Q2 2023 Canadian Tire Corporation Limited Earnings Call

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[music].

Please standby your meeting is about to begin.

My name is dawn 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 then the number one on your telephone keypad to withdraw your question Press Star then the number two now I will.

So long as you Karen Keith head of Investor Relations for Canadian Tire Corporation Karen.

Thank you Donna and good morning, everyone welcome to Canadian Tire Corporation second quarter 2023 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, which is available on the website. It includes cautionary language about forward looking statements risks and uncertainties, which also apply to the additional material.

To help you better understand the results discussions 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 ask that you limit your time to one question plus a follow up question before a cycle back into the queue.

Let me welcome you to contact Investor Relations, if you 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.

Sure you gleaned from our disclosures this morning, our second quarter results Mark a turning point in the Canadian economy.

When we announced our Q4 and 2022 results in February .

I advised we expected a more constrained demand environment, specifically in the first six months of 2023.

As inflation continues to persist along with rate hikes consumers are feeling the squeeze and finding themselves in a precarious financial position.

Which has driven a change in household spent.

Reiterated by the Canadian Chamber of Commerce, and Angus Reid data several weeks ago.

Despite these difficulties our teams have done a commendable job navigating through the dynamic economic conditions managing the remediation efforts at our age a bill its distribution center and supporting Canadians impacted by the devastating wildfires.

Grateful for our team members' dedication to making life in Canada, better for our customers communities and each other while remaining focused on driving our long term success and growth.

Our management team remains disciplined in dedicated there's no question that everyone is clear eyed about the challenges Canadians are currently facing.

I'll spend some time this morning discussing in more detail, what we're seeing in terms of consumer demand, but before I do I'll provide some color on our Q2 results.

Overall, our Q2 results were in line with last year's figures, but arrived in a slightly different manner than expected.

Consolidated comparable sales were up <unk>, 1% following strong growth of 5% in Q2 of 2022.

Despite softening demand for discretionary goods, we continue to drive customer engagement by executing the initiatives within our better connected strategy.

And our strong gross margin aided by the MSA impact helped to offset increased expenses driven by our continued investments and higher supply chain costs, which were in part due to the D C fire.

This enabled us to deliver a normalized EPS of $3.08 slightly below what we achieved in Q2 of last year.

Hello, Gregory will address this in his prepared remarks, I think it's important to say upfront that given the macro environment. We are managing operating expenses carefully while continuing to invest in the building blocks for our future.

Now, let's address the challenging macro environment, we face.

With 10 interest rate hikes in less than 18 months and persistent inflation impacting the cost of living and leading to reduced savings cushions.

Canadian consumers are experiencing increased financial strain and facing tougher spending decisions.

Our triangle rewards and credit card data provide us with a privileged perspective on the economic landscape.

These macro pressures are affecting spend across many external categories.

This trend, which we'd been observing over the last few quarters accelerated in the latter half of Q2, especially the last few weeks of June .

The spend per card holder in Q1 was flat relative to last year, but Q2 marked the first quarter since 'twenty 'twenty that saw a decline in spend.

Spend categories, including home gas electronics and clothing.

Now declining.

Stalwarts like travel dining and grocery experienced significantly lower growth rates as the quarter progressed.

When you move from external credit card spend so what is happening within our businesses and triangle rewards membership specifically, we are seeing more pressure on consumers, particularly following the ninth interest rate increase in June .

At the macro level, but we are seeing is real performance bifurcation between essential and discretionary categories.

That's C T. R. R essentials portfolio was up more than 6% in the quarter.

And our discretionary portfolio was down more than 3%.

This performance Delta was evident for much of the quarter and accelerated in June .

When combining our triangle membership data with external household data we use in our real estate modeling, we see that the discretionary softness is coming from more indebted households, most notably in Ontario, and B C.

Spending on higher ticket items, starting to get squeezed and customers prioritized essential products over discretionary ones.

As you would expect this has had a bigger impact on sales at ctr compared to our other banners.

Changes in monetary policy are softening consumer spend across the country with.

With the last two interest rate moves specifically, creating a more pronounced demand impact and discretionary categories.

Overall, the macro economic environment and consumer demand.

Differ significantly from our expectations when we set out our strategy in early 2022.

Given this and further to the noticeable slowdown in sales in the second quarter, we have decided to withdraw our previously disclosed financial aspirations at this time.

It is unclear whether the monetary policy tightening has ended.

By the end of Q4, we hope to have a better view of the long term macro environment and interest rate impacts and expect at that time to be in a better position to provide an update on our long term aspirations.

To be clear our decision to withdraw our financial aspirations at this time does not shake our commitment nor our conviction.

The building blocks of our better connected strategy.

Our ongoing commitment to a better connected strategy further positions us to deliver value over the long term.

As the investments, we are making in our stores and digital capabilities continue to outpace expectations.

Although spending maybe down store traffic at C. T. R remains flat, indicating that customers, even with less to spend continue to choose us for their purchases, reflecting our sustained relevance and their trust in us.

We are continuously adjusting our tactics, while staying true to our better connected strategy.

Our triangle rewards loyalty program is a crucial avenue for delivering value to our customers.

Investments in our triangle loyalty program have provided members with more opportunities to earn Canadian tire money.

In the last 12 months, we've seen our highest spending members earn an average of 8% back on their annual spend which helps their dollars go further at our stores.

Canadian tire money redemption continues to deepen engagement and drive spend.

In Q2 customers were redeemed $100 million and Canadian tire money across our banners and the associated spend totaled $220 million, a 3% increase over last year.

And although in Q2, we saw a decline in spend per member total transactions remained flat another indication of our sustained relevance.

Overall in Q2 loyalty member spend continue to outpace that of nonmembers and member registration rate also increased.

Ultimately our ongoing investments in growing our registered promoter Bull and triangle select members is paying off and creating a pipeline of opportunity for when the market normalizes.

In addition to triangle, our high low retail approach and broad multi category assortment allows us to offer value to customers through pricing and promotional strategies across our banners.

Our own brands portfolio gives us the flexibility to provide customers with what they need at budget friendly prices and our recent promo value message campaign emphasizes our commitment to helping customers stretch their dollars further.

Finally, before I turn it over to Gregory.

I want to emphasize our sustained commitment to investments that will enhance our competitive position and create shareholder value in the long term.

As I said off the top we do expect these macro challenges to continue for some time, but the market will inevitably stabilize.

These investments will ensure we stay ahead and build our relevance to consumers and they are delivering great results even today.

Our strategic investments are working as we expected them to notwithstanding the challenges we face.

The recent addition of marks in sport Chek to our one digital platform streamline the customer shopping experience further enhancing customers online experience and supporting sales through our websites.

And our new partnership with Microsoft will accelerate our modernization efforts enhancing flexibility stability scalability and innovation.

Through our co innovation with Microsoft and the generative AI space, We will pilot our first customer use case and a key essential category. This fall.

Additionally, we are already reaping the rewards of our Ctr store investments.

57, new or refreshed store projects completed to date continue to outperform both our financial and customer experience score expectations.

We believe our concept connect format as a strong representation of the future of retail.

Overall, while we faced challenges today, we are not losing sight of the bigger picture.

Our focus on customer value through triangle awards own brands strategic investments in our high low value driving retail model position us well for long term success.

With that I'll pass it over to Gregory.

Thanks, Greg and good morning, everyone I'll spend most of my prepared remarks. This morning on what drove our Q2 results followed by our views on the balance of the year and finish with some commentary on our continued focus on the long term.

Starting with our Q2 results overall, although we were pleased with how we performed in the quarter. Our results demonstrate that we are not immune to macroeconomic pressures, which are most impactful in quarters like Q2, where discretionary mixes out of time.

As Greg mentioned inflation remains stubbornly persistent and interest rates have risen at an unprecedented rate I know, we're all looking forward to one day when the economic conditions stabilize.

That said, we are happy with our solid sales performance in the quarter up a 0.1% against a 5% comp a year ago with good margin management, we delivered consolidated normalized earnings only slightly below last year.

Retail earnings benefited from the M S a change which flowed through the retail segment numbers.

Excluding that revenue and gross margin dollars were lower than last year, despite faster than expected remediation at the D C and with an 80 basis point increase in the gross margin rate driven by Ctr.

Financial services delivered solid normalized earnings revenue gains were offset by the expected decline in gross margin is not write offs continue to return to more historic levels.

We also had higher net finance costs and as a result normalized diluted EPS was essentially flat compared to last year at $3.08.

Now as reported income was $1 76 lower than last year by 67 cents, let me unpack the two normalizing items the.

The first was a $33 3 million dollar charge in relation to recently enacted budget legislation, which will require G. S. T. H S T treatment on payment clearing services.

The charge represented an impact of around 35 cents at the EPS level and brings us up to date for this change.

This expense will also be recognized in SG&A going forward.

The second item was our continued costs related to the remediation of the March D. C fire, which we have also normalized for costs.

Cost for building damage asset write downs cleanup and repairs were $74 6 million in the quarter or around 97 cents at the EPS level.

We expect further direct costs related to the fire to ramp down over the next quarter or so and hope to provide an update on insurance recoveries as we progressed the claim with our insurers. Additionally.

Additionally, it's worth adding here that we estimate the indirect impacts for the fire, which we did not normalize for accounted for a further 15 cents of impact on a per share basis.

With that I'll move on to the performance of the retail business starting with sales retail sales were just under 3% were down just under 3% to $5 2 billion driven by a 19% decline in petroleum sales on lower volumes and as we cycled record fuel prices. This time last year.

Excluding petroleum sales were down 0.1% against strong growth in all banners last year.

The quarter was characterized by good growth in April , which we mentioned on our Q1 call, but sales softened as we came through the quarter, particularly in Ontario.

At C. T R comparable sales were up <unk>, 1%.

We continued to see customers shift to essentials, and more value offerings and as Greg mentioned, providing our customers with value is where we remain focused.

For the third quarter in a row automotive and living grew at the entire retail, but these divisions were offset by declines in seasonal plane and to a lesser extent fixing.

Central automotive categories, such as maintenance and auto parts grew across all regions driven by demand for oil tires and battery.

In the living division kitchen, cleaning and pet care categories were also up across the country.

We also saw good demand in other categories like gardening golf hockey and outdoor cooking.

Poor air quality drove higher sales of home air quality appliances and products, but these were offset by lower demand for party supplies patio furniture bikes and camping.

Turning to see chair revenue now stronger than expected outbound volumes from the a J bill its distribution center meant that revenue we expect it to be delayed into Q3 was actually recorded in Q2 as the supply chain supply chain team did a remarkable job completing significant remediation.

The Asian work at the D. C ahead of schedule.

However, ctr revenue was down 4.7% after adjusting for the $87 million of MSA benefit in our reported revenue.

We've discussed before that in any one quarter, we may see a disconnect between sales and revenue growth and that was the case again this quarter as revenue and discretionary categories was down significantly against growth last year.

At sport Chek Q2, comparable sales were up 1% with good with good growth in Quebec and Ontario.

Quebec in Alberta, while Ontario was down.

The tougher consumer demand environment meant promotional intensity remained highest in this business, but we leveraged triangle loyalty effectively to offset some of this acquiring new members re engaging in active members and growing royalty baskets and sales.

Or check has been focused on building out its team sports offering and we were pleased to see the category up 10% this quarter with growth across all regions.

At marks comparable sales ended slightly ahead of last year up 4%, despite cycling a really tough comp.

As a reminder, in the second quarter of last year March was up close to 21% on demand for casual wear and industrial apparel.

In the quarter industrial and casual footwear sales were up offsetting the decline in casual wear compared to last year strategically our path to long term and incremental sales growth continues to be finding the right balance to attract a broader customer set at marks by having an ideal mix of industrial and casual wear.

Cross owned and National brands.

We are well on track with a conversion of a handful of bed Bath and beyond stores that will become part of the marks banner and contribute to <unk> growth going forward.

We expect to open these in the coming quarters, starting in rate Red Deer later this year.

We're also trialing, a new format store dedicated to workwear and a few key markets with our first scheduled to open in Edmonton in August .

Turning now to Helly Hansen at the end of Q2 <unk>.

Sally Hansen revenue was up 11, 3% on a on a year to date basis with a 2.2, 0.9% declined this quarter, mainly reflecting the timing of sports wholesale shipments.

Consumer demand, especially in the U S drove strong sales growth through our retail and e-commerce channels in the quarter.

And the business is gearing up for the opening of new outlet stores in Canada and U S. Over the next year, which is expected to contribute to growth and margin expansion at healthy.

Before I move on to financial services I will briefly comment on our retail gross margin as well as opex and inventory levels.

In the current environment. It is critical that we strike the right balance between demand creation and being price competitive to drive value for our customers and we were pleased with the balance we struck this quarter.

Our Q2 reported gross margin rate, excluding petroleum was 35, 7% up 251 basis points.

Even after excluding the favorable MSA change retail gross margin rate, excluding petroleum was up 80 basis points.

You will remember that freight costs were especially high in Q2 and Q3 last year.

Lower freight costs. This year helped across our banners. This along with stronger product margin, it's ctr more than offset higher promotional intensity at sport Chek and marks.

As you know margin always vary somewhat quarter to quarter and this year, we have a more marked year on year movement due to the MSA impact with a favorable benefit in the first three quarters reversing in Q4.

And the current economic context operational discipline remains a key focus and we are intent on finding efficiencies that will help us drive a long term growth of the business.

Normalized consolidated SG&A was up 5% in the quarter, mainly due to strategic investments as we transition to a cloud based infrastructure and invest in our retail store network.

Due to the D. C fire. We also had operating efficiencies that we didnt normalize for.

The rate of SG&A growth did slow this quarter. We expect this trend to continue in the back half of the year as supply chain costs come down and reduce the need for three pls to further reductions in inventory, even as we continue to invest to support our better connected strategy.

Inventory growth also slowed this quarter with inventory up 6% versus up 22% at the end of Q1.

GTR inventory was down reflecting the adjusted buys we spoke to last quarter and spring summer sell through offset by higher inventory at other banners, partially reflecting unit cost inflation.

On the dealer side.

Inventory units are now below last year with improvements in spring summer and non seasonal categories.

I'll now move on to financial services, where portfolio performance metrics continued to trend back towards historic levels and are in line with our expectations.

Active accounts and average account balances grew more slowly this quarter, both were up around 4% as a result of slowing credit card acquisition.

As Greg mentioned card spend declined for the first time since Q4 of 2020 softening through the quarter and ending down by close to 2% driven by declines and lower spending on our card outside of our family of companies.

Like the slowing in key account metrics receivables were up eight 2% and ending receivables finished the quarter at $7.2 billion.

Turning now to the financial performance of the business revenue was up 7% over last year, while gross margin was down reflecting higher write offs and net interest expense.

ECL allowance was at $913 million was up $44 million versus last year and up $16 million compared to Q1, reflecting growth in receivables in the quarter.

The allowance rate finished the quarter at $12, 7% within our target range of 11, five to 13, 5%.

Opex this quarter included a $33 million charge in relation to the recently enacted budget legislation for H S. E. T. S. T on payment clearing services, which we isolate it as a normalized charge.

Normalized IV T ended relatively flat compared to 2022 at $88 7 million.

Risk metrics were broadly in line with the last quarter PD, two plus rates were at 3% and the write off rate was up slightly to five 6%.

The write off rate continues to return to more historic levels as new accounts work their way through the portfolio and mature account performance stabilizes.

Employment key economic indicator for us remains robust and payment rates remained higher than historic levels.

However, we have started to take proactive measures around acquisition strategies and reduce lending for the higher risk segments to manage potential exposure given the economic uncertainty that we're facing.

As we look ahead for the balance of the year, we've already seen meaningful indications that consumers have been cutting back on spend through June as Greg has outlined.

What we've seen in our results through July does not indicate any change in that consumer behavior. Although we will have easier sales comps and fewer freight headwinds as we come through the last few months of the year, particularly in Q3, we were cycling higher freight costs.

In light of softer consumer demand shipments to dealers and revenue growth at ctr will likely be softer in the back half of the year, especially when added to the fact, we have now cleared our backlog caused by the D C fire.

As we discussed in February dealers ended Q4, a little heavy on inventory and certain Christmas categories. We expect them to continue to prioritize non seasonal and essential inventory as they adapt and respond to a softer consumer demand.

This should drive a further inventory reductions ctr, which will help reduce related supply chain and interest costs, notwithstanding higher interest rates than last year.

Before I conclude I want to touch briefly on this management team's strong belief in <unk> long term growth prospects and I want to separate that from the withdrawal of our financial aspirations.

While we suspect softer consumer demand will dampen retail sales over the coming quarters, we expect our better connected strategy in combination with favorable long term trends like Canada's growing population and solid employment trends to favor retailers like Canadian tire, who are prepared to be there for Canadians by investing in the Canadian market.

As such we remain committed to a better connected strategy and want to reiterate our confidence in our longer term prospects for profitable growth.

We're optimistic that the economy and the consumer will stabilize over time he will once again get the benefit of growth from the more discretionary part of our assortment.

In the meantime, we have the capacity to navigate this environment with a strong balance sheet and our resilient business model.

We have the right long term strategy and a management team with the skills and conviction to get it done.

Thank them for their continued commitment to managing today, while remaining focused on driving our long term growth.

We continue to believe we are better positioned than we've ever been to operate with agility and manage our business tightly to allocate cash effectively and manage our offering to deliver value to our customers.

We will continue to prioritize spending that supports our long term strategic initiatives as we plan for 2024 and continue to deliver returns to our shareholders on a year to date basis, we've invested $238 million in the business paid $138 million in dividends to shareholders and returned $421 million to shareholders.

By way of our current buyback program.

We continue to believe that balanced and consistent capital allocation anchored on investing in our business for the longer term is the best approach.

As we normally do we plan to update you on our capital allocation plans for 2024, when we report our Q3 results in November .

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

Thanks Treasury challenging as it may be we continue to balance managing in the short term with bolstering our capabilities for the long term through continued investment in our better connected strategy.

We also continue to live up to our brand purpose of making life in Canada, better not only for our customers, but our communities as well.

Back in June we held our annual jumpstart month, and our employees for Jumpstart campaign achieved record setting fund raising results.

I think our customers team members Canadian tire dealers and our vendors for their incredible generosity, which is further enabling us to ensure that come what may kids can continue to participate in sport and recreation.

And as I alluded to at the start of my prepared remarks. The challenges Canadians are facing are not just economic.

The impact of extreme weather is being felt around the world here in Canada. It has perhaps never felt more real and right now.

For our part we will continue to step up with support for the for those impacted by these ongoing.

Crises.

I'll end my prepared remarks, this morning by reiterating.

My thanks to the team.

Getting through the first half of this year and delivering the results we announced today was no easy feat.

We certainly need to continue proving our mettle, but I have confidence in our collective strength and ambition, which I expect to pay off in the long term.

And 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.

You can withdraw your question by pressing star too.

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.

And the first question is from Irina Count from RBC capital markets. Please go ahead.

Thanks, and good morning, everyone I really appreciate all the color that you provided around the current demand environment.

My question is around discretionary versus essentials can you give us an idea of what proportion of your sales fall into each of those buckets and also a little bit more color around how you're thinking about inventory and price or our offering.

And price points.

And within good better best at this point.

Yeah. Good morning, Irene I think there's probably most applicable to ctr I would imagine so they will have TJ answer that yeah. Good morning, Irene Hope Youre doing well as you know we are we have a robust dataset.

We analyze our business.

Business with and we've been talking a lot over the last couple of quarters about the bifurcation between essential and nonessential I know how consumers are migrating more towards essential if you look at our business in totality we're about.

Two thirds, nonessential, and a third essential or not really changes quarter to quarter to quarter.

Q2 would be the quarter that we have the most pronounced.

Non essential business and you get into Q4, and Q1 and it becomes a little bit more essential while we've been seeing as you've pointed out and as Craig and Gregory both pointed out is that we have seen a migration more towards.

Essential spend it's a it drove the growth that we did have in Q1 or Q2 I should say as we go forward. What we're doing is we're leaning into our inventory buys, particularly as we see consumer trends.

Leaning more towards the the essential businesses. So as we look to the back half of the year for Q3 and Q4, we do start to see a little bit more pronounced a skew in our mix towards essential and we will be driving our inventory buys accordingly, and you see the dealers lining up that way.

As well, our our image our inventory buys and what they're holding in inventory will help drive.

Drive Q3, and Q4 and we do expect some of these trends to continue as we go forward.

I mean, I would just add we feel really good.

About the fact that at C. T. Our when you look at our corporate inventory or just our discretionary inventory is down over double digit year over year.

And our in transit discretionary inventories down even further and when you look at dealer discretionary inventory, it's only marginally up so as we think about you know the the tactics and the planning and the running of the business around what we're seeing you.

You know in the performance Delta inventory is rounding out in shaping the way we would want based on the demand signals we're seeing.

That's really helped us I just want to make sure that I heard correctly, you said two thirds is nonessential and one third is essential.

Correct, yeah over the long term with a little bit different skew quarter to quarter as you get into the back half of the year, we skew a little bit more essential than that than that average.

Okay. So if just thinking how thinking through they're trying to put this all together in terms of sort of the evolution of the shipments to dealers in the back half of the year.

If we're seeing weakness in discretionary but.

But dealers are a little bit Atkins discretionary inventory, we should be thinking that the shipments should be down more than that.

What we might think that the sell through will be down.

Yeah. It's Gregor here, let me, let me take that one I think I think look I think there's as you know any quarter. There's a lot of moving pieces. What you just said.

They can impact as kind of one way or the other I think what I would say because you also again if I if I talk again, what were comparing against last year. That's part of the equation as well right. As you remember Q3, and Q4 from a comp perspective were a little softer from a demand from it from a Pos perspective. So I mean, it's it's a as always it's a bit of puzzle pieces to put together.

But I think what you said is accurate around that one element of it but I would just encourage you to think there's other pieces of it kind of more in totality around around around what the revenue had been sales picture may look like that that's all I want to encourage in my in my in your thinking on this.

Thanks, that's very helpful.

Thank you. The next question is from.

George <unk> from Scotiabank. Please go ahead.

Yeah, Hi, good morning, I, just wanted to get a sense of how the ctr comps performed in the quarter I'm, hoping you can give an April number maybe a June may number I'm, just trying to get a sense of it was more linear stepped down exiting and also just wondering what what drove the weakness in Ontario is that just higher household leverage or anything else you can.

Called out thanks.

Yeah, George It's T J, maybe I'll start with the first part of your question as we are articulated in Gregory mentioned this in his upfront on our Q1 call. We mentioned that we were up 3% in April at C. T. R and we finished the quarter a plus 0.1%. So obviously the.

The sales trajectory.

When when in a downward direction as the quarter went on particularly in June .

So we definitely saw that and we also looked at that from an essential and nonessential perspective, and the non essential categories drove that disproportionate growth in a more pronounced way, particularly into June Greg I think you wanted to comment on yes, So George maybe maybe maybe.

Maybe I'll try and unpack the.

Terrio comment as part of its part of a bigger story.

So bear with me on that you know we tried to do unpack as much as we could in the prepared remarks, but maybe I'll go a little bit deeper I mean generally speaking.

When you when you look across the country. It spend by household income amongst triangle credit customers. What we're seeing is growth in C. T C spend at all income levels.

Customers with lower incomes continue to outpace the average spend growth across all income segments, but again, there's there's growth in all segments I think the bigger new analysis that we've shared this quarter is a level deeper and it's about combining our triangle data.

With external data around debt to income classifications in other words, how indebted is the household and we really start to see performance deltas emerge.

By region as well.

Debt burden households decrease their spend with us significantly in the quarter, especially in June , especially in discretionary categories and the sales performance was a delta was the greatest in Ontario, and B C.

Which happened to have the highest concentration of debt to disposable income in Canada.

So what we're seeing George is very clear to us are.

Essential portfolio remains extremely resilient across all income levels in all regions and inclusive of debt burden households.

Where we're seeing softness is in the discretionary portfolio.

So.

I think the objective of quantitative tightening is being delivered upon I can't speak whether it's too much.

But we can certainly tell you that across our portfolio of discretionary categories, especially in Ontario, and B C that policy is having its intended effect so.

What.

You know what were based on what we're seeing as we tried to talk about we are adjusting our overall resource allocation to lean into value and and central categories with even more conviction in our commentary the last couple of quarters, but as I've said before we're going to do so in the confines of the better connect.

This strategy.

I'm really pleased with what I'm seeing with regards to traffic holding steady steady across our businesses not just C. T R M, which which I think is really positive.

Okay. That's helpful and just for my follow up maybe the Gregory can you maybe break down that retail SG&A inflation number a little bit.

Maybe it's the buckets for us I'm, just trying to get a sense of what <unk> could.

Look like for the year and I'm just wondering generally speaking is there anything we can perhaps due to maybe slow that down.

Chase the macro gets a little bit tougher from here.

Yes, sorry, I think I missed the first few words that was retail SG&A I believe George right Yeah.

Okay. Yeah, I think what we're seeing is consistent with what we talked about last quarter. So I'll just I'll add I think it's actually playing through even in our inventory numbers. So that that if I break it down by category. You know there are three areas that youre seeing kind of increase on the retail side of things from a cost perspective. One of course is as you said, we're spending more in I T to support.

Better connected strategy, and frankly, where we're expensing more because it's it's basically cloud based infrastructure initiatives, which have a different accounting treatment and the issue. We're facing there is I don't think we've reached a new norm yet around mix of spend I think we're still you know a few quarters away from getting to that normalized kind of a new penetration rate of our mix rate of of.

Capital versus expense. So I still think that is going to be kind of a headwind as we roll forward, but I I said this on a few of the calls last quarter and I'll keep saying the cash the same here oldest is as it were accelerating the recognition because essentially you take the expense now instead of recognizing that's depreciation so over time, the depreciation numbers will go down.

To offset this with just in that transition period kind of in these early days as we as we've kind of invoke more on these these cloud based infrastructure initiatives. So that's that's where I would say we are from my T. We're not through the journey, yet, but we've absorbed a lot of that change, but there's still some more to come on the supply chain side, we talked about the number three pls and.

And you know again the merchants the supply chain team have done a great job navigating kind of the inventory remember back to Q at the end of Q4. This year at the corporate level, we were up 30% three zero and it'll move that down to 6% and theyre not done there's more work we need to do to continue to work on that on that corporate inventory.

And what you'll see then is it basically an improvement in and a reduction of three P else our supply chain costs will go down over time, and I think where you started this you're going to start to see that kind of in the latter part of the year. The other one I'd point out around an increase it's really around our retail as we put Greg said, there was 57 stores that in projects with <unk>.

Crashed and implemented.

So those will start to kind of grow our our occupancy costs are our cam related costs et cetera, but you're going to get revenue for those directly so that should be in line from a from a from a from a leverage perspective. It's just you know right now when the revenues down a little bit for the reasons, we've talked about the leverage ratio looks a little bit off more than it then I think it is so long way of.

Saying I think it's playing out the way we expected it to and it is an area we're focused on and as I said in my remarks. We you know we know we have to look more closely at every spend right now so we want to make sure we're investing to support our long term strategy and those things. We can defer I will assure you. All we are deferring and we're going to continue to do that on as we move.

Going forward, so a bit of a long answer, but you gave me a chance to kind of get at this once and for also so hopefully that adds some some more clarity for everybody.

Yeah. Thanks for that I guess, no plans to really slow down at retail bucket. This time right.

No I can't we are committed to kind of grow or our strategy.

I don't think Andy just want to take a short term view on this and say, let's just cut all these.

Projects like you know, we just got one digital platform and play Theres more things. We wanted to do is to leverage that and build off of it and take advantage of it I think that's just the wrong term decision look we're committed to this strategy, but we are going to look around the edges I'll say again, George I mean on a consolidated basis not retail on a consolidated basis, our SG&A was up 5% in the quarter that's.

Down from where it has been trending.

Okay. Appreciate the color. Thank you.

Thank you. The next question is from Mark Petrie from CIBC. Please go ahead.

Hey, Thanks, Good morning, you called it shrink and higher penetration of known brands.

The shift away from discretionary spend so I just wanted to dig into that a bit more maybe first where are you seeing the biggest sort of growth in own brands in too.

How materially our own branch skewed to the discretionary portfolio.

Yeah, maybe I'll I'll take that Mark we.

We obviously continue to be very bullish on.

On the on owned brands in totality in terms of some of its ability to differentiate our business. We've got all sorts of work.

Going on across the across the business to further penetration further penetrate our own brands our business.

When you when you look to the quarter, specifically are about 38% of the business was a was owned brands. We had real strong growth in a couple of key key brands.

Across the business as you know Vita by <unk>, It was really strong powerful power.

Petco to name a few.

And maybe maybe just for illustration purposes, I know I know.

You Love to hear some of these brand stories.

I'm really pleased with the progress we've made with the Sherwood brand over the last few years.

Since the brands launch in 2020, we've been really focused on building the brand's credibility with the next generation of hockey players and this just gives me a nice opportunity for a an announcement plug, which we'll formally announce tomorrow, we just aligned with Connor bedard and his management team on a multi year partnership.

The Sherwood brand will be the exclusive provider of hockey sticks gloves and other equipment to enable conard a b is very best on the ice I don't know that he really needs it but.

And then in this partnership with Connor along with our other partnerships with top athletes like Matthew could Chuck and William knee lender, just I think it just really demonstrates how far our product development and quality has come the progress we've made over the last few years you can definitely expect this brand to show up as a greater <unk>.

Force in the hockey market going forward.

As it relates to discretionary and essential categories are theres, a pretty even distribution of own brands penetration across those two segments of our portfolio to T. J 's point it shows up a little bit differently by quarter. When you think about you know some of the big discretionary categories that drive Q2.

Like barbecues, and bikes and patio furniture, and camping, we saw softness and those discretionary categories and still held our overall penetration rate of 38%. So you know the automotive and repair and maintenance fixing our businesses et cetera are going to show up.

Tal and our central portfolio and there's a whole a whole bunch of brands you know motor Master maximum master craft that start to come to mind Noma, a when you think about that essential portfolio for the back half of the year. So I think we're well positioned with the owned brand portfolio to provide value as the shift moves more to.

Going forward.

Okay. Thanks, and then.

On a related question, obviously the relationship with Big National brands is a key part of the strategy across banners I know there's been lots of success stories, so don't necessarily need a full recap, but I'm, just curious, particularly with ECR and check if there's anything of note.

With regards to how your relationship with with the with the key National brands is evolving.

Mark It's T. J, maybe I can start start with that I think we when we talk of better Assortments, we like to talk about the diversity of our assortment and the breadth of offering and we often talk about kind of a good better best spectrum and how much breadth we have in the price range architecture, but similarly from an owned brand in a Nash.

Brand standpoint, we really believe that we've got a really strong one two punch when it comes to the consumer offering and what we do is we partner up category by category with the national brands that consumers covet and and stay loyal to overtime. So we continue to do that as we go forward here and whether it's sold.

The stream or Dyson or are the likes of those types of brands. It's it's we despite the fact that we have a very very strong owned brands portfolio, we see a ton of value for consumers and our consumers see a ton of value and us having the brands that they want category by category. So we're going to continue to to continue to kind of drive that one two punch.

As a as we go forward here and and and we don't see any change in intact from from that perspective, and I would just add mark and she asked specifically about check a very strong growth with Nike on a year to date basis and sport Chek I think are moving that relationship.

You know closer where we'd like it to be the inventory supply is kind of moving in our favor relative to last year and previous years through the pandemic I think the teams are working well together.

And and the Assortments are standing up tall in front of the customer and the check business.

Alright, thanks for all the comments all of us.

Thanks Mark.

Thank you. The next question is from Tami Chen from BMO capital markets. Please go ahead.

Thanks, Good morning, first a clarification question when you talk about corporate inventory.

Entered the quarter up 22%, Thank you Javier and exited the quarter up 6% year over year like you're factoring in.

The spring summer as well as the Christmas inventory to correct.

That is total owned inventory on ships in D sees that as on C. T. Six balance sheets. So there's every tire every.

Lender that you can think of that we get is that as our wheel entitled fourth.

And the 6% is that largely.

Inflation or any other units down.

Yeah, I think it's a bit of a different story by banner I think I said on my remarks, So Canadian tire retail is actually down if you look at some of the other banners are up there's a little bit of preorder I think it marks and check they took a bit of a early receipt, but I certainly think inflation is part of that story Theres no question.

But I I again, so all the banner President's continuing to work in this regard, but we were really pleased on the progress we've seen to get us from 30 to 22 down to six and as I said in my prepared remarks, we Ain't done yet theres more that we want to do but theres, probably been a bit of early receipt and youre right theres going to be a price inflation component of it but really I mean, I don't want to under.

Score this are really happy with the performance to get inventory levels down to where they have been and keep the margin performance where it is I think those are you know I just don't want to lose sight of those few points.

Yeah, I'm glad you mentioned the margin part because that's my that's my follow up question is I'm just really surprised.

Our underlying retail gross margin improved 80 basis points Wang the consumer environment is what it is and you, but you still managed to work down your inventory. So I guess the question is how how did that happen can you talk a bit more about what.

But the tools we're.

Cause you to achieve that.

Sure, Jamie it's Greg I'm, I'm, assuming you're pleasantly surprised right.

[laughter].

Yeah, well, let you know.

Gregory hit on that as we I think this is the story right. It's that the teams continue to manage margin extremely well.

When you look at components of margin, we certainly have had headwinds from freight and Cogs inflationary pressures, we'd start to see those reverse in the quarter.

And we're working as hard as we possibly can to get every dollar we can on some of that reverse oleds, we'd like it to come quicker to us, but we're working hard to get it and.

And we've continued to leverage our capabilities and I would say, there's three or four big ones. One certainly is our sourcing to take advantage of that deflation on the Cogs base too is the elasticity modeling around promotional discounting and really pivoting towards how to think about elasticity for essential.

Mrs are and then our customer data to really strike the right balance between price investment and margin efficiency.

We've talked about many times, we're also placing increased.

Emphasis on targeted triangle rewards related investment versus mass price investment that shows up in all banners, it's really starting to come through.

Has been for a couple of quarter or few quarters and check them and marks it's just giving us better return better efficiency.

And in General I'd say in most of the categories in which we compete the industry was.

Was in and maybe still is dealing with higher levels of inventory so for sure the promotional intensity.

<unk> was high in the quarter and we expect it to be as we move forward for the balance of the year. We although we did appreciate our margins I can tell you. We don't feel like we left the bad on our shoulders at all this quarter as our promotional discounts. This quarter were steeper than they were last year. Both in terms of average save story.

And total dollar discounts.

Our growth.

Across our businesses is definitely more pronounced for discounted items.

But we're still managing those margins with all believers I talked about a Grigory mentioned, just like revenue and sales there can always be variation quarter to quarter, but as we talked about a fundamental building block of our Investor Day plan was to hold our margins flat and this quarter.

Demonstrates that took that capability really shining through.

Okay. Thank you.

Thank you.

The next question is from Vishal <unk> from National Bank Financial. Please go ahead.

Hi, Thanks for taking my questions just a clarification, so when you're when you're withdrawing your longer term 2025 aspirations.

You're maintaining your your aspiration to hold gross margin.

And protect those gains that you saw through the pandemic. It is that what I just heard you say in the last comment.

Yes.

It's it's Gregory here Vishal I think you know as Greg said in his prepared remarks, we withdrew the financial aspirations and I Gotta keep saying this because it gets critical but we are totally can it makes us a better connected strategy. So let's just make sure we all separate those things and keep separating them because we're really pleased with what we've seen I would think I would say it this way we're going to come back up.

One point as Greg alluded to with some new aspirations, which will cover all the elements at this point I would say that that was really never technically an aspiration. It was more just an objective within the aspirations that we had around ROIC are around.

The EPS target that is still a focus of the areas. So I don't want you to think just because we've withdrawn the aspirations. We're gonna let T. J go hog wild and do a bunch of things on margin. So I, just I I say that had been ingest, but I, but I mean it. It's it's it's it's it's really around kind of the demand environment and how different things had been versus what we expected is why we felt.

The inappropriate to withdraw the aspirations at this time, but we feel the actions we're taking are bang on and and so we're going to continue to work on margin management, we're going to continue to focus on own brands like none of that's going to change until you know and then once the economic conditions. We think settled down then we'll kind of put it all back together again and talk to you about.

At that point in time is that is that clear.

Hey, Yeah, it's clear I, just want to double click on that I mean, obviously, there's something that's changed within within your modeling to to cause you to say Hey, you know what maybe these aspirations that we've laid out arent appropriate so.

Obviously, you said the demand side is one so I'm just cascading down the P&L and figure out what the other line items are so you know when you are in your mind and well obviously demand is one on the sales side, but you know gross margin and sales are.

Our linked so yeah I was wondering maybe it's Craig let me take that again I think in our disclosures in the press release, we tried to kind of outline what were the kind of changes kind of work. So you hit on the biggest one in my mind, which is consumer demand, which cascades its way down everything to be Frank.

The other thing is kind of inventory levels, we talked about it at all I think in the press release and the MD&A around carrying much more inventory than we thought is that that has an impact on three pls in some of our SG&A and costs our interest.

Interest rates, what that's done not only theres been more kind of working capital, we're carrying but we've got 10 interest rate increases that we didn't necessarily contemplate. So it is you know interest inflation driven that kind of makes its way in various parts of the P&L, but I'll tell you the biggest one far and away is the demand environment and what that's done that's that's what I would just want to reiterate that I think Michele.

That's that's the most important point I mean.

Since.

The Investor day, which is less than 18 months.

Ago, we've seen a complete inversion with GDP growth in the policy rate.

Are we going into the Investor day, we had 5% GDP and effectively zero nominal interest rate and we've gone to the exact opposite and it's not clear to US now where we are in the tightening cycle. So if we arent done then we'll continue to see demand impacts in our discretionary businesses. If we are done or close to being done then we're in a <unk>.

Positioned to provide a view to how we believe these businesses will perform on the top line and how that flows through the revenue and the rest of the P&L to your point, because we're gonna be operating with much more stable visibility. We just don't have that right now. So that's the that's the biggest rationale for the withdrawal but to Gregory.

<unk> point, the key components of how we run our business for long term growth, they're not going to change, while we're waiting to get that that visibility.

Okay, and with respect to our e-commerce sales and AR and K entire it's a path to increasingly become our omnichannel retailer.

Improve your omni channel the channel capabilities.

Are your ecommerce sales are they where you thought they would have been when you came up with your Investor Day plan and and if not you know known as talking to a changing the plan, but is it possible to defer some of the <unk>.

So later down the road or is that something youre still actively investigating and we'll update it later.

Well, we're certainly not taken our foot off the gas from an investment standpoint, Michelle and.

We we continue to believe that looking at e-commerce, and bricks and mortar as two different channels is the wrong way to look at the business the customers the channel.

And.

The lines are so blurred between digital and the store and that's what our new concept connect format is all about it's about deploying technology in store that improves the customer experience and ODP is about improving.

Every element of the digital experience, which connects to physical sales I mean, as we've talked about before our estimate is that 80% of all in store transact transactions the front door of the transaction as the website. So we continue to remain.

Pretty pleased with the work done across our banners are on the digital front, both for e-commerce and in store.

Our penetration rates to your point they've settled in that mid to high single digit range.

And we continue to show up you know with options for the customer any way they want to shop.

We've now successfully rolled out one digital platform across all of our major banners as we talked about we've been talking to you about that investment for almost four years right. It. It's it got slowed a little bit with with Covid, but it's modern architecture and the ability to quickly unlock personalized customer centered.

Centered experiences that could end online or could end in the store.

So you know I think we feel really really good about how all of this is is is coming together and we continue to push technology deployments.

Into a.

Physical locations when do you think just and C. T R 90% of Canadian tire stores now have lockers.

We have rolled out a scan in buy in stores across the network. We've got deployment now of electronic shelf labels that were pretty excited about 70% of the store network. Check is is is moving forward with with a significant amount of our blocker expansion.

We've got same day delivery pilots are going so there's a there's a tremendous amount of activity, but I wouldn't tease out that activity specific to E. Commerce, it's really about omnichannel and it's the essence of better connected it's connecting the physical and digital channels. So that is the essence of the strategy.

Thanks for those comments.

Thanks for saying.

Thank you. The next question is from Chris Li from Day shopping. Please go ahead.

Oh, Hi, good morning, Thanks for squeezing me in I, just I apologize if you covered this already but did you share with US what was the C. T R. A comp in July .

It's Gregor here I think what we said was the trend we saw in June continued we didnt give the number and I'm not planning on right now either but above all we were notified.

<unk> just to the trend that we saw that as you know our disclosures talked about noticeably slowed down I think was the wording we used in July and that that same trend continued in July .

Okay. That's helpful. And then my other question I know I know this is a very difficult question to answer because no. One has a crystal ball and it's probably too early to ask this but you know given the 10 interest rate hikes have a delayed impact on consumer spending do you think it's reasonable to expect earnings growth next year, I mean, obviously sales will likely remain challenged.

Next year, but it sounds like you do have other levers.

That you can pull to get some growth. So just at a high level. How do you think about the earnings cadence for for next year. Thank you.

Yeah, I think it's Gregory here and I think you know I am I, just not getting prepared to answer at this point and the reality is.

I think Greg gave a good summary in terms of where we are let's get through kind of these economic conditions. Once we have that settled we're more than willing to talk about next year five years two years whatever it is but we you know we're just seeing as you said what's happened in June and July and I I I. Just think you know for us to kind of talk at this point, it's just it's not it's not appropriate.

In my mind, so stay tuned I know, it's a question of all your mines and and and we will look to be able to answer when we think we are ready, but at this point I just want to reiterate we are working on the right things for the long term success of Canadian tire and and if there's some short term noise and some pain and that that'll be what it'll be but we'd be we're a better business were more resilient and and we can.

Work and will work and manage our way through this is how I, how I would want to leave it.

Okay, that's fine.

Okay.

Thank you thank you Chris.

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

Thanks. Good morning, I. Appreciate you squeezing me in here Gregory I think I heard you correctly earlier in the call you said during your prepared remarks that you expect the pace of SG&A growth slow through the balance of the year I'm curious if you can help us get an understanding of what exactly is embedded within that assumption as far as the.

The combination of ramping up the new P. T. A D. C that you have and also the use of <unk> for the balance of the year I appreciate that it's probably going to be less than what you're what you're doing right now as far as relying on them, but just wanted to get an understanding of what your base cases for where you expect that mix or that usage to be in the <unk>.

For the year, three pls versus Euro D seats, and maybe if you anticipate still relying on a good mix of Npls for 2024.

Yeah, I think the way I'd answer the question as we think about going into 'twenty 'twenty four our number will be significantly reduced from number of three pls.

I'm going to stop short of telling you to kind of where we are and what that's going to fall down too, but I mean, it'll be noticeable in the P&L, Let me put it that way, it's not it's not insignificant.

But as you know there's lots of things to work through its still kind of in this time period. So that's our plan and feel really good about the progress made the merchants the supply chain team are all committed to this kind of activity and I would expect we're going to enter 2024 with a very different you know X desk capacity picture that we have now and certainly than we had at this point.

Last year.

Okay, and then maybe a quick follow up as well I appreciate the commentary that you've given so far on the remediation efforts.

P J D.

D C.

Yep.

Appreciate it's early days, but would you be able to give any sort of rough timeline for when you expect those remediation efforts to be fully complete or is it is it just too early to tell at this point.

Yeah, Let me let me take that one it's Gregory again I think you know it's it's a it's been a it's been a long process I will tell you given the extent of the fire, we couldn't really get investigators in until kind of mid way later into Q2. So you know and that's what you have to consider as part of this process frankly as peoples.

Safety and wellbeing so.

It has gone down or is it longer than I think all of US had hoped but the practical reality is that that's kind of where we are there's still some direct costs. We are certainly going to incur for example, they're still hold the roof.

Having said that like that's probably capital in a different accounting treatment, but my point is I don't think we're done with recognizing direct costs I expect the indirect costs that we've kind of talked about Q1, and Q2 I expect those to start to trend downwards and the question is were working with you sure on the claim about when we're going to be able to.

Recognize recoveries and it's just a you know it that that again, just given where we were in the process. It's just going to take us a little bit of time. So that's the best I can give you at this point and will speak more about it as an on on Q3.

Okay I appreciate it thank you.

<unk>.

Thank you there are no further questions registered at this time I'd like to turn the call back over to Mr. Hecht.

Thanks Donna.

Everyone for your questions and for joining US today, we look forward to speaking with you when we announce our Q3 Q3 results on November 9th in the meantime enjoy the rest of your summer.

Bye for now.

Thank you. This concludes today's call you may now disconnect your lines.

This conference is.

No longer being recorded so it's closer to home for me. Please also as this thing.