Canadian Tire Corporation, Limited (CTCA) Earnings Call Transcript

Thank you for standing by. My name is Rebecca, and I'll be your conference operator today. Welcome to the Canadian Tire Corporation earnings call. [Operator Instructions] Now I will pass along to Karen Keyes, Head of Investor Relations for Canadian Tire Corporation. Karen?

Thank you, Rebecca, and good morning, everyone. Welcome to Canadian Tire Corporation's Second Quarter 2026 Results Conference Call. With me today are President and CEO, Greg Hicks; Executive Vice President and CFO, Darren Myers; and Executive Vice President and Chief Operating Officer, T.J. Flood. Before we begin, I'd like to remind you that today's discussion contains information that may constitute forward-looking information within the meaning of applicable securities laws, including management's current expectations regarding future events and the company's True North strategy. Although the Company believes that the forward-looking information in today's discussion is based on information, estimates and assumptions that are reasonable, such information is necessarily subject to a number of risks, uncertainties and other factors that could cause actual results [Technical Difficulty] from those expressed or implied in such forward-looking information. For information on material risks, uncertainties, factors and assumptions, please see the company's MD&A, which is available on our website and filed on SEDAR+. The company does not undertake to update any forward-looking information, whether written or oral, except as required by applicable securities laws. I'd also like to highlight that because last year had 53 weeks, comparable sales for Q2 are presented on a shifted basis comparing weeks 14 to 26 of this year to weeks 15 to 27 of last year. 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 before stepping back into the queue and please contact Investor Relations if we don't get through all the questions today. And with that, I'll turn the call over to Greg. Greg?

Thank you, Karen, and good morning, everyone. The agility and discipline of our team continued to be tested in Q2 in an operating environment that was substantially similar to Q1. Yet again, we face uncooperative weather with CTR hampered by wet spring and summer days and consumer sentiment remained soft. Ultimately, we demonstrated our ability to deliver for discerning customers and achieved strong financial results. Consolidated retail sales increased, while EPS jumped 10%, coming in at $3.94. Importantly, we advanced in areas that matter to us strategically as we build a stronger retail system with growth in loyalty, digital and new concept stores, all outpacing our broader retail sales. Both Mark's and SportChek delivered impressive comp sales, amplified by new and modern stores that are outperforming on all metrics and benefiting as Triangle loyalty members move around our enterprise retail system. Mark's grew with existing and new customers with NPS and sales up, including a record Father's Day. And our World Cup fan gear performance proved once again that SportChek is the undisputed destination for athletes and enthusiasts with one store manager literally selling the Canada jersey right off his back. Shifting gears to customer sentiment. For a long while now, consumers have been living with the threat of trade wars and tariffs and managing the day-to-day pressure of higher food and gas prices. This was evident in Q2 as we saw our credit card holders spending significantly more on gas than they did last year, putting correlating pressure on our business. However, our best customers, Triangle members, showed up with sales, spend and trips per member all outpacing non-loyalty equivalents. And more broadly, we saw continued spending across all cohorts led by value-oriented and higher debt members. To the extent that Q2 was a weather story, declines in major outdoor categories at CTR accounted for more than 100% of our sales challenge. Many other categories performed well. And even in our weather-challenged categories, we continue to see discretionary dollars in the market with strong sales of our new barbecue lines and innovative patio designs. So as I reflect on Q2, the conclusion is clear, weather pressured CTR balanced by great sales at Mark's and Chek in an environment where customers are spending carefully. For our part, we continued to double down on strategies that work in a value-driven environment. We kept our value proposition sharp using our DaiVID AI analysis to drop prices on more than 5,000 products. And we saw strong customer response to lower prices on essentials like cleaning and storage. We issued significantly more Canadian Tire Money through Triangle bonuses and our growing list of partnerships. Personalized loyalty promotions hit the mark, attracting and reengaging more Triangle members, driving loyalty sales up 3.5%. And exclusive offers for credit card holders gained traction, driving higher eCTM issuance at the bank. On average this year, credit card holders who activate offers are not only visiting us more, they are buying baskets that are 5% larger than noncredit customers. As I turn it over to Darren to dig into our numbers, it's clear our Q2 results did not come easily. They are a reflection of our discipline and a credit to our team. We have our hands firmly on the wheel, managing the right price margin, balance in your OpEx and wise investments for the future of our retail and bank businesses. Over to Darren, and I will return in a few minutes for a quick update on exciting True North advancements.

Thank you, Greg, and good morning, everyone. We delivered a strong financial quarter in Q2 with disciplined execution, helping offset demand headwinds. Diluted normalized earnings per share was $3.94, up 10% year-over-year. This reflected higher Retail segment IBT, a lower share count and a favorable blended tax rate. CTFS was in line with last year as strong top line growth offset planned investments. Let me walk you through the quarter, starting with Retail. Retail sales and revenue were up in the quarter, supported by Petroleum, where higher gas prices more than offset lower volumes. Excluding Petroleum, Retail sales were up 2.5%. Retail revenue was down 1.1% as growth at SportChek and Mark's was more than offset by lower sell-through and dealer restocking at CTR. Comparable sales were up 0.7% overall despite a tough prior year comparison that benefited from favorable weather and patriotic purchasing. SportChek's 8% comparable sales increase was a very strong result, supported by strategic inventory investments ahead of major sporting events. World Cup sales accounted for roughly half of the growth with Montreal Canadiens fanwear sales also contributing. Outside fanwear, athletic footwear performed well, while categories like cycling were more muted. At Mark's, comparable sales were up 4.2%, benefiting from a rainier spring. Industrial footwear and workwear led the growth. Newer format BBB stores outperformed, led by strong denim sales and strong sales in casual wear categories. At CTR, comparable sales were down 0.8% versus 2025, while up 5.5% on a 2-year stack basis. Despite a tough prior year comparison, there were several positive highlights in the quarter. Promotional offers resonated well with consumers. Seasonal categories such as patio and barbecue were up and tire change activity picked up early in the quarter, supporting the 24th consecutive quarter of growth in automotive. Fixing and Playing also outperformed overall CTR sales. These gains were offset by softer performance in Gardening and summer climate control, particularly in Alberta and Ontario where weather was inconsistent through the quarter. Slower sell-through had a knock-on effect on dealer restocking and CTR revenue, which was down 3.5% in the quarter. Although CTR revenue has outpaced sales over the last 12 months, the two are broadly aligned year-to-date with sales slightly ahead of revenue and up 1% against strong 2025 comparatives. As you know, these metrics tend to converge over time. At the end of Q2, CTR dealer inventory was up 1%, mainly in Seasonal categories. Sell-through has improved since quarter end as summer weather arrived more broadly across the country. Across the banners, corporate inventory was up 7%. About 1/3 was in CTR Seasonal categories with the balance supporting growth at SportChek and Mark's, including World Cup sales demand that extended into July. Turning to margin now. Excluding Petroleum, our gross margin rate was 35.1%. Our rate improved 33 basis points over last year, driven by positive contributions from SportChek and Mark's. We also continue to leverage our margin tools, including DaiVID, to target promotional investments. Turning to operating costs. We are seeing the benefits of stronger performance management and tighter cost discipline while continuing to invest in the business. While some quarter-to-quarter variability is inevitable, we were pleased with how this came together in Q2. Retail SG&A was $10 million lower year-over-year. And SG&A as a percentage of revenue, excluding Petroleum, was stable at 23.3%. Supply chain execution was solid and savings from last year's restructuring, lower variable compensation and the shift of some marketing expense to Q3, helped offset higher real estate store operations costs. Depreciation and amortization costs were up 4% year-over-year, driven by lease renewals in our Vancouver area DC. Despite these factors and certain insurance recoveries last year, Retail IBT was up 1.2% at $201 million. Normalized retail EBITDA increased 2.2% to $498 million. Retail ROIC was 11.1%, an improvement of 80 basis points year-over-year. Moving to Financial Services. We continue to deliver strong GAAR growth with a 4.2% increase in the quarter. Improved cardholder retention helped to grow active accounts and average balances were up, reflecting higher card spend. SG&A was up as planned, trending at a rate of approximately 28%, where we expect it to stay through the second half. The spend is supporting account acquisition, engagement and ongoing project investments. Key risk metrics remained stable with aging flat year-over-year at 3.3%. The net write-off rate held at around 7.2% despite elevated insolvencies. This remains consistent with industry trends, and we continue to monitor closely. The allowance remained unchanged at $935 million, and the allowance rate was 11.8%, reflecting higher ending receivables. Turning to capital allocation. Our store refresh program continues to advance with 30 projects completed in the first half. We expect that number to more than double by year-end, modestly below our original plan of 70 projects due to some shifts in timing. Our pipeline remained strong and vacancies created by HBC exits are creating attractive future opportunities for our Destination Sport and BBB concepts. Reflecting the change in phasing and continued focus on capital discipline, we now expect CapEx to fall into the range of $450 million to $500 million in 2026. Our buyback program is ongoing with an additional $85 million of shares repurchased in Q2. Before I wrap up, let me spend a moment on what we're seeing in Q3 and the balance of 2026. We're encouraged by the early Q3 sales growth as summer weather has arrived. That said, there's still more than half the quarter to go. And as it's been all year, the consumer environment remained dynamic. We continue to plan for growth in the back half of the year on a 52-week basis. At CTR, the prior year comparison becomes less of a headwind, while at SportChek, we expect some moderation as we cycle the run-up to the Blue Jays' historic 2025 World Series run and favorable Q4 weather. We're pleased with the Q2 retail gross margin performance with margin rate, excluding Petroleum, 35.1%. We continue to feel good about our full year North Star target of 35% plus despite some expected Q3 headwinds from higher transportation fuel surcharges and targeted investments. We're pleased with the reduction in SG&A in the second quarter as we continue to manage our costs and pace of investments. We do expect some growth in Q3 dollars in part due to timing shifts from Q2 and to support growth in the business. Overall, we are pleased with the team's execution, and we're seeing the benefits of greater discipline, stronger performance management and a sharper focus on execution. We remain focused on staying agile, putting the customer first and investing in True North. We see a clear path to unlocking sustainable sales growth, improving bank profitability and advancing towards our financial framework over the long-term. We look forward to updating you again at our Q3 results call in November. With that, I'll hand things back to Greg.

Thanks, Darren. For the past many quarters, I've used the term performing while transforming. This is the idea that we have both a day-to-day business and a long-term strategy moving in parallel. In the short-term, you're seeing evidence of our True North advancements with effective merchandising strategies, AI pricing, OpEx discipline and a sharper operating model. Longer term, we're excited about continued progress across all of the True North cornerstones. In Retail forward, we have plans to expand both our enterprise footprint and our reach with accelerated ambitions for our modern SportChek and Mark's stores. This remains a real opportunity for us, and our real estate team is actively engaged on sites, including some former HBC leases. Ultimately, True North is about building a long-term omnichannel advantage that gives customers the flexibility to shop with us however they choose. To this end, we are making considerable progress in eCommerce, where our sales growth continues to significantly outpace bricks-and-mortar. I know you've been following closely as we have created an increasingly compelling and convenient digital experience. Recently, that progress has accelerated in several ways, including: expanding AI search to become increasingly conversational and smart; adding buy now, pay later options online at Mark's and SportChek and CTR; launching free ship-to-home services exclusive to Triangle members, which we are still refining as sales and customer satisfaction scores climb. Now, if you visit any one of Canadian Tire Mark's or SportChek online, the other banners are not only visible, but one click away. While this may seem like a small convenience, it's indicative of a bigger move towards digital harmonization, taking advantage of our scale, showcasing our full, multi-banner assortment and moving customers more easily across our enterprise. In fact, early results have shown that CTR's sizable web volumes can generate impressive customer traffic flow to both Mark's and SportChek. Ultimately, this is just the first completed phase of our digital harmonization strategy with plans for integrated search, card and payment functions to come. In our Triangle-powered cornerstone, we are making membership more valuable, increasing personalized offers and connecting Triangle to more aspects of everyday life. More than 2 million of our loyalty members are now active with our partners at Petro-Canada, RBC or WestJet. And when our partnership with Tims Rewards launches in a few weeks, millions more will be able to earn Canadian Tire Money with their daily coffee. A major plank of our True North strategy, these partnerships continue to drive incremental sales. And finally, I'll conclude with a theme you should expect us to return to time and again, which is our customer-centered growth strategy powered by AI. On our last call, I introduced our MOSaiC customer intelligence platform and our plan for a fundamental pivot from selling products to serving the occasions of life. With MOSaiC, we've analyzed hundreds of millions of customer transactions, Triangle loyalty data and volumes of external insights using bespoke AI to identify where our retail system can show up best in new or existing categories. And after significant development and work with Microsoft, this platform is ready for prime time. Our major banners, stores and sites are executing a new approach to the back-to-school season, coordinated enterprise-wide. Using AI intelligence, we have introduced new categories of products, new approaches to merchandising and new price points. And we are coordinating our marketing, loyalty and digital promotions as an enterprise, Canadian Tire, SportChek, Mark's and Triangle, all combined to create scale. Together, we know that the parent buying sneakers also needs crayons and some jeans. We know that the kid moving into a dorm wants a laptop, a fan, furniture and a hoodie. We know how to serve them in each of our banners, but we now have detailed plans to solve more of their back-to-school needs by moving them across our enterprise. As an illustration, for the first time ever, you will see Mark's and SportChek marketing tucked into your Canadian Tire flyer. I just spoke to the fact that our harmonized websites will encourage customers to shop any of our banners and our combined assortment with just a click. Our sites now have enhanced data like essential shopping list, FAQs and tips, all designed. So AI agents can discover, understand and recommend our back-to-school products when customers search the occasion on their favorite LLM. And our Triangle team has created personalized offers designed to both help and reward customers bespoke for their specific back-to-school needs. When we launched True North, you asked us what we meant when we said we would drive customer-centric growth. And this is a big part of the answer. AI insights are helping us dig deeper into our total addressable markets and to find new ones. Back-to-school is a $3.4 billion market in Canada. We have low single digit share, but our insights show us that Canadians believe we have a right to win in this space. It's a small business for us today, but we have a path to meaningful upside, and we're going to learn what's possible turning True North theories into action. Internally, we call this enterprise-wide customer occasion a customer lighthouse. Our next lighthouse is holiday, a much larger business for us with meaningful opportunities to grow share and sales. And I look forward to telling you more on our upcoming calls. To close, I feel good about the team's agility in the face of a tough consumer backdrop. At the same time, I'm confident that we are also building for the future. As we open the call for questions, I'll answer the first one now. We are thrilled that the Heated Rivalry guys like our plaid bag. We did not pay them to carry it and no, I can't get you one, but our stores would be happy to serve you in the coming days. And with that, let's open the line to questions.

[Operator Instructions] Our first question comes from the line of Irene Nattel of RBC Capital Markets.

Now that my hopes are dashed, I'll just have to ask a different question.

That was for you, Irene.

Really intrigued by your last comments around sort of the shift from -- sort of from product to customer-centric, need-centric. What are your early thoughts around the implications with respect to -- do you have -- like are you surfacing gaps in your product offering? Or is this really just about packaging things differently for the consumer? And as you progress down this road, how will we, the investment community, see this reflected in the financials?

Yes. Maybe I'll take that, and T.J. may want to jump in as well. I think contextually, Irene, if you think about our lighthouse strategy, it's really just a more modernized approach to traditional category management frameworks. Given our enormous customer data, we're in a great position to integrate our customer insights into the planning and execution of how we go-to-market and deliver more effectively on full customer shopping occasions. We are prioritizing each occasion for share growth and where we have a right to win. And typically, each occasion is associated with a set of categories across our whole retail portfolio, not always, but often it's a set of categories across our total retail portfolio, with both trip drivers and basket builders. Each occasion would be underpinned by a detailed playbook across the whole organization for required assortment and pricing changes. So yes, we are adding new assortments. I mean some of the insights, I'm thinking about holiday specifically around gaps in our assortment, around things like lower-priced wrapping paper and just how we go-to-market with wrapping paper, how the customer thinks about us for wrapping paper and there's 4 or 5 other categories within holiday like that. I'm just using wrapping paper as an example. Back-to-school, we've introduced from Chrome -- $500 Chromebooks to miniature fans for dorm rooms, all things that were gaps in our assortment before. So yes, the playbooks will identify required assortment changes, identify pricing changes, channel strategies and the marketing required to win share in the occasion. It's new, but we're excited. I mean PJ and the team at Mark's are super excited about back-to-school and how that all comes together for Mark's. As an example, we're engaging the whole organization in a different planning approach that is very, very customer-centric. So I'm feeling good about how we're approaching the early lighthouses. And I think what underpins all of it is just this fantastic data that we have. So more to come. We'll continue to talk about lighthouses. We'll talk about the postmortem associated with lighthouses. Not sure it will -- We may stop short about market share in occasions, but you'll be hearing lots more about this is really how we're going to market, Irene.

Our next question comes from the line of Martin Landry of Stifel Canada.

I would like to dig in into your eCommerce sales. They were up 14% year-over-year. You alluded to improvements you've made in -- on your website, the ease of clicking on other brands. Just trying to understand a little bit, 14% growth, how does that compare to the previous quarters? And is there any banners that were the main drivers behind that growth?

Maybe I'll take that one. Ultimately, the strategy is about giving customer optionality around how to shop us. From an outcome standpoint, we believe there are significant opportunities to increase our total addressable market and market share by removing some of the friction for customers in shopping us across channels. I think as we've discussed before, we've been working to drive our capabilities and ensure that our customer experiences were strong. And we now feel the time is right as a big lever, a big example, to use free shipping as an option and demand lever for CTR while continuing to improve our digital experiences across all of our banners. I think, as you point out, I would say what we're doing seems to be working. It's a long game, but we're encouraged that eCom growth continues to significantly outpace bricks-and-mortar growth year-to-date. As you mentioned, comp eCommerce sales were up 12%, backed by 14% in CTR. That is more of a separation or higher performance than what we've seen in many, many quarters. It is coming predominantly on the backs of -- free shipping certainly from a growth standpoint at CTR is a significant driver. But I think making that offering also just brings more visibility to our buy online, pick up in stores. We see growth in that channel as well. We continue to benefit from good traffic across the site. So we're seeing those visits translate into more purchases. And we're also getting traction, Martin, on extended online-only assortments, which is, again, fairly new for us. I think we have about 12,000 items now in online only, and that's ramped in the first half of 2026. And I think it really gives us a new tool for broadening our assortments in general as we deploy the Lighthouse strategies that I just talked about. So our expectations going forward, Martin, is growth in both channels, but outsized growth in eCommerce. That's the way we're intending to steer and manage the business.

So it sounds like this was not -- it's broadly based across all banners, not SportChek. I just wanted to see if SportChek had a big influence in this quarter?

Yes. No, not from an eCommerce growth standpoint in terms of driving the overall 12%. SportChek has always had a strong and penetrated eCommerce business. But I -- we touched on -- I touched on digital harmonization for a reason. Strategically, this is a signature move of True North around moving from a HoldCo to an OpCo. True North is about aggregating the scale that we've created for ourselves to better compete with scaled players. And having websites that aren't connected, each having their own digital front door, doesn't really present our scale to the customer. And so the reality is we have an unbelievably deep procured catalog, product catalog, and it's designed for life in Canada with many products that are exclusive to us. So we need to better expose the assortment to Canadians with less friction. So as I said, the tabs are a first start, but a fully integrated search cart and payment experience is the end state that we're building towards. SportChek and Mark's, as I alluded to, just given scale and size, will likely benefit more from traffic flow from that integrated experience. I mean, imagine the breadth of a category like sporting goods when all of our banners are built into an integrated experience for the customer. So like we did - for the other analysts on the call, like we did previously with our investment in our One Digital Platform, we'll keep you posted ongoing on the progress we're making towards that end-state destination.

Our next question comes from the line of Tamy Chen of BMO Capital Markets.

Darren, I was wondering if you are able to quantify at all the magnitude of that favorable timing of some marketing spend that shifted into Q3?

Yes. I wanted to say -- I wanted to give you a little bit of color on it, but it's not a large enough number that I would call out the absolute amount. What I would overall tell you is we're pleased with how we're managing SG&A certainly in the quarter. And for the first half of the year, you see each quarter, we've been holding rate and we've actually made a little bit of improvement in the rate. I think you should expect the same type of thing in Q3. We'll see some growth in SG&A dollars. We'll have a little bit of timing impact, but I think we'll be focused again on -- really on maintaining that type of rate, maybe there was a little bit of pressure. And then just as a reminder for everybody, the restructuring benefits that we had from our actions, they started a little bit in Q3. So there's a small amount in Q3. The lion's share of it starts getting in Q4. So just think about that as you're modeling out your numbers.

Okay. And my other question was, I see it looks like since the beginning of last year, you're disclosing your Canadian Tire, your eCTM growth. It looks like the last, I want to say, 2 quarters, there's a notable year-over-year acceleration in that. Can you talk about that a bit more? Like I assume the acceleration is just from all these partnerships. Can you talk a little bit about what the growth trend was like for eCTM before 2025? And lastly is, like I think historically, the Triangle credit cards is the main driver of these points. I assume that's still the case, not so much from the non-credit card Triangle members?

Yes. Maybe I'll take that. Tamy, it's Greg. I think this is a very concerted strategy, obviously. eCTM is obviously exclusive to us. It's a big part of our Triangle program and a huge part of the value that we're providing to customers in a very difficult environment. And so it's a lever that works very well for us from a flywheel perspective. More issuance equals more redemption, more redemption equals add-on sales and more first-party data generation. So that's the strategy behind it. The primary kind of reasons or rationale for a higher issuance rate this year, you pretty much kind of answered your question. Partnerships are an entirely net new lever relative to last year. And then just this value focus, this is a way that we can give very differentiated value to a value-focused consumer and value economy. And we're -- CTFS continues to be the predominant issuer. And as we work to integrate the bank even more into driving retail value, we are putting new initiatives in place, as I called out in my prepared remarks, for issuing more Canadian Tire Money, offering bonus offers and integrating some of those offers into the online banking platform. So there's a lot of net new initiatives around eCTM and the bank integrating to make retail more successful. So from a relative -- from a run rate perspective, I don't know how to quantify the net kind of difference versus last year. It's elevated for sure this year, and we would expect that to continue.

Yes. The only thing I'd maybe add to that, Tamy, is just, the way we're managing all this and with our margin nerve center, like we have our hands on all the dials on what's the most effective way to go to the market and to stimulate demand and still deliver the types of financial metrics that we're looking to deliver.

Our next question comes from the line of Vishal Shreedhar of National Bank Financial.

Can you separate the benefit on gross margin in retail from banner mix and help me understand the underlying margin performance at CTR? And also, as you discussed that, maybe help us understand the outlook for the balance of the year given freight and foreign exchange and promotional activity as we contemplate our models?

Vishal, it's TJ. I'll jump in on that one. As Darren talked to earlier, we're very pleased with how the teams managed our margins in Q2. We were up 33 basis points year-over-year. And as you articulated, banner mix did play a role in that with the growth in Mark's and SportChek. And we also, particularly at SportChek with so much fanwear sales, we did benefit from regular sales from that perspective. We felt pretty good about our margin rates within CTR, not materially off of last year, a little bit below last year, but nothing material. And we continue to build, and build our capabilities around promo and pricing and our margin nerve center and leveraging our AI tools around DaiVID to manage margin rates. We -- As we've said on previous calls, we feel the capability we've built here is on par with what you can see from some of the best retailers operating at global scale. The other thing I'll highlight is that with the focus that Canadians are putting on value right now, we were able to invest in price where we thought it made sense. And as Greg mentioned, we had over 5,000 regular price decreases on top of our already sharp promotional activity. So we are really trying to lean into value to help inspire demand. And I guess what I would say as we go forward, as you know, and we talk about it a lot, margin rate can be choppy quarter-to-quarter, but we do remain focused and committed to our North Star from a margin rate perspective for the year. We do expect to face some headwind, as Darren described, on fuel in Q3, but we do have the full year North Star in mind as we go forward here.

CTR same-store sales declined 0.8%, and that was more than caused by these weather-sensitive categories, as I understood it. Maybe you could help us understand ex the weather categories what CTR performed at? And I ask in the context of the inventory at corporate increasing 7% and my interpretation of your comments that Q3 at CTR has rebounded as weather returned to more normal patterns?