Company Reports

We do not plan to significantly alter our CAD 150 fair value estimate in light of no-moat Canadian Tire’s fiscal 2024 first-quarter earnings report as weaker-than-expected revenue was compensated for by resilient retail margins. Comparable retail sales declined 1.6% (below our forecast for flat comp growth) amid a weak spending environment, with softer sales proving pervasive across each of Canadian Tire’s retail banners. As we expected, management cited weakness across its discretionary product categories but noted a slight uptick in essentials, led by automotive. Consistent with recent quarters, the firm also continued to grapple with inventory destocking from its dealer partners as revenue declined 6% compared with a 2% drop in retail sales at affiliated banners. Management struck a cautious tone when discussing dealer restocking and expects the pace of ordering to remain prudent and reactionary to underlying consumer demand in the coming quarters, which we agree with. We do not anticipate a quick amelioration in the Canadian economy and expect Canadian Tire’s top line to remain constrained in the near term, though we suspect the firm has already faced the brunt of its destocking headwinds and thus expect the firm’s revenue to align with retail sales more closely.

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.

With over 1,400 affiliated retail locations across multiple different banners, no-moat Canadian Tire serves as one of Canada’s leading general merchandise retailers. The firm sells a wide assortment of goods spanning automotive parts, home furnishings, appliances, and home improvement items at its iconic namesake banner, which accounts for over 500 locations. Recent acquisitions of various sporting goods and apparel chains have further bolstered its footprint and given the firm an ingrained presence in Canadian communities.

Canadian Tire closed a difficult 2023 with results that fell short of our estimates. As was the case throughout the year, high interest rates and other economic challenges weighed on consumer demand for nonessential goods across the firm’s retail banners in the critical holiday period. On top of that, Canada’s unseasonably warm weather suppressed sales of everything from outerwear to skiing equipment to gardening supplies. Consequently, the full-year consolidated revenue decline of 6.5% missed our estimate for a 3.5% drop, and normalized earnings per share came in at just $10.37, $2.09 below our forecast and down from $18.75 in 2022.

Despite its iconic namesake banner, Canadian Tire faces intense competition in a changing sector. With shoppers embracing e-commerce, the firm faces top- and bottom-line strain as online retailers often offer better prices and selection. While the geographic dispersion of Canadian consumers impedes digital penetration due to shipping speeds and costs (giving Canadian Tire’s extensive store network an advantage), we expect urban and suburban shoppers to embrace scaled digital sellers (such as wide-moat Amazon) and large foreign brick-and-mortar chains (such as wide-moat Walmart) that can leverage their infrastructure to Canadian Tire’s detriment. Although Canadian Tire did well to expand its digital order capacity during a pandemic-related sales surge, we believe long-term challenges remain.

As has been the case throughout 2023, no-moat Canadian Tire’s retail operations were negatively affected by weak demand for non-essential consumer goods amid inflation and higher interest rates in Canada. The firm’s overall same-store sales slid 1.6%, including a drop of 0.6% at its namesake banner. However, as we had previously lowered our expectations to reflect the difficult market conditions, we do not expect to make any material change to our CAD 175 fair value estimate, leaving shares undervalued.

Despite its iconic namesake banner, Canadian Tire faces intense competition in a changing sector. With shoppers embracing e-commerce, Canadian Tire faces top- and bottom-line strain as online retailers often offer better prices and selection. While the geographic dispersion of Canadian consumers impedes digital penetration due to shipping speeds and costs (giving Canadian Tire’s extensive store network an advantage), we expect urban and suburban shoppers to embrace scaled digital sellers (such as wide-moat Amazon) and large foreign brick-and-mortar chains (such as wide-moat Walmart) that can leverage their infrastructure to Canadian Tire’s detriment. Although Canadian Tire did well to expand its digital order capacity during a pandemic-related sales surge, we believe long-term challenges remain.

Canadian Tire’s second-quarter results were overshadowed by management’s admission that it will not reach its medium-term targets due economic conditions in Canada. In March 2022, the company held an analyst event to highlight a three-year plan to invest CAD 3.4 billion in its brands, stores, digital capabilities, and supply chain to enable it to achieve greater than 4% annual comparable sales growth and CAD 26 in 2025 EPS. However, the Bank of Canada has since raised interest rates 10 times to combat persistent inflation, which has taken a toll on demand for discretionary consumer goods. As these types of products account for roughly two thirds of Canadian Tire’s offerings, it has pulled its medium-term targets. While disappointing, we only expect to reduce our CAD 181 fair value estimate by a mid-single-digit percentage (leaving shares fairly valued) as we were always skeptical that the no-moat firm could meet its goals due to intensifying competition and nonexistent switching costs. Specifically, prior to the withdrawal of the company’s targets, we had forecast 2025 EPS of CAD 20.72, operating margins around 10% (little changed from historical levels), and annual revenue growth rates for its three major retail concepts of 1%-3%.

Despite its iconic namesake banner, Canadian Tire faces intense competition in a changing sector. With shoppers embracing e-commerce, Canadian Tire faces top- and bottom-line strain as online retailers often offer better prices and selection. While the geographic dispersion of Canadian consumers impedes digital penetration due to shipping speeds and costs (giving Canadian Tire’s extensive store network an advantage), we expect urban and suburban shoppers to embrace scaled digital sellers (such as wide-moat Amazon) and large foreign brick-and-mortar chains (such as wide-moat Walmart) that can leverage their infrastructure to Canadian Tire’s detriment. Although Canadian Tire did well to expand its digital order capacity during a pandemic-related sales surge, we believe long-term challenges remain.

Despite its iconic namesake banner, Canadian Tire faces intense competition in a changing sector. With shoppers embracing e-commerce, Canadian Tire faces top- and bottom-line strain as online retailers often economically offer a price and selection advantage. While the geographic dispersion of Canadian consumers impedes digital penetration due to shipping speeds and costs (giving Canadian Tire’s extensive store network an advantage), we expect urban and suburban shoppers to further embrace scaled digital sellers (such as Amazon) and large foreign brick-and-mortar chains (such as Walmart) that can leverage their infrastructure to Canadian Tire’s detriment. Although Canadian Tire did well to expand its digital order capacity during a pandemic-related sales surge, we believe long-term challenges remain.

Our CAD 188 fair value estimate for no-moat Canadian Tire should not change much after the company announced first-quarter results that have it on track to meet our full-year targets. Consumers continue to pull back on discretionary spending amid high inflation, also trading down the quality spectrum. Canadian Tire’s multitier assortment, including a private-label lineup that constituted a little more than 35% of sales, should continue to be an asset in all economic conditions. We believe omnichannel improvements and cost leverage will support low-single-digit revenue growth and midteens EBITDA margins over the next decade. We suggest prospective investors seek a greater margin of safety.

Despite its iconic namesake banner, Canadian Tire faces intense competition in a changing sector. With shoppers embracing e-commerce, Canadian Tire faces top- and bottom-line strain as online retailers often economically offer a price and selection advantage. While the geographic dispersion of Canadian consumers impedes digital penetration due to shipping speeds and costs (giving Canadian Tire’s extensive store network an advantage), we expect urban and suburban shoppers to further embrace scaled digital sellers (such as Amazon) and large foreign brick-and-mortar chains (such as Walmart) that can leverage their infrastructure to Canadian Tire’s detriment. Although Canadian Tire did well to expand its digital order capacity during a pandemic-related sales surge, we believe its long-term challenges remain.

We don’t plan to alter our CAD 198 fair value estimate materially for no-moat Canadian Tire after the company reported 2022 results. We maintain our view that the market fails to fully appreciate the firm’s vast product lineup (owned, national, and multitier), which affords flexibility during economic downturns. The shares trade roughly 13% below our intrinsic valuation even after a 5% pop on the earnings report, providing a buying opportunity.

Despite its iconic namesake banner, Canadian Tire faces intense competition in a changing sector. With shoppers embracing e-commerce, Canadian Tire faces top- and bottom-line strain as online retailers often economically offer a price and selection advantage. While the geographic dispersion of Canadian consumers impedes digital penetration due to shipping speeds and costs (giving Canadian Tire’s extensive store network an advantage), we expect urban and suburban shoppers to further embrace scaled digital sellers (such as Amazon) and large foreign brick-and-mortar chains (such as Walmart) that can leverage their infrastructure to Canadian Tire’s detriment. Although Canadian Tire did well to expand its digital order capacity during a pandemic-related sales surge, we believe its long-term challenges remain.

Our CAD 215 per share valuation of no-moat Canadian Tire should slide by a mid-single digit percentage—similar to the shares’ trading reaction—after the firm posted third-quarter results, with consumers shifting toward lower-margin essential categories in response to rising prices and economic uncertainty. We don't believe the challenges suggest a material change in Canadian Tire’s positioning, so we maintain our 10-year forecast for low-single-digit revenue growth and low-double-digit operating margins. We see the shares as attractive, with Canadian Tire’s multitier lineup affording more flexibility in a recessionary environment than investors are currently crediting.

Despite its iconic namesake banner, Canadian Tire faces intense competition in a changing sector. With shoppers embracing e-commerce, Canadian Tire faces top- and bottom-line strain as online retailers often economically offer a price and selection advantage. While the geographic dispersion of Canadian consumers impedes digital penetration due to shipping speeds and costs (giving Canadian Tire’s extensive store network an advantage), we expect urban and suburban shoppers to further embrace scaled digital sellers (such as Amazon) and large foreign brick-and-mortar chains (such as Walmart) that can leverage their infrastructure to Canadian Tire’s detriment. Although Canadian Tire did well to expand its digital order capacity during a pandemic-related sales surge, we believe its long-term challenges remain.

Despite its iconic namesake banner, Canadian Tire faces intense competition in a changing sector. With shoppers embracing e-commerce, Canadian Tire faces top- and bottom-line strain as online retailers often economically offer a price and selection advantage. While the geographic dispersion of Canadian consumers impedes digital penetration due to shipping speeds and costs (giving Canadian Tire’s extensive store network an advantage), we expect urban and suburban shoppers to further embrace scaled digital sellers (such as Amazon) and large foreign brick-and-mortar chains (such as Walmart) that can leverage their infrastructure to Canadian Tire’s detriment. Although Canadian Tire did well to expand its digital order capacity during a pandemic-related sales surge, we believe its long-term challenges remain.

Our CAD 216 per share valuation of no-moat Canadian Tire should not change much after it announced second-quarter earnings (including 5% consolidated comparable sales growth, excluding fuel) that suggest solid performance despite inflation and economic turbulence. Our 10-year forecast still calls for low-single-digit revenue growth and low-double-digit operating margins. We believe the shares are somewhat attractive, with market sentiment underestimating the flexibility that Canadian Tire’s assortment (across owned and national brands as well as a multitiered product lineup) provides.

Despite its iconic namesake banner, Canadian Tire faces intense competition in a changing sector. With shoppers embracing e-commerce, Canadian Tire faces top- and bottom-line strain as online retailers often economically offer a price and selection advantage. While the geographic dispersion of Canadian consumers impedes digital penetration due to shipping speeds and costs (giving Canadian Tire’s extensive store network an advantage), we expect urban and suburban shoppers to further embrace scaled digital sellers (such as Amazon) and large foreign brick-and-mortar chains (such as Walmart) that can leverage their infrastructure to Canadian Tire’s detriment. Although Canadian Tire has done well to expand its digital order capacity during a pandemic-related sales surge, we believe its long-term challenges remain.

We do not plan a large change for our CAD 207 per share valuation of no-moat Canadian Tire after it announced a good start to 2022 (including 6% consolidated comparable growth, excluding fuel) that leaves it poised to approximate our near-term targets. Our 10-year forecast still calls for low-single-digit annual revenue growth rates and midteens adjusted EBITDA margins.