Canadian Tire boosts dividend

TORONTO — Canadian Tire Corp. (TSX:CTC) boosted its dividend Thursday in a sign it is confident about future growth even as the retailer undergoes a major overhaul in how it manages its various divisions.

TORONTO — Canadian Tire Corp. (TSX:CTC) boosted its dividend Thursday in a sign it is confident about future growth even as the retailer undergoes a major overhaul in how it manages its various divisions.

“In looking at our results I’m quite pleased with where we stand today compared to just a year ago,” president and CEO Stephen Wetmore told a conference call with analysts to discuss the company’s third-quarter earnings.

“We’re in a fundamentally stronger position today than a year ago and I am confident that we are focusing on the right things to return our core retail performance to our aspiration of three to five per cent top line growth.”

Canada’s largest hardware and home goods chain’s said its quarterly dividend will increase to 27.5 cents next year from 21 cents.

The 6.5-cent quarterly increase was announced after the retailer reported its third-quarter profits rose 21 per cent to $103.2 million, or $1.46 per share, when factoring in a restructuring charge of $14.7 million.

That was up from $85.4 million, or $1.11 per share, in the same three-month period a year earlier, with operating revenue improving 1.6 per cent to $2.2 billion.

The results easily beat the expectations of analysts for earnings of $1.21 per share on $2.23 billion in revenue.

The $14.7-million restructuring charge was the result of a shakeup in the company’s executive suite and a decision to shift its separate units under one corporate umbrella to eliminate duplication and bloated costs.

That overhaul came just months after the company announced in April it was refocusing on its core automotive and retail businesses instead of other divisions like financial services and Marks, which remained the main drivers of growth in the most recent quarter.

Canadian Tire Financial Services, for example, posted a 175 per cent increase in earnings before income taxes to $51.3 million in the quarter, while Mark’s retail sales are up 4.5 per cent, much higher than Canadian Tire Retail.

“It hasn’t escaped me that our earnings strength this quarter is driven by CTFS and our retail performance at Marks is coming back in line with historical trends,” Wetmore told the analysts.

“We have work to do to drive growth across all of our categories in our core business. But I also think that we are making progress in the major areas we identified in April that are key to achieving these objectives.”

Retail analyst Robert Cavallo of Mackie Research said the better than expected earnings were impressive, but he was waiting to see them continue over the coming quarters.

“We still see some reason for caution with retail results, which are still soft, and financial services, which is growing its share of the consolidated results.”

While the financial service division posted impressive results, that segment can be a double-edged sword for companies that diversify away from their core areas, said Brian Yarbrough, a retail analyst at Edward Jones.

“In good times, it’s very good, in bad times it can be very bad. If you think about it, ’09 was a very bad time, a lot of bankruptcies so their writeoff rates went way up, their credit metrics started deteriorating,” he said.

“Now their credit metrics are improving a little bit faster than expected.”

Retail sales, which are at the centre of the company’s new-found focus, rose a modest 2.5 per cent to $2.51 billion, while retail stores open more than a year saw sales grow 1.4 per cent.

Sales of merchandise in key categories, including backyard, cleaning, exercise and outdoor recreation grew over last year.

Petroleum retail sales were up almost four per cent after suffering a 20 per cent decline in the year-earlier period.

In the automotive division, growth came in light maintenance parts and auto pride and accessories, but that was offset by slower sales in heavy auto maintenance parts, auto fluids and tires.

Canadian Tire is trying to refocus on its automotive business that helped build Canadian Tire into a household brand, but expects weakness in that area to continue throughout 2010.

Canadian Tire’s auto sales have been hit by weaker consumer demand, more competition and a deteriorating reputation in the business that once built the brand.

However, it’s too early to tell whether the company’s reorganization and refocus on its automotive division has had any effect on profitability, Yarbrough said.

“They need to get the automotive going,” Yarbrough said. “If you think of Canadian Tire, they’re known for their automotive, but if you ask half of Canadians they’ll tell you they’ve had a bad experience on the automotive side of things.”

“If they can get that improved that could be a very big driver of longer term growth,” Yarbrough said.

Speaking on that issue, Wetmore said in-store training is progressing and that the company’s customer survey index is showing “early signs of improvement in automotive, specifically in the areas of overall satisfaction and likelihood to recommend.”

As part of a store renewal plan announced at an investors day in April, Canadian Tire is concentrating on expanding so-called “smart stores,” which aim to direct customers more easily around the stores and highlight the automotive division.

The company is on track to open three new smart stores, three smaller stores and complete 59 smart-store conversions in 2010 and expects to have converted 100 older format stores overall by the end of the year.

Such stores have delivered good sales results and the company plans to convert another 60 stores through 2011, Wetmore said.

Canadian Tire has a workforce of 58,000 and operates 273 gas stations and 482 retail stores across the country.

Canadian Tire shares gained $2.21, or 3.33 per cent, to $68.55 Thursday on the Toronto Stock Exchange.