Canadian Tire: Financial Marks Unlikely to Ameliorate Soon as Demand Normalizes; Shares Undervalued

In light of stringent competition and a weakening demand backdrop, we’ve lowered our fair value estimate on no-moat Canadian Tire to CAD 150, from CAD 175 previously, though we still view shares as slightly undervalued. The firm’s portfolio of over 1,400 stores benefited from a robust spending environment in fiscal 2020-22 as comparable sales growth burgeoned and margins expanded amid favorable operating leverage and resilient demand across discretionary product categories. However, demand showed signs of normalizing in fiscal 2023—retail revenue excluding petroleum declined nearly 8%—as lackluster retail spending was seemingly exacerbated by inventory destocking from its third-party dealers. With little evidence to suggest a rebound is imminent, we expect the firm’s near-term growth and margin trajectory to be constrained.