Canadian Tire Earnings: Medium-Term Targets Abandoned as Canada’s Economic Woes Too Much To Overcome

Canadian Tire’s CTC.A 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%.

In the quarter, Canadian Tire reported flat same-store sales, a 3% decline in total revenue, and a 6.6% pretax margin. Given these results and the dim outlook for the rest of the year, our full-year projection of flat sales and an 8.1% pretax margin appears out of reach. Similarly, our estimate of CAD 15.93 in EPS (down from CAD 18.75 in 2022) is likely in doubt. The firm recorded a 28% decline in EPS to CAD 1.76 in the quarter, but this included CAD 1.32 in unusual charges, the largest of which related to the fire at its distribution center in March. Excluding these items, its EPS declined 1%.