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Edited Transcript of CTC.A.TO earnings conference call or presentation 9-May-19 12:00pm GMT

Q1 2019 Canadian Tire Corporation Ltd Earnings Call

Toronto Jun 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Canadian Tire Corporation Ltd earnings conference call or presentation Thursday, May 9, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Allan Angus MacDonald

Canadian Tire Corporation, Limited - Executive Vice-President of Retail

* Dean Charles McCann

Canadian Tire Corporation, Limited - Executive VP & CFO

* Gregory George Craig

Canadian Tire Corporation, Limited - CEO & President of Canadian Tire Bank and President of Canadian Tire Financial Svcs

* Gregory Huber Hicks

Canadian Tire Corporation, Limited - President of Canadian Tire Retail

* Stephen G. Wetmore

Canadian Tire Corporation, Limited - CEO, President & Non-Independent Director

* Thomas J. Flood

Canadian Tire Corporation, Limited - President of FGL Sports

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Conference Call Participants

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* Emily Foo

BMO Capital Markets Equity Research - Senior Associate

* Irene Ora Nattel

RBC Capital Markets, LLC, Research Division - MD of Global Equity Research

* James Durran

Barclays Bank PLC, Research Division - MD, Head of Canadian Equity Research & Senior Analyst

* Keith Howlett

Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst

* Mark Robert Petrie

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst

* Patricia A. Baker

Scotiabank Global Banking and Markets, Research Division - Analyst

* Vishal Shreedhar

National Bank Financial, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Valerie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Canadian Tire Corporation Limited First Quarter Results Conference Call. (Operator Instructions) This morning, Canadian Tire Corporation Limited released their financial results for the first quarter of 2019. A copy of the earnings disclosure is available on their website and includes cautionary language about forward-looking statements, risks and uncertainties, which also apply to the discussion during today's conference call.

I would now like to turn the call over to Stephen Wetmore, President and CEO. Steven?

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Stephen G. Wetmore, Canadian Tire Corporation, Limited - CEO, President & Non-Independent Director [2]

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Thank you, operator, and good morning, everyone. Thank you for joining us. As you know, Q1 is the smallest quarter for retail and in fact in the past 5 years, it's contributed on average only 4% to retail's full-year earnings and this year will be no exception. However, the year is off to a great start as we delivered exceptional retail sales and double-digit earnings growth in Financial Services. Our first quarter also falls right after our largest quarter and due to its size and weather dependency, it is most vulnerable to any anomalies in our sales and revenue patterns. Sales and revenue at CTR move in tandem over the long run, but their trend is really in balance in any given quarter and this was clearly the case in Q1. A mild December and a slow start to January meant that when our sales picked up in February, they were supported by drawing down on existing inventory.

Dealer orders accelerated late in the quarter, which meant that some shipments were still in transit and didn't translate into revenue until we came into the second quarter. Typically, Q1 is dominated by our Financial Services business and this was the case again this year with the bank delivering double-digit earnings of 15.8% and GAAR growth of 9.3%. Our Triangle Rewards program has been one of the fastest growing credit card offerings in Canada and the engine behind the exceptional account growth we've experienced in Financial Services. With 2.1 million active accounts in our books, we started to shift our focus towards growing our engagement with our existing customers. And yes, we've seen write-offs tick up slightly reflecting the seasoning of accounts we acquired in the last 12 to 18 months. This trend with write-offs is exactly as we planned and I couldn't be more pleased with the health of our Financial Services business.

One of the pillars of our ongoing One Company, One Customer strategy is the evolution of our Canadian retail marketplace bound together with Canada's most iconic loyalty program. Today we are celebrating our first anniversary for our Triangle Rewards program and both our loyalty program and our credit card far exceeded our expectations. Over 50% of our customers at Mark's, SportChek and CTR are using our loyalty program; an amazing 100 million transactions over the past year. Allan will speak more to our own brands performance. But in reference to Helly Hansen, our integration efforts and their financial performance are both proceeding on plan. 2019 retail sales performance in Canada is expected to almost double to $130 million and their international performance is also on track.

Own brands within Canada and internationally are both pillars as well to our future growth. Lastly, I want to lay some pipe as I've often been accused of concerning our bottom line earnings performance. Our capabilities and focus on topline have progressed exceptionally well. We believe we can now allocate the resources to our bottom line earnings performance. We must achieve our 10% plus return on invested capital and we will have more to share with you on this over the coming months.

So with that, I'll hand the call over to Allan.

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Allan Angus MacDonald, Canadian Tire Corporation, Limited - Executive Vice-President of Retail [3]

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Thanks, Stephen. Good morning, everyone. As Stephen said, we are all pleased with the exceptional topline growth delivered by our retail banners demonstrating yet again the underlying strength of the business. In fact Q1 marks the -- CTR's 20th straight quarter of topline sales growth and one of the highest growth rates over this 5-year period. After a mild December and a slow start to January, sales at Canadian Tire returned to normal and grew an impressive 7.1% versus last year, that's up over $100 million in a relatively small quarter. Even with such strong topline performance, the team managed to improve product margin by 11 basis points, but this was somewhat overshadowed unfortunately by a few margin rate adjustments that didn't go our way and Dean will talk more about that in a minute.

Q1 had great performance at CTR across the board, but I did want to congratulate the automotive team and our dealers for their impressive results in the quarter. Auto service grew 9% in Q1 led by over 30% growth in our winter tires business. This marks 8 consecutive quarters of growth in service thanks to a lot of collaboration strengthening a business that's differentiated us for many, many years. In e-commerce business, it's been nearly 6 months since the deliver -- the roll-out of our deliver-to-home program at Canadian Tire Retail and we've learned some pretty interesting lessons. First, our best-in-store customers are also our best e-commerce customers. It's a great starting point for our strategy to build a true omnichannel experience focused on growing the customer not the channel.

Second, we see deliver-to-home really setting us apart when it comes to large items and bulk. Through our store network with over 12 million square feet of warehouse space within 15-minute drive of Canadians and almost all of our dealers are acting as local carriers for ship to home and with a strong advantage here in owning the last mile. And third, even though it's early days, our customers are loving it. Our net promoter score for deliver-to-home e-commerce at CTR is one of the highest across the entire company. Like I said, it's early days, but we are very pleased with the progress. In terms of own brands, our sales from own brands continue to deliver growth in line with our aggressive internal objectives that we set for the consumer brands division. Our focus at SportChek has been to increase the penetration of own brands, which has now reached 12%, up from just 8% a year ago thanks primarily to the strength of WOODS and Helly Hansen and some great work by TJ and the team in building a strong accessories business.

Mark's and CTR have been focused on overall growth supported by own brands in select categories. Sales were up 10% this quarter thanks to both organic growth in existing brands like Denver Hayes and MotoMaster and new introductions and line extensions. Most notable was the introduction of the Vermont Castings line of barbecues and accessories performing well above target and the countertop appliances launched from Paderno, both great examples of growing Canadian Tire's consumer brands division by investing to bring new design and innovation to the market. And we also had a couple of launches coming this quarter to brag about. At SportChek, FWD is the new active lifestyle essentials brand, you'll see as FWD. FWD will anchor a new category strategy as SportChek works to redefine how women think about their workout accessories. This is going to be a fun brand aimed at bringing some flair to the contents of every woman's gym bag. I'm also pleased to announce that in Q2 Mark's will be launching the exclusive No Fly Zone, mosquito repellent clothing, the first technology of its kind in Canada.

It keeps insects away by having mosquito repellent actually woven into the cloth and I've worn this stuff and it's actually pretty good. The product has been on the works for years and is another great example of Mark's leadership in innovation and product development. And then moving on to SportChek and Mark's performance. At Chek, our comp sales exceeded our plans at 3.4% and TJ and the team did a great job of staying focused on their objectives; staying relevant to our customers, developing our own brands, expanding our assortment in new categories and improving the customer experience. At Mark's, comp sales grew an impressive 4.9% delivering another strong quarter. Our Hero categories performed well and we're particularly encouraged by the continued strength in casual wear thanks to its new identity with well worn and refresh assortment.

We think Mark's has a tremendous potential and a long way to go in Canada. Today also marks the 1-year launch -- since the launch of Triangle Rewards. And in going back to our original ambitions for the program; our goal was to attract new customers, increase engagement and create more lifetime customers. In the past quarters, we've talked to you about what we think are impressive stats on acquisition, issuance, redemption; all of which have exceeded our expectations. But the real power behind Triangle Rewards, which makes all of this possible, is the rich data we are gathering to inform a single view of our customers. The 100 million transactions, Stephen referenced, is allowing us to gather insight on millions of customer and product combinations. Thanks to these insights, Triangle Rewards is enabling us to take our understanding of the customers to the next level curating experience based on their needs and preferences.

We're also very excited that for the first time in our history, we've been able to identify and target a group of customers we call our high-value customers. Although it's early days, here's what we can tell you. High-value customers represent 25% of CTR's active members and 62% of the sales associated with Triangle Rewards program. 71% of our high-value customers shop at least 2 of our banners and they spend almost 5 times more than the rest of our customers. But the real opportunity isn't just knowing our high-value customers today, it's using our data and the value of the Triangle marketplace to retain and move customers upstream into the high-value category. And as a next step, we're focused on getting this data to all of our company and into the hands of our dealers. Localization will move the program to a whole new level as our dealers start to use the data to connect with customers in ways we have never done before. It's a transformative year for the company. But as we look forward, we're excited about our next chapter and there's really no end to the potential of Triangle Rewards.

And with that, I'll hand it over to Dean to walk you through the financials.

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Dean Charles McCann, Canadian Tire Corporation, Limited - Executive VP & CFO [4]

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Thanks, Allan. Stephen and Allan have given you a good deal of color around the performance in Q1, and I'm going to take a little different tact this quarter with a series of almost decato fast facts to consider as we assess the performance of the quarter. Couple of things to get out of the way. We provided you the detailed information in the disclosures to allow you to get the effect on our OpEx and EBITDA from the adoption of IFRS 16. The earnings impact on a consolidated basis was a benefit of about $4 million and a negative in the retail segment of about $4 million. Next are the negative effects on the quarter from a few other items. First is other income is down about $12 million, primarily a function of lower year-over-year gain from sales of non-strategic real estate. Second is the negative impact on our non-controlling interest due to the sell-down of our interest in the REIT from 86% to 76%, an impact of $5 million after tax.

Third is higher net financing cost versus last year, primarily the result of the Helly acquisition and increased working capital investment. Interest cost ex IFRS 16 impacts are higher by $12 million in the quarter. Partially offsetting the above is a benefit to our tax rate and the effective rate reductions in jurisdictions Helly Hansen operates in as well as lower costs for our non-deductible stock option expense. Netting all these impacts, which are in a small quarter magnified in terms of the effect on the results, was almost $0.29 per share. Now turning to the quarter's operating results. As Stephen and Allan have pointed out, there is lots to be very pleased about. Sales of CTR exceptionally strong as winter arrived finally and recall that Q4 December was significantly impacted by this later start to the season. And importantly, the weather arrived late which drove top line; but because dealers had their inventory, it did not drive revenue for CTR.

The positive for that is we end the quarter from a store inventory point of view exceptionally clean on anything weather related, which should bode well for us later this year when it comes time for dealers to restock although we always have to recognize that dealer ordering has an experience element to it. Our retail gross margin reflects the inclusion of Helly Hansen and improved product margin at CTR as Allan alluded to and that continues to benefit from the initiatives on pricing and sourcing that have been put in place by the business. However, our challenge in the quarter was caused by our unique model at CTR. Sharing margin with dealers creates complications and frankly in Q1, we have typically since 2013 enjoyed some measure of positive impact as dealer results are accumulated. Last year, this contributed positively to our margin results for CTC.

This year, despite dealer results for the year being very strong continuing to grow nicely year-over-year, the true-up year-over-year recorded in Q1 was lower. An addition -- in addition, lower revenue at CTR which as noted earlier relates to the late arrival of winter and Easter promotional shipment shift, freight headwinds that are industry wide and investments required to defend our market share in SportChek; all negatively impacted our retail gross margin percentage performance in the quarter. On the expense front, though admittedly a bit complicated to derive in the results, our operating expenses when you back out Helly's costs, exclude petroleum and adjust for IFRS 16 were actually down year-over-year. I'm very pleased with the level of expenses in the quarter as they reflect our focus on cost control across the company. As I've said in the past, the next phase of productivity will focus on our operating cost structure and this work will accelerate in 2019.

Few other fast facts. We provided some separate disclosures of Helly's results. They generated about $7 million in EBITDA in line with our expectations and I will reiterate that Helly is a business that builds its order book in the first half of the year and delivers those benefits in the second half. Corporate inventory was up, half of it's Helly's results, the balance is a buildup of CTR for the spring season and our continuing effort to build up Chek stock position which will show up as benefits to their sales and margins going forward. CTFS had an exceptionally good quarter and it's great to have the -- have fully cycled the effects of the adoption last year of IFRS 9. I will again point out that the write-off rate adjusted for the effect of our change in methodology for recoveries is rising, very normal given the strong portfolio growth. This is expected, but will come with yield revenue on the portfolio as well.

Retail ROIC held up in the quarter at 8.9%. We may see some pressure on the calculation as we cycle through the year absorbing the full effect in invested capital of the Helly acquisition. Lastly on cash and capital allocation, Q1 is a big quarter for working capital investment. As mentioned, our planned inventory build elevated our working capital position somewhat. Operating CapEx was $79.8 million, up $34 million versus the prior year. We still expect to spend to our guidance of $475 million to $550 million for the full year. Since our November share repurchase announcement, we repurchased $292 million. As you know, our announced intention was $300 million to $400 million by the end of 2019.

And with that, I'll turn it back over to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Irene Nattel with RBC Capital Markets.

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Irene Ora Nattel, RBC Capital Markets, LLC, Research Division - MD of Global Equity Research [2]

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I guess the first question has to do with whether you can kind of bridge the timing gap for us on the sell-through of in this case winter inventory and when this show up in the shipments to dealers, is it Q3, Q4? And you also had a very strong summer sell-through last year. So when does that sort of show up in Q2, Q3; just kind of helping bridging that gap would be great.

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Dean Charles McCann, Canadian Tire Corporation, Limited - Executive VP & CFO [3]

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The accountant will start off, Irene, but anyway I've got Greg and Allan and the team here and they can bail me out if I say anything that's inappropriate. But long story short, it mean -- as you know as we referenced, right; the strong topline didn't translate into revenue because quite frankly in Q4 as we noted, the dealers were ready for winter in December because of the very strong December in '17 and winter didn't show up, but they had the inventory available in February when winter showed up in force and that drove topline, drove business in stores, all those kinds of things. But I think if you and I were both dealers, we wouldn't be reordering spring -- winter merchandise heading into spring. So -- and then the reality in when that should show up is when we head into kind of third and fourth quarter. But I'll let Greg kind of elaborate on that.

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Gregory Huber Hicks, Canadian Tire Corporation, Limited - President of Canadian Tire Retail [4]

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In general, the spring inventory bridges late Q1 and Q2 so are kind of placing shipments, so to speak, where dealers order in advance getting ready for the season would bridge late Q1, early Q2. And the same can be said for winter inventory bridge between late Q3 and early Q4. And then to Dean's point, we really rely on the weather kicking in to drive replenishment to sales activity in the quarters that you would expect them to show up.

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Allan Angus MacDonald, Canadian Tire Corporation, Limited - Executive Vice-President of Retail [5]

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Irene, it's Allan. The 1 thing I'd share with you is trying to forecast the timing of shipments is incredibly difficult and especially with the little information you have. The 1 thing I'd take away is that after a soft Q4 and a strong Q1 without a lot of shipments, it's reasonable to assume that a lot of the inventory -- that we're not going to go into Q4 next year with a big inventory hangover and short of that, I wouldn't go too broadly on that.

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Irene Ora Nattel, RBC Capital Markets, LLC, Research Division - MD of Global Equity Research [6]

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And then my other related question is a really special concept related. It comes to the commentary that you guys made about I guess this was Stephen in his opening remarks about now we need to really start to see some of the -- a lot of the investments flow through to the bottom line and we need to really make progress towards that 10% retail ROIC target. And so could you please walk us through what the key initiatives on both of those are and when we start to see those reflected on the P&L and the balance sheet or cash flow?

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Stephen G. Wetmore, Canadian Tire Corporation, Limited - CEO, President & Non-Independent Director [7]

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Irene, it's Stephen. The issue here is that what we wanted to try to do over the last 3 years was to ensure that we had the products, that we had the digital properties and expertise to be able to meet our customer requirements and stay competitive in the marketplace. And you can't take everything on it once. So what happened was in 2016, we created consumer brands. The tens of millions of dollars that we've spent in consumer brands since that time has been all new expenditure. Tremendous uplift to our revenue, I'm not saying that and very, very important to us, but all new. The investments we've made in our digital properties are going from 50 people working on our website and search engines and digital properties are now up around 160, 170 people. The marketing analytics and personalization investments that we've made have all been new. The data that's coming in from Triangle Rewards has to be analyzed, parsed and behind that we had to make all the investments in our data lake et cetera, et cetera. So all of that, all brand new. We're also incurring more costs on fulfillment as you would expect with our online performance so that all has to be addressed here and we have got focused initiatives against all those. All our IT, all the kind of programs and writing and office development that are required in order to do digital are all new to our IT organization. So, I'm not going to go in and say cut 30% of your existing IT operation and concentrate on the new operations. You simply do the new operations, bolt them on, get them done. Same with merch, non-merch; same with our little in-house what we call rubber works and CTX investments to try to put machine learning into all our processes. So, the way I have kind of looked at it here is say keep our traditional business going, bolt on the new and when we get to where we believe that we're operationally efficient in terms of our digital properties and our in-store technology et cetera for our customers, then we'll address the cost structure. So, all I'm really sort of laying pipe for is that I believe in the former we're there and now we're going to go after the cost structure.

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Irene Ora Nattel, RBC Capital Markets, LLC, Research Division - MD of Global Equity Research [8]

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And Stephen, also though as you go address the cost structure, is this something that's going to be evident as we move through 2019 ?or is this really more of a 2020, 2021 where we see the benefits?

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Stephen G. Wetmore, Canadian Tire Corporation, Limited - CEO, President & Non-Independent Director [9]

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So I mean I think the -- we said financials -- in our financial aspirations that 2020 we'd hit a 10% ROIC and that has to be our line of sight. There's absolutely no doubt about it. So, we are working extremely hard right now on all this. I don't have it all together to explain every last detail to you now, but I will very shortly.

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Operator [10]

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Our next question is from Peter Sklar with BMO Capital Markets.

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Emily Foo, BMO Capital Markets Equity Research - Senior Associate [11]

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This is Emily Foo for Peter. So on CTFS, growth in GAAR was 9.3%. So we just want to dive into that number and see what's really driving it. Is it because you're getting more sign-ups at point of sale or is it because of the integration with the loyalty program or were there other promotional programs that have really driven the growth this quarter? And then also during the call, you said that you're going to start to shift towards engagements. So should we see this number start to come down a little bit.

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Gregory George Craig, Canadian Tire Corporation, Limited - CEO & President of Canadian Tire Bank and President of Canadian Tire Financial Svcs [12]

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It's Greg here. We've talked past few quarters on our growth in receivables and I think you hit on all the reasons for the growth. I'd start off with integration first and foremost. This journey frankly started two-and-a-half years ago; some of the in-store financing offers at CTR, open up additional channels at Mark's, at SportChek for us and then all that accelerated with frankly the launch of Triangle around a year ago, right. So that's really what has driven the receivable growth over the past frankly 12 months has been, as you said, the integration and then the launch of Triangle I would say accelerated that even more. And Stephen, we've talked about this last quarter as well, this concept of engagement. I think first and foremost, we've had 3 really strong years of comp receivable growth if I go back in the time tunnel. So, I think you will see that growth start to moderate a little bit kind of in the balance of year, but I still expect us to be higher than the industry. But we absolutely turned our attention to engagement as the next one for us to work on. We look at something called second use so after you'd use the card once, do you use it a second time? And this is really early for us, but we've seen some positive results in the quarter for new accounts we've acquired. It's just going to take us some time for that to weave its way into a portfolio that's 2.1 million accounts and over $6 billion in receivables, but we 100% are really focused on engagement because we think it's the right thing to do in terms of we've got the engagement, we've got the -- excuse me, the acquisition humming, really happy with what we've seen on the value prop. It is the next kind of frontier for us to focus on is to kind of, as Allan alluded to, that lifetime view for the customer. So, that's really what we talked about with engagement. So I would expect us to see receivables moderate a little, but I would -- again higher than industry I would expect for balance of year.

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Emily Foo, BMO Capital Markets Equity Research - Senior Associate [13]

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Then as a follow-up, your credit card past due rate increased a little bit by about 20 basis points sequentially from Q4. Does that concern you? Or is that just noise?

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Gregory George Craig, Canadian Tire Corporation, Limited - CEO & President of Canadian Tire Bank and President of Canadian Tire Financial Svcs [14]

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No. I think -- well, obviously we keep a really close eye on all of our credit risk metrics. We're not concerned about the level of risk in the portfolio. What I would encourage you do is look at March to March because there is a seasonality with allowance rates as you come off of Christmas and the receivables that are high and typically you have your allowance needs a bit higher kind of in March. So, I would look at the 11 basis point -- the rate is higher by 11 basis points compared to March of last year and that's frankly come down from what we've seen in December. So we're very comfortable with where we are from a risk perspective.

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Operator [15]

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Our next question is from Mark Petrie with CIBC.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [16]

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Thanks, Allan, for the comments regarding the launch of deliver-to-home at CTR. But I'm just curious, what was the impact even directionally on the P&L as a result of that launch over the last 1.5 quarter or so and how should we think about how that plays out sort of into -- through 2019?

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Allan Angus MacDonald, Canadian Tire Corporation, Limited - Executive Vice-President of Retail [17]

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Well, that's a good question. Well, I've got Greg and Dean here are going to keep me honest. But like a lot of things with CTR, we're keeping a really close eye on moving the business forward and getting the right balance of making sure that we're disrupting the business, but not that -- not for without good reason. We're also trying to make sure that we keep our share, whether it be share of the e-commerce business or share of the bricks and mortar business. And I mean if you think of it in terms of the way we manage pricing, we work really hard to get share and we don't give it up without a fight and e-commerce would be no different. So what we're doing right now is trying to maintain the balance of -- gauge our speed based on how much transformation we have in our plan which has been fairly aggressive and making sure we're going to maintain our share. So, that helps us guide the investment and the pace at which we're rolling it out. So far, that has -- we've been able to sort of withstand any disruption that that's introduced into the P&L at CTR. I don't foresee that changing dramatically in the short term, but if the market changes, we're going to change with it. So, I think of it more in terms of being market led and it's no different than if you see a major shift in commodity prices or aggressive pricing in the market and the bricks and mortar world will be right there following suit. So as we're sitting right now, I would say think consistency. Dean, Greg, I don't know if you'd say anything different?

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [18]

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And then I also wanted to ask you about Triangle and again thanks for some of the comments on that. Obviously there is a number of ways that you can sort of take the information that you're pulling from that program and I'm just sort of curious how you're prioritizing that and where you're seeing the biggest impact on your business or the biggest opportunities as a result of the growth in that program and how you sort of prioritize that for this year?

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Allan Angus MacDonald, Canadian Tire Corporation, Limited - Executive Vice-President of Retail [19]

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Well, I'm going to let Greg offer comment here too. But what I would say is every time we get a new insight from the increasing sophistication of our data analytics, it causes you to question things you always believed to be true and that's a wonderful thing and it begs more questions than it does provide answers. And right now for us, it's guiding us in a lot of areas of the business from the products we're selecting to the way that we're thinking about growing share. So in terms of how we prioritize it, it's really about where we get the biggest insight to be honest and it's just such a new kind of treasure chest of information that we're really working hard to digest it and translate it into meaningful changes in the business at this point. But Greg, you probably have a couple of examples you want to talk about.

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Gregory Huber Hicks, Canadian Tire Corporation, Limited - President of Canadian Tire Retail [20]

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Mark, I mean -- I think all of us as BU leaders, there's stats and learnings that are emerging that we're all becoming fascinated with. As mentioned in our opening remarks, this is the year one anniversary and the first couple of quarters were really about execution. So, now we're starting to kind of mine the data and act. So if I were to identify a few things, I think I'd start with member engagement. I think you're going to hear us talking much more about the engagement of our membership in the quarter from a performance explanation standpoint so meaning members who spent with us compared to last year and if you look at what happened this quarter in CTR, that was up double-digit. We think this is a great indicator for us going forward especially given our low asset utilization in a quarter like Q1. Second, you've heard us talk about ECTM issuance. The whole program has been designed to issue and redeem ECTM and the program did just that in the quarter with our overall issuance in CTR up $50 million. And I think this combined with the fact that ECTM balances right now are at an all-time high bodes well for redemption and spending in the upcoming kind of larger member spending quarters. And maybe one more that I'd suggest that we're really excited about is just the number of members who provided us permission for email engagement. We had a very productive quarter in terms of getting our membership to sign up for email subscription and we now have over 3.5 million contactable members in the Triangle Rewards program. So the Triangle program provides the most value to members when a member engages with us one-on-one and this addressable audience now has scale, which I think significantly increases the speed and pace of our personalization journey.

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Allan Angus MacDonald, Canadian Tire Corporation, Limited - Executive Vice-President of Retail [21]

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And I'd add. The 2 comments I made in my script for -- the success we've had in auto service is no accident and that is it. I ran that business many years ago and not well, it is a tough business. And the magic here is that comment about it's -- the high-value customers are really important to retain, but the near high-value customers are important to identify and understand how you move them into the high-value category. So what Greg's talking about; auto service, the Vermont Castings launch which has been -- I can't even explain to you how happy we are with us at this point. Those are strategies to move customers into that high-value category and that's where we really think the benefit is. So if you are asking for a priority, Greg, I don't know (inaudible) , but I'd say that's probably it, just create as many high-value customers as we can.

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Operator [22]

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Our next question is from Vishal Shreedhar with National Bank Financial.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [23]

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Just on the product margins off the top, I think you noted that the Canadian Tire Retail product margins were up. Wondering -- and I guess the implication is that tire didn't by the sales with the other strong comp. Wondering what the total product margin was for -- if you can aggregate Tires, SportChek and Mark's. Was that also up?

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Allan Angus MacDonald, Canadian Tire Corporation, Limited - Executive Vice-President of Retail [24]

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Total product margin?

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [25]

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Yes. Is there a way to understand how the other banners did?

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Allan Angus MacDonald, Canadian Tire Corporation, Limited - Executive Vice-President of Retail [26]

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The product margin was up overall. FGL, we invested in margin, right, to drive top line, but that's no different. We were doing that a year ago as well so from a relativity point of view, that's -- I wouldn't draw any big conclusion about that. But Mark's was up, right. So generally speaking, the message I want to get across is we weren't buying sales in the quarter. I just want that crystal clear to everybody and I think I reiterated that earlier this morning to a lot of folks. Very important to understand, right. But when you have such a small quarter with respect to retail and you have some noise in it as we referenced in our remarks, that's what impacted us on an overall basis. But very, very pleased I think retailers; all of us, the finance guy is very pleased with respect to kind of the, if you will, pure product margin and the types of initiatives that the teams have done around cost control and purchasing all those kinds of things are still bearing fruit for us.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [27]

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So -- and you can help me on this, Dean, if I got timing wrong. But a few years ago, Tire had these productivity initiatives which were very successful and I think that helped gross margin and I believe subsequent, the messaging was those productivity initiatives would flow into Chek, into Mark's. So, have those started and where are we and are they flowing into gross margin? And I guess I would...

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Dean Charles McCann, Canadian Tire Corporation, Limited - Executive VP & CFO [28]

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The short answer is yes, Vishal. And they continue at FGL particularly in spades and that's all part of the program that Allan and TJ are executing in terms of basically moving Chek kind of forward from a new base. I mean that business is the most, if you will, disrupted in terms of the new world of retail and guys are doing an extraordinary job and those types of initiatives that are absolutely core to that. And Allan has referenced those many times before as has TJ. And on Mark's side, absolutely, Mark's tends to kind of grab a hold of anything good and try and get it for free so absolutely.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [29]

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So as an investor, how do we determine or how do we assess when that investment period for Chek is over? Are we near the end or are we still early days?

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Dean Charles McCann, Canadian Tire Corporation, Limited - Executive VP & CFO [30]

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I think what I do is I'd watch the top line performance at Chek, right. Is it able to continue to compete. I mean that's the reality. We're focused on ensuring that we continue to grow share and protect our share in the marketplace and not cede a damn thing to anybody, right, in the big scheme. The same thing for Mark's right. I think Allan, you can speak to that.

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Allan Angus MacDonald, Canadian Tire Corporation, Limited - Executive Vice-President of Retail [31]

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Look, Vishal, what I would say is that some of the productivity initiatives we had at CTR contributed to a certain efficiency or an effectiveness that made a margin contribution. Those same types of initiatives you brought to the new different business and they could manifest -- the benefit can manifest itself in different ways. So promo optimization at CTR drove margin benefit, promo optimization at FGL helped support topline growth because they were tackling a different type of inefficiency. So, I would caution you not to dismiss the topline growth in terms of productivity because productivity can be seen in more than just margin expansion.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [32]

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The transportation costs, I think retailers have been incurring heightened transportation costs for at least a year now. Should we expect those to cycle soon?

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Dean Charles McCann, Canadian Tire Corporation, Limited - Executive VP & CFO [33]

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I mean all I'll say to that is in terms of the productivity initiatives from a cost point of view, that is one that's very, very high on the list around here. So, it's affecting everybody, I think it's industry-wide as you know and it's been affecting us for a while. But I think I'm encouraged that the guys are on it and I think we're probably mitigating as much as we possibly can. But I think there's a lot more that can be done and I know the -- particularly the transportation and logistics and supply chain teams are all over it.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [34]

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The dealer cost true-ups that you referenced in Q1 and I know you don't historically provide a lot of color on this dealer arrangement. But just for the sake of investors so we can kind of mitigate the volatility in the earnings a little bit, is that -- does that happen every quarter? Is that a Q1 issue, is it a bigger issue in Q1? How can we think about that?

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Dean Charles McCann, Canadian Tire Corporation, Limited - Executive VP & CFO [35]

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The relativity in Q1 is pretty significant, Vishal. That's really what it is. In a small quarter, anything that either goes for you or against your kind of gets magnified. So, I'd say Q1 is probably the largest -- most impactful with respect to it, right. But it in essence occurs over the course of the year. It's a margin sharing arrangement so read into that whatever you want. And at end of the day, what hit us in Q1 is just -- we just didn't have the same level of positive true-up this quarter as we did a year ago. It's as simple as that. But magnitude wise, it's accentuated because it's a very small retail quarter like 3/5 of nothing as I usually describe it right in the context of the full year.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [36]

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Okay. And details are forthcoming on your initiatives to get the SG&A under better control as per -- so we'll learn more about that in the quarters ahead.

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Dean Charles McCann, Canadian Tire Corporation, Limited - Executive VP & CFO [37]

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I think we better do that as Stephen said we're doing it.

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Operator [38]

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Our next question is from Jim Durran with Barclays.

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James Durran, Barclays Bank PLC, Research Division - MD, Head of Canadian Equity Research & Senior Analyst [39]

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So I just wanted to start off with demand on the consumer side. So we've seen a -- obviously a material weakness in the Stats Can reported retail sales trends as we've come into the early part of 2019. Have you seen anything with respect to consumer behavior at either the retail business or the credit card business?

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Stephen G. Wetmore, Canadian Tire Corporation, Limited - CEO, President & Non-Independent Director [40]

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It's Stephen. The -- obviously it's very difficult to take a total retail scan from Stats Canada and then apply it directly to us and especially when we're heavily, heavily slanted towards weather and seasons. The -- what we have seen is a tremendous take-up of our product offerings when the kind of weather and timing of the year is appropriate for our revenue and that's what really encourages us. We haven't seen anything behind it. We haven't seen a slowing at all across the credit card business in particular actually or within any of the retail banners. It's just not -- there's nowhere that we could point that there would be any indication nor can we point to any particular area of the country where we're seeing a little bit of anomaly either. So, we're not seeing it.

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James Durran, Barclays Bank PLC, Research Division - MD, Head of Canadian Equity Research & Senior Analyst [41]

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Okay. And how tight is the pricing environment? I mean with the freight increases and of course previously FX pressures, it seems that in general merchandise broadly, there hasn't been a lot of pricing power in the marketplace. Would you classify how you're viewing this year as being as tight that way or tighter than we've seen in the past couple of years?

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Gregory Huber Hicks, Canadian Tire Corporation, Limited - President of Canadian Tire Retail [42]

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It's Greg. I think you give nailed it. We're just -- we're not seeing any inflation at the consumer level. I think we've talked in previous quarters about the capabilities we have to monitor from a competitive intelligence standpoint what's happening at a price basket, a category, a region, a competitor level both digital and bricks and we're not -- we're not seeing any movement and therefore we're not moving and we're forced to really kind of work all the levers and the arrows that we have in the quiver on the margin line, which has been a successful strategy for us. But I think you -- I think you explain it properly. there just -- no one seems to want to give an inch right now.

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James Durran, Barclays Bank PLC, Research Division - MD, Head of Canadian Equity Research & Senior Analyst [43]

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And I assume that your own brand -- consumer brand strategy has probably been a benefactor of that kind of environment or are you able to increase your penetration and that helps you at the margin side and to the consumer provides them with a better value?

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Gregory Huber Hicks, Canadian Tire Corporation, Limited - President of Canadian Tire Retail [44]

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I mean own brands for sure is a big kind of margin lever for us as we push the penetration. I mean Allan talked to promo optimization and we've got sourcing and some other -- some other drivers for sure. But own brands and that's -- it's a great strategy for us because of price transparency, because of margin blend, because we can really get behind the brands. There's a lot of things to like about what that strategy does for us.

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James Durran, Barclays Bank PLC, Research Division - MD, Head of Canadian Equity Research & Senior Analyst [45]

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Specifically on SportChek, you talk about the competitive intensity in that marketplace. Is it -- like what's the balance between the competitive intensity 4 wall versus e-commerce? Like is it e-commerce that's adding to the stress in that industry or is it 4 wall competitors?

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Allan Angus MacDonald, Canadian Tire Corporation, Limited - Executive Vice-President of Retail [46]

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It's Allan. TJ is here too, little further away from the phone but. Long story short, we're seeing normal competition in that market. Obviously e-commerce is more impacting the sporting goods categories than some other categories, but it's a competitive market and we're working really hard within SportChek to make sure that we're not giving up any share at this point. So, it's not so much pricing that we're seeing being off. It's pretty aggressive competition and quite honestly TJ and his team are dug in and they're not giving an inch. But TJ, I don't know...

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Thomas J. Flood, Canadian Tire Corporation, Limited - President of FGL Sports [47]

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I think that's well said, Allan. I think the only other thing I would add is from a consumer standpoint, the categories in which we compete in a healthy active lifestyle are growing categories. And when you're competing growing categories, retailers of all shapes and sizes tend to lean into those categories. So, we're starting to experience competition from bricks and mortar that historically we probably wouldn't have experienced as much as well as e-com. So when you -- when you're in the States and you've got kind of a trend, a lot of retailers kind of dig in. And I think what Allan said is bang on, we're trying to use every lever that we have to maintain our share, whether that be better inventory management, better promotional activity and more efficient promotional activity and evolving our assortments to stay relevant with our consumers over time. So, we're feeling very good about how we're positioned going forward. But it's competitive out there, there's no question about it.

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James Durran, Barclays Bank PLC, Research Division - MD, Head of Canadian Equity Research & Senior Analyst [48]

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And would that competitive intensity that you're seeing at SportChek be the same or worse at CT Retail and their sporting goods category?

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Allan Angus MacDonald, Canadian Tire Corporation, Limited - Executive Vice-President of Retail [49]

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I would say not quite as intense, Jim. We don't -- CTR footwear and apparel isn't a big portion of our business and we don't play heavy in some of the bigger national brands. So, I'd say it's -- we don't monitor the intensity as intensely as TJ and the team would have in SportChek.

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Thomas J. Flood, Canadian Tire Corporation, Limited - President of FGL Sports [50]

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When you think about these categories, if you're an apparel retailer, it is pretty easy to lean into athletic footwear, Yoga wear, at leisure if some of your traditional categories are being disrupted. Little tougher to start selling barbecues and bicycles.

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Operator [51]

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Our next question is from Keith Howlett with Desjardins Securities.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [52]

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Just wanted to go back to the gross margin. On the dealer profit-sharing arrangement, do you true-up to the prior quarter each quarter? Or is it a once-a-year true-up in Q1?

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Dean Charles McCann, Canadian Tire Corporation, Limited - Executive VP & CFO [53]

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Jim, as I said, the elements of true-up probably are accentuated in the first quarter. That's when it is going to be the most impactful, but the margin sharing arrangements generally impact every quarter through the year, right. All I want -- I don't want to go too far with this, but it's just that as we've always said right when something impacts the margin that's unusual in the quarter and you know we don't split it out for each business, all those kinds of things; but that's why we feel compelled to kind of highlight it this quarter because it's such a small quarter. But to your point, it generally affects us over the course of the year. But the order of magnitude relative to -- it just gets accentuated this quarter would be just because of that sort of relative year-over-year in a very small quarter. I don't know if that helps or not, but that's kind of the way I think about it.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [54]

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And then just in terms of comparing the product cost margin to the reported gross margin, I assume the supply chain -- internal supply chain costs and freight, are those the 2 other addition things to get you from product margin to gross margin?

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Dean Charles McCann, Canadian Tire Corporation, Limited - Executive VP & CFO [55]

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I mean there's a myriad of things, Jim. Everything from returns to back pages with respect to vendor funds, I mean there's a myriad of things, right. Much less of a myriad than there used to be under the -- when we did the dealer contract. It's less complex than it used to be, but there's lots to keep accountants busy within the business.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [56]

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And from a operational point of view, is management focused on the gross margin or is the view that the product margin's more controllable so we focus there or how do you run the business?

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Dean Charles McCann, Canadian Tire Corporation, Limited - Executive VP & CFO [57]

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In terms of running the business, absolutely it's the product margin and the initiatives Allan was talking about, the COGS, all those kinds of things. That said, the guys are very aware of the things we call below the line, whatever you want to call it. At the end of the day, they are very aware of what -- there are many -- much of that that can be controlled. Freight absolutely can be controlled. There's no doubt about it, right. But there are things happening in the industry that have gone against us. That said, the team's got to find solutions to those, right. No different than when we had FX challenges or any other challenge, right, in the margin line.

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Allan Angus MacDonald, Canadian Tire Corporation, Limited - Executive Vice-President of Retail [58]

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Keith, that's probably the best example. If you think about when we had FX challenges sort of 3 years ago, they were substantial. We talked a lot about productivity. When you have FX headwinds, you can't use FX management to address them. You have to use other levers within the business because we don't control obviously exchange rate. Some of these are no different and you got to lean into the value you're trading for your customers, the product -- the price you're charging for your product, how good your promo is and driving margin there. So of course we're managing our costs in every aspect wherever they can be, but we're looking to drive incremental value where we can too.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [59]

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And then if I just probably ask on the consumer relationship or the member management. Auto service is historically a very challenging category in which to please customers. I'm wondering if your 25% high-value customers, how do -- are they users of your auto service in line with the general customer population or are they bigger users of auto service or how do they sort out there?

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Gregory Huber Hicks, Canadian Tire Corporation, Limited - President of Canadian Tire Retail [60]

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Keith, it's Greg. They absolutely are more engaged with the Triangle program than most of our other categories and that has primarily come through Greg Craig and the team and ISF where 1 in every kind of 3 or 4 tire sales that are done with members are financed through ISF, which has been a great driver -- differentiated driver for us. This is a category that as Allan talked about provides -- Triangle provides so much benefit because for now we just know so much more about our members. Now we know that on average about 20% of our membership comes back for tire changeover in the following season. We know that when they come back, they spend about $300 on a repair order. We know that a third of them go into the store and spend $50 in the store. So you can start to build a story and an audience and there's lots of opportunity for us to work on conversion, as you can imagine, with that type of data. And so when we think about how we drove the 30% number that Allan talked about in his opening remarks, we use different tactics and some of the data that came out of the Triangle program is really what kind of points us in the right direction with respect to engaging with those members on a one-on-one basis either to remind them to come back to do their winter changeover or to incent them when they were coming to pick up their car to shop at the store. So that's really what this -- the power of the program is kind of I think well-illustrated with the category, as you point out, like tires and auto service.

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Operator [61]

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(Operator Instructions) Our next question is from Patricia Baker with Scotia bank.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [62]

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Both Allan and Stephen referenced the consumer brands division and clearly the work that you've done there has been instrumental in driving sales and margin over the last few years and obviously it has scope across all of the banners. But I'd be curious to really know a lot more about that division. How it's structured? What range capabilities and activity take place within the division? I assume there's research development, testing. Really want to understand the process of how a new brand comes to fruition. Maybe you could simply just talk about how the development of either No Fly or FWD or anything else that you want to talk about. Just to really understand that division within Canadian Tire better.

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Allan Angus MacDonald, Canadian Tire Corporation, Limited - Executive Vice-President of Retail [63]

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It's Allan. It's interesting because the way we've structured consumer brands is really to prevent against a phenomenon. I was wisely explained to yesterday that small trees can't grow underneath a big tree. We separated it out from the main business and there's a number of really important elements. Marketing is managing the brands with a view not to the value they create for a particular flyer category promo merchant, but with the value they create for the brand. So, that's a big change for us. We have a design team that has a number of capabilities that are sort of compartmentalized. So in the case of Mark's, long tradition of design capability and innovation when it comes to fabric and clothing design. So No Fly Zone came out of Mark's -- a component of Mark's, which is now part of consumer brands, which was run by the man sitting to my left, PJ Czank in his previous life and that was really about working with some suppliers in the market on some innovations they've been doing. No Fly Zone took us 8 years to bring to market because it had a lot of Health Canada hurdles to get through, but we're really, really pleased we're there. Then you take Vermont Castings and Paderno, both run with an internal engineering and design team who go right to the shop floor and design from the ground up. So, the Paderno countertop appliances that we've brought to market, we own the tooling and the design for all of those. Along with the Vermont Castings barbecues have been in the works for about 2 years now. So, we have bespoke teams with each their own industry skill set and capability that match with a series of designers that have specialty in that given area. They are coupled with a marketing and brand design organization that helps build them the brand. And at the end of the day, we produce believe it or not big binders for every brand that outline the strategy, the category, the brand hierarchy, the product set, the specs. Then it gets turned over to our procurement and sourcing organization who work to bring it to market. And then finally, the merchants who have been involved every step of the way of course. And when we think about things like loyalty in the Triangle program, those insights inform the decisions we're making. It's no accident that we went after barbecues, it's no accident that we went after barbecues at the premium level and it's no accident or coincidence that we didn't just go with barbecues; we went with accessories as well and that potentially this could have international appeal. So it's a great team working together. It's few hundred people now. And look, we're really proud of them and I think the magic for us is going to be how do we make sure that these relatively little trees continue to be able to grow.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [64]

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Okay. I will add a follow-up, not necessarily follow-up, but it's a very small question. Allan, in your remarks you talked about the net promoter score at the deliver-to-home being the best across the company. I'm just curious whether there's learnings to come out of that particular stat that you could pull back into other aspects of the business to look at what are -- what's behind that net promoter score being the strongest and are there learnings there to advance net promoter score across other parts of the business?

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Allan Angus MacDonald, Canadian Tire Corporation, Limited - Executive Vice-President of Retail [65]

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And it's a great question and there are -- I mean we -- net promoter score, the best way to think of it as you well know is a summary of a whole bunch of other drivers. But you derive from the analytics what's material in terms of impacting a customer's likelihood to recommend. When we understand that, you then apply it to different parts of the business and see if it has the same impact. So in the case of a deliver-to-home, it could be you could end up focusing on an element you think is really important and find out the true driver of likelihood to recommend is something that you were doing well that you didn't even realize was that important. So, we're tearing it all apart. The question of speed is really, really important when you put everything together and you say okay, Canadian Tire's going after building One Company, One Customer; share of wallet with one customer, with one company. They're obsessed with net promoter score. They want to create more high-value customers. That would make it obvious to say then well, of course they're never going to sacrifice growing at channel at the expense of NPS unless there's a really, really good reason to do so. So, we're trying to move all these things in tandem so that our customers are walking away with a closer connection to Canadian Tire. And you see that when -- in my remarks, I said it's not about growing the channel, it's about growing the customer. And we're really, really pleased that this is going to complement not a competitor.

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Operator [66]

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Thank you. This was our last question. This concludes today's call. A webcast of the conference call will be archived on Canadian Tire Corporation Limited Investor Relations website for 12 months. Please contact the IR team if there are follow-up questions regarding today's call or the materials provided. Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.