Morningstar | On-Track Start to 2019 Reinforces Our Outlook for Canadian Tire; Share Trade Fairly
Our CAD 143 fair value estimate for no-moat Canadian Tire should not change much after first-quarter results. We also do not anticipate altering our long-term outlook (low- to mid-single-digit revenue growth and low-double-digit adjusted EBITDA margin on average for the next 10 years).Canadian Tire saw 3% first-quarter revenue growth against 109 basis points of adjusted EBITDA margin contraction (to 12.5%, excluding fuel and the impact of new lease accounting standards). While we anticipate better full-year results (5% revenue growth against roughly flat adjusted EBITDA margins, excluding the accounting change), we anticipate timing to contribute, with a late winter leading dealers to draw down inventory, which should be a late-year benefit.
In Canadian Tire’s smallest retail quarter (fiscal 2018’s opening period accounted for 20% of full-year retail revenue), financial services had the most noteworthy performance, with 9% receivables growth ahead of our 8% full-year mark. The segment (roughly 30% of pretax earnings) fuels retail performance, with the revamped credit card and rewards program generating larger-ticket sales while building Canadian Tire’s customer data and analytics efforts. While we believe its data capabilities are too nascent to counterbalance the intense competitive environment that drives our no-moat rating, we are encouraged that the firm has started to capitalize on the opportunity.
We also have a favorable view of Canadian Tire’s own-brand portfolio. Penetration at Sport Chek rose to 12% from 8% a year ago; with roughly 40% and 60% levels at the namesake stores and Mark’s, respectively, we believe management has done well to create a more proprietary assortment. However, competition remains intense in categories and among retailers, and we do not believe the labels are sufficiently differentiated to command a sustainable competitive edge (especially with its most advantaged brand, Helly Hansen, also sold elsewhere).
Canadian Tire Corporation comprises three main business operations, which provides a range of retail goods and services. Co.'s three main business operations are: Retail, which is conducted through a number of banners, including Canadian Tire, Canadian Tire Gas (Petroleum), Mark's, PartSource, and various FGL Sports banners; CT REIT, which is a real estate investment trust engaged in owning, developing and leasing commercial properties; as well as Financial Services, which markets a range of Canadian Tire-branded credit cards, insurance and warranty products and processes credit card transactions with respect to purchases made in Canadian Tire associate stores and Petroleum outlets.
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