starting apart, but we still probably have a few quarters is what I would suggest before where we're seeing anything in.

In that regard.

Okay, and I know, it's all systems go on your strategic initiatives, but is there.

Backdrop changes and maybe the demand for for E. Comm isn't as high now as it was at the heightened pandemic is there any way that that management or considerations that management could have pushed back some of the initiatives and bring some relief to the P&L.

Yeah. It's a great question you know I think the short answer is yes, but I think the more important answer is we don't want a blink and react quickly. We've got we think the initiatives. We have are really important to the long term strategy of CTC and we had a great discussion on this with the board kind of yesterday and he even into I'm sure will.

Talk more about it later so.

So I think the reality is we know these are these initiatives are important to ctc's longer term, Greg talk to you about two real estate look you know that just opened in the quarter that you get a chance go to well under go to Ottawa, you can or kilowatts, maybe a little harder but.

Those stores are such.

Representation.

At the end of the brand and I think what we're doing online is just as important. So the short answer is yes. We are we have actions to take if we feel the need to if it's necessary, but we also want to remain pretty committed to these kind of long term strategies is how how I'd answer your question.

Thanks for that color.

Thank you. The next question is from George <unk> with Scotiabank. Please go ahead.

Yeah, Hi, good morning, guys I'm just wondering if the are the higher price point categories driving an equal share.

Of softness when compared to the lower prices categories I guess when it comes to the nonessential categories.

Okay.

Yeah, George it's Greg here in aggregate when we look at what we deem high ticket discretionary across the portfolio, which would be items over $200. We're not seeing any material differences in the performance of the aggregate high ticket discretionary portfolio.

But as T. J has talked about there's there's lots of categories that we can.

Dive into we alluded to a couple of them.

In the prepared remarks in those specific categories, certainly are seeing softness and they are more non essential.

Non essential variety.

Okay and could you please talk a little bit about the promotional environment, a sport chek in marks and maybe how you see that evolving over the next 12 months.

Yeah, I think it's Greg again.

The I think the promotional environment across all of our retail businesses domestic retail businesses is starting to get back into more nor.

Normal course, Gregory talked about the fact that coming out of Lockdowns in Q3 last year I think in aggregate was less promotional intense because scarcity was driving demand, especially in Ontario people were coming back into the stores and and nobody really felt the need to sharpen their pencils.

So there was more of a margin delivery strategy.

It was that was apparent in the industry Q3. This year felt more a more normal and I think going forward. Let me do each banner really quickly Ctr you heard us talk about the fact, where we're seeing the most promotional intensity.

It's kind of the win.

When people come in through the front door is.

As in non essential categories.

I think market share in those categories is going to travel through more promotional intensity.

And then you know from a mark Mark's and sport Chek standpoint, let me start with sport Chek.

National brand inventory availability has been a challenge since the start of the pandemic and so that has led in aggregate to less promotional intensity.

And we have been.

With a concerted and conscious strategy to try and sell more inventory at regular price.

And by and allocate differently with new systems that we've put into place and and that banner. So you're seeing more inventory become available from national brands. The service levels are going in the right direction. There is still quite a bit of room.

For improvement there.

So until we get to steady state service levels I think.

We'll be playing catch up a little bit in <unk>.

The real promotional intensity, so all that to say getting closer to normal it'll it'll get back to normal on the backs of on the backs of national branded inventory supply.

<unk> marks now has that dynamic which is relatively new for them over the last few years in that 35% of their business now is national brand.

Same dynamic with respect to service levels, maybe a little bit better than what we're seeing in sport Chek and overall, though we're not seeing a requirement for being more intense in that business, where I think we talked at length.

The last call about our happiness with what we're seeing with respect to consumer demand in that business.

Real consumer a real a younger demographic emerging.

And they don't seem to be anywhere near as promotional intense as a as an older demographic. So we like the dynamics there from a promotional intensity standpoint marks.

Great. Thanks, a lot appreciate it.

Yeah.

Thank you.

As a reminder, we ask that you limit yourself to one question plus one follow up question before cycling back into the queue. The next question is from Peter Sklar with BMO capital markets. Please go ahead.

Alright, good morning, Emily for Peter.

Thanks for giving us the.

Two how that shift to non essential category and that you've got a higher promo mix.

And that's where the previous question that the $200. This question the items there is no discernible difference.

Are there any more I think about the average basket ctr horizontal maybe your average per item price.

Item number of items in particular has any of those.

Noticed any noticeable change.

Yes.

Hey, Emily it's it's T J, maybe I'll take that one yeah, we as we've seen in in Q1 Q2, and Q3 of this year AUR has definitely.

Definitely risen.

And on price specifically, if you look at Q3.

There was inflationary impact, but there is also upward drivers as well different from last quarter, the migration into our better best price range of the architecture has slowed it's still up but it has slowed so that has put some some upward.

<unk> influence on our AUR, we did as Greg pointed out we did see some declines in some of the higher priced tiers, but that was more category specific because we also saw increases in others. So that one's a little bit more of a mixed bag and for US It's C. T R.

Despite some of the promotional intensity that that Greg described and folks who are our non members, we actually were pretty flat on promo mix and our depth of discount wasn't as pronounced as it was last year. So the only other insight I might be able to provide as we gave a lot of.

Kind of data for you guys over the last couple of years on what we were describing is boredom busters. So within that kind of non essential category you look at categories like bikes and backyard amusement exercise waterfront in home entertainment.

Those are the types of categories that we are that we have been experiencing some some declines theyre down about 30%, but still up 16% relative to 2019, but what I think is most important to point out in that in that respect is the resilience and the power of the breadth of our assortment because.

Although those categories were down 30% year to date.

Automotive alone has more than offset with its growth, it's more than offset all of those declines in those boredom Boston Buster categories. So we are definitely seeing a migration from a consumer standpoint, but we're also seeing our assortment stand up really well in the face of that.

And we think that bodes well for us as as we head into any economic environment.

Thanks, Larry.

Very helpful.

Just going back to the room.

Retail gross profit percentage being down.

Considerably year over year, due to higher freight and higher product costs, but what is most of these costs.

And as a man and why weren't you able unable to build these costs until the pricing structure.

Like what happened since Q2 that Nate.

Yes.

What kind of more pronounced in Q3.

Yes, maybe I'll take that one it's Greg.

Thank you know in aggregate, there's only so much price we can move to the customer so we feel like.

We feel like we if you look specifically at that lever, we've got five or six margin levers at our disposal you look at that lever.

And I think the teams the merchants feel like they've pushed as much as they can.

You know to the customer so that's number one and then number two we just keep coming back to the supply chain. You know the reality is we're having to bring in significantly more inventory so our inbound aggregate.

Inbound freight is much higher on a dollar basis and that dollar basis is flowing through.

Into rate from a gross margin standpoint so.

You know I I.

I applaud the teams in terms of everything they've been able to do to mitigate when you look at gross margin on a year to date basis, but given the fact that we had to bring in so much inventory you heard us talk about the amount of in transit inventory, we had for our fall winter businesses on the balance sheet coming out of Q2.

That that flow through in Q3, and we don't sell that merchandise until Q4 so.

I think that's the way I'd think about it that way.

Okay. Thank you very much.

Thank you. The next question is from Luke Hannan with Canaccord Genuity. Please go ahead.

Thanks, Good morning, I just wanted to ask about the owned brand development pipeline that you guys have you touched on the success of <unk> with design I'm curious as we think moving forward into 2023.

Could we see the the development of the brands that you have in the pipeline being accelerated.

Accelerated and then how should we think about those introductions.

Either on the spectrum of good better best in terms of price or focusing on that essential versus nonessential kind of split working capital.

Yeah look it's Greg again.

We have such a robust pipeline.

In terms and it's a multiyear pipeline. So the teams I kind of outlined a few.

That are that are launching here now or with us we're launching a new special.

Special collection with Jillian Harry Harrison, our collaboration with canvas. That's launching this weekend that I know the teams are incredibly excited about we could probably spend the entire call on the innovation, that's rolling out either this quarter or as we head to 2023, it's tougher the product development teams to pivot net new <unk>.

Innovation to a central from non essential in a kind of a 12 month period.

It's more more our resource allocation, specifically inventory and marketing.

You could see more focus on own brand a central.

And we've got big swaths of own band print owned brand penetration with strong margins, So think essentially the entire automotive business.

Masters are multi hundred million dollar brand are fixing business with master craft and and maximum so we think we're well penetrated in our central it with our own brand.

Portfolio.

Our net new innovation for 2023, we'll follow the same path as this year than previous years, which is more oriented towards better and best and like I say, we just feel we just came through our big annual convention with our dealers Big trade show.

And our own brands were on on display. It's it literally is just unbelievable to see the innovation that's hitting the streets.

Understood.

And then for my for my follow up here.

<unk> talked about what the promotional environment looks like across your retail banners. So I guess sort of partially answered the question, but I'm more curious on your your ability to preserve the project margin internally, how how does that look across each of the different banners.

CPR Howie sport Chek.

Mark is there any discernible differences between the banners that we should be thinking about heading into 2023, where you might be able to better preserve margin or or not.

You know, it's it's more of the same I would say look because we're starting from a different starting place from an owned brand penetration standpoint in sport Chek.

There's potentially more of an opportunity do appreciate margin rates in that banner.

You've heard US talk you know at Investor Day, we appreciated our margin rate by 140 bps.

You know 19 to 21 Big building block of the Investor strategy is to hold that margin rate. So that will most likely travel equally through our plans are for that to travel equally through.

Through each banner, but I would say sport Chek, maybe has a little bit more opportunity in and.

And we think we can balance the teeter totter, a little bit more on margin rate in revenue and Helly Hansen with with some investment and capability and so that may see a little bit more of a of an appreciation to.

Gregory Splint, there's lots of noise going on there with knowing knocked depreciation, but no no I wouldn't I wouldn't say any banner.

We're not forecasting kind of a lot of variability in either denigration or appreciation in margin rate by banner.

Got it thank you.

Yes.

Thank you.

Your last question will be from Mark Petrie with CIBC. Please go ahead.

Yeah. Thanks, just quick with regards to the retail gross margin can you talk more about the materiality of the other variables alongside the impact of freight which I think you said it was 200 basis points and then it would also be helpful. If you put that 200 basis points in context of what you saw in the first half of the year and maybe even in broad strokes your expectations for what that would be in Q4.

Sure.

Yeah, Mark it's it's it's Gregory I can start I would say you know if I look at the your second half of the question first it was a growing impact. So we saw there was certainly an impact in Q1.

You know I think we talked a little bit about this in Q2 as well thinking back around we mentioned that ctr and kind of the highest hill to climb in terms of margin recovery in Q2, and almost got there but not quite.

And then Q3.

Clearly the highest the highest increase in the highest absolute percentage as a as a as a total that we've seen.

Now going to go a long ways back in terms of all the other elements I mean, I don't think there's been much change in those.

From a growth perspective, I would say they've been fairly static kind of Q1 Q2 Q3.

But as we've tried to say on the call a little bit I think we see kind of those starting to turn the other way and I use kind of you know.

Oh containers excuse me as as the Best example of that right. So we are negotiating and seeing kind of better prices right now in Q4, but we would have locked in our rates and in Q4, a year ago. So that that that would have been a pretty consistent increase.

No contingent on the amount of volume that you are moving on a quarter by quarter basis.

The only thing I would add mark is.

Think about.

Well I guess essentially all of our retail business, both businesses, but certainly C. T R.

I mean, your you know the teams are the the whole the whole business kind of flips over for fall winter rightly, they're entirely different retail strategies that stand up in front of the customer when we moved to outerwear and our clothing businesses.

And it's Christmas and toys and snow blowers in Salt and you know it's a it's a different it's a it's a real changeover and so.

The teams would've been negotiating on a Cogs space late last year early last early this year before.

The war in Ukraine, and so.

We certainly saw more Cogs impact.

In terms of negotiating through line reviews, and schedules et cetera with factories, but now as we look to commodities you know you're starting to see.

You're starting to see the commodity charts are kind of turned green, which is a green means is good.

Turning to go down on a year over basis year over year basis in most categories, you know think textiles plastics metals all trending lower.

Keep in mind, the commodity changes again have to work through or a negotiation cycle, but I think there's relief in sight.

We have headwinds for sure relative to the U S dollar, but theres tailwind relative to the RMB depreciated. So you put this all together.

Between freight and Cogs inflation.

We feel more opportunistic going forward and hopefully gets us back to more of a normal course operating environment in terms of how the merchants deal with all the.

Leavers at their disposal for margin management.

Okay. Thanks, and I also wanted to ask about financial services I'm somewhat surprised not to see the provisions up on a dollar basis, just given the growth in the portfolio and the increased loss rates and aging I know the macro is a big factor of the job market is strong but it would be helpful to hear about what your view is in terms of the factors that could push that ECL higher.

Yeah I think.

Market's Gregory I think he hit so when we look at every quarter. There's as you know a number of variables one would be probability of recession. As an example, which I don't think that's changed kind of our view from from a from a from a financial services perspective quarter over quarter.

Yes, there was some nominal growth in receivables between beginning and ending in the quarter, but it was I think maybe $100 million.

So you look at that you'll get changes in the risk profile and end customers as they move between buckets and I will say this because I think it's important we continue to see an elevated payment rate right. So.

When you look at all those factors, we were really comfortable where we were in the third quarter, but as you know we've we have to do this again in the fourth quarter. So it is it is it can be it is dynamic depending on what what what changes, but it's it's risk factors, it's volume of receivables its its payment behavior.

And then kind of some assumptions more on the macroeconomic side of things employment and probability of recession et cetera, So those would be.

Kind of a number of the variables that we look at in determining what the right E. C. L was for the quarter.

Okay. Thanks, all the best for Q4.

Thank you. This concludes the question and answer session I will now turn the meeting back over to Mr. Hecht.

Thank you for your questions and for joining US today, we look forward to speaking with you when we announce our Q4 and full year results on February 16th in the meantime, stay well and enjoy the upcoming holiday season Bye for now.

Thank you.

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