Canadian Tire SWOT analysis and financial report

Published:

Part 1 Extend Financial Stake

Canadian Tire has been recognized as a successful retail brand in Canada, still surviving the competitive retail environment for years. Regardless of the issues that involve customer service and threats from global companies, Canadian Tire continues to maintain a strong and loyal clientele. Based on the information addressed, it is easy to realize that Canadian Tire should extend its financial stake. The concerns emphasized in the SWOT analysis indicates that the company must aim to resolve current issues from its weaknesses and threats in order to remain at steady level in the retail environment.

Part 2

Canadian Tire Corporation Limited, is a Canadian retail company founded in 1922. As Canada’s largest retailer, it has a wide selling range which includes automotive, sports and leisure, and home products.

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Canadian Tire’s revenue by banner is composed of Canadian Tire, Petroleum, Mark’s, Financial Service and FGL Sports. Since 2012, the consolidated revenue has showed a continuously increasing trend every single year. This appearance could be attributed to four reasons. Firstly, the higher shipment is concerned in same-store sales growth at Canadian Tire and same-store sales across the Mark’s and FLG Sports banners. Secondly, because of rising volume as new sites which were added on the 400/401 highways, the retail sales in Petroleum has been growing. Although, price per litre was increased, the company could focus on convenience products. Process enhancements and new product offerings which have led to an increase in the average account balance also affect the revenue in Financial Service. The acquisition of PHL in August 2013 also made an impact in increasing profits to Canadian Tire.

Although, the number of stores declined since 2012, retail revenue has continued to increase. This initiative rationalized the FGL Sports corporate stores, with future growth in the network to come primarily from Sports Check banner stores. Financial Services’ gross average accounts receivable for the total portfolio has accelerated during the last three years. Especially in 2014, the firm made more measures to support Financial Service to continue its trend of strong GAAR increases.

In 2010 Canadian Tire Corporation began to focus it's business to support growth and productivity improvements in order to achieve specific financial goals and it announced several implementations that follow. These financial aspirations came to a close at the end of the fiscal year 2014.

Starting with a financial target specifically relating to Canadian Tire retail sales growth of 3 per cent to 5 per cent over the strategic plan period of 2010 to 2014, the company was only able to achieve 2.4 per cent, they attributed this short fall to consumers becoming more cautious in spending in an uncertain economy. In spite of this Canadian Tire has seen positive outcomes in the past two years due to customer's positive responses to the initial phases of the company's retail growth strategies and marketing programs.

In 2008, Canadian Tire began it's new store concept “The Smart Store”. This store concept includes enhanced products in it's Living category with inspiring displays as well as store within a store concept of Hunting & Fishing categories. All these improvements resulted in an enriched customer experience which translated into bringing this concept across to 196 stores by end of 2014.

Another significant initiative that was fruitful in 2014 came from the company's Retail Estate division CT REIT (Canadian Tire Real Estate Investment Trust). During

2014, CT REIT completed 13 property acquisitions all of which made up approximately 1.5 million additional Square feet of gross leasable area. This than translates to long term monthly cash distributions on a tax- efficient basis for it's share holders.

Technological advancements also provided support to the company's operations. During 2014 a new data centre in Winnipeg was implemented to provide extra support and to improve speed to the market. In 2014 a partnership with Communitech in Waterloo was made to give access to advanced talent that will provide enhanced retail experience by investing in in-store digital intergration and the company will continue to invest in technology in order to remain competitive in years to come.

Another program that was completed in October 2014 is their very well known Canadian Tire Money Loyalty program. However customers can now collect electronic money using the Canadian Tire mobile app., yet another strategy to build personalized relationships with Canadian Tire loyal customers over the long term.

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On October 1,2014 the company made a strategic partnership with Scotiabank by acquiring a 20 per cent interest in the company's Financial Services business for net proceeds of $476.8 million. Within the next 10 years the company has an option to sell a further 29 per cent of the Financial Services business to Scotiabank any time which translates into financial flexibility for shareholders. As part of this transaction the company can rely on a credit facility from Scotiabank of $2.25 billion, which may be utilized to cushion any refinancing risk of it's credit card portfolio.

Overall with the Company’s diluted EPS, dividends paid per share and stock price that have risen over the past three years. And it's partnership with Scotiabank business pursuant to a strategic partnership agreement that includes a co-marketing arrangement. The Company’s Class A Non-Voting share price grew 22% over the prior year. The Company has a track record of increasing its annual dividend. Furthermore, In 2014 the company increased its annual dividend to $2.10 per share, and dividends paid per share represented 26.4 per cent of prior year normalized EPS. If they continue to invest into their strengths to meet their objectives they should continue to have a healthy total return of 10 per cent to 12 per cent including dividends for their shareholders over the next few years.

Liquidity

Current Ratio current asset÷ current liabilities

2015

8,510.2 ÷ 4,578.8 ≅ 1.86:1

2013

7,977.8 ÷ 4,322.1 ≅ 1.85:1

There seem to be little improvement from 2013 to 2015. The ratio isn’t the best but it is slowly getting better.

Quick Ratio (current asset- inventory)÷ current liabilities

2015

(8,510.2-1,623.8) ÷ 4,578.8 ≅ 1.50:1

2013

(7,977.8-1,481.0) ÷ 4,322.1 ≅ 1.50:1

No change between the two years. Canadian Tire would be able to pay off their obligations. The company however would not have a lot left over after that so the shareholders shouldn’t expect high dividends.

Profitability

Gross Profit on Sales (%) (Gross profit ÷ sales)×100%

2015

(4046.0 ÷ 12462.9)× 100% ≅ 32.5%

2013

(3722.3 ÷ 11785.6)× 100% ≅ 31.6%

Slow improvement the gross profit and sale have grown within the year. This shows the grown within the year. This shows the company has steady growth when it comes to profit on sales.

Return on Sales (%) (Operating income÷ Sales)×100%

2015

(878.2 ÷ 12,462.9)× 100% ≅ 7.0%

2013

(784.6 ÷ 11,785.6)× 100% ≅ 6.7%

This shows how much is left over out of each dollar of sales after expenses. The change from 2013 to 2015 is only 0.3% which is expected due to the fact that sales did grow but not by lot. As sales grow so does the expenses the company may need to rethink their expenses.

Return on Assets (%) (Operating income ÷ total assets)× 100%

2015

(878.2 ÷ 14553.2)× 100% ≅ 6.0%

2013

(784.6 ÷ 13630.0)× 100% ≅ 5.8%

Again very little change between the two years, but there still is change and it’s positive change. Doesn’t seem like the company is using their assets to carry out their business mission.

Return on Equity (net income÷ Shareholders’ equity)× 100%

2015

(639.3 ÷ 5630.8)× 100% ≅ 11.4%

2013

(564.4 ÷ 5449.9)× 100% ≅ 10.4%

The return on every dollar that is invested isn’t a lot. However this has grown a bit.

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Debt to Assets (%) (Total debt ÷ total assets)× 100%

2015

(8,922.4 ÷ 14,553.2)× 100% ≅ 61.3%

2013

(8,180.1 ÷ 13,630.0)× 100% ≅ 60.0%

The debt to assets is rising and with that so is the risk. The degree of leverage is high at 61.3% putting the company at a financial risk.

Debt to Equity (%) (Total debt ÷ total shareholders’ equity)× 100%

2015

(8,922.4 ÷ 5630.8)× 100% ≅ 158.5%

2013

(8,180.1 ÷ 5449.9)× 100% ≅ 150.1

The company’s debt exceeds its shareholders’ equity. Meaning that there would a lot of risk with this company if investing.

Interest Cover Ratio operating income ÷ interest paid

2015

878.2 ÷ 122.0 ≅

2013

784.6 ÷ 126.5 ≅

Efficiency

Total Assets Turnover Sales÷ total assets

2015

12462.9 ÷ 14553.2 ≅ 0.85X

2013

11785.6 ÷ 13630.0 ≅ 0.86X

The ratios are both below 1 this means the company isn’t using their assets efficiently. They did a better in the previous year but not by lot.

Receivable Turnover Ratio Sales ÷ Receivables

2015

12462.9 ÷ 4905.5 ≅ 2.54X

2013

11785.6 ÷ 4569.7 ≅ 2.58X

Receivable Collection Period Receivables ÷ (Sales ÷ 365)

2015

4905.5 ÷ (12462.9 ÷ 365) ≅ 144 days

2013

4569.7 ÷ (11785.6 ÷ 365) ≅ 141 days

Canadian Tire needs to work on a collecting receivable. The length between the giving of the loan and the collection is too long. The length of their collections does impact their bottom line in a negative way.

Inventory Turnover Sales ÷ Inventory

2015

12562.9 ÷ 1623.8 ≅ 7.7X

2013

11785.6 ÷ 1481.0 ≅ 8.0X

Inventory Holding Period Inventory ÷ (Sales ÷ 365)

2015

1623.8 ÷ (12563.9 ÷ 365) ≅ 48 days

2013

1481.0 ÷ (11785.6 ÷ 365) ≅ 46 days

Their Inventory Efficiency Ratios show that Canadian tire has a well-placed inventory plan. Product is being sold at a reasonable time and they still have some in stock.

Market- Related Ratios

Earnings Per Share Net Income ÷ Number of common Share

Basic

Diluted

2015

$7.65

$6.96

2013

$7.59

$6.91

Canadian Tire did prove earning per share; they have two different types of shares they are Basic and Diluted. These shares were attributable to owners of Canadian Tire Corporation. The company’s net income had increase from 2013 to 2015 so the share price is accepted.

Canadian Tire SWOT Analysis

Strengths

  • Specializes in automotive parts/materials
  • Offers online shopping through Canadian Tire website
  • One of Canada’s top and largest retail stores
  • Provides financial services for customers
  • Provides promotional activities for customers which increases its market share
  • Offers various types of services for its customers
  • Offers rewards when customers use credit card to purchase goods or services
  • High presence in domestic market

Weaknesses

  • Stores are only located in Canada
  • Not known globally which makes it discouraging to compete with worldwide industries like Loblaws, Metro etc.
  • Share in market is lower than the majority of retail stores in Canada
  • Prices for products have increased over the years which leads to a reduction in customers
  • Market share is limited due to competitive segment

Opportunities

  • To expand worldwide
  • Improve its services to higher standards for customer satisfaction
  • Promote its gas services
  • Pursue to franchise its brand to attract a more diverse audience

Threats

  • Competing retail stores offer a much more convenient service and customer satisfaction (Ex. Wal-Mart, Home Depot, Rona)
  • New competitors in the market are pushing forward
  • Customer inputs have issued poor services and quality of goods

Strengths

Management states Canadian Tire now offers many of its products and services online for purchase in store pick-up across the store network. The company’s commitment is to strengthen its ecommerce platform and focus on finding ways to use technology to service and connect with customers. For example, Canadian Tire now has a mobile app that sends updates to those who have it, alerting them with promotions and feedback from previous purchases. Also, the company offers one of Canada’s most beloved loyalty programs, which is “My Canadian Tire Money TM” which allows customers a choice between paper-based and electronic Money. The Company is well positioned in this competitive environment since it has made investments in its store network, creating consumer-responsive designs like the Smart Store concept at Canadian Tire, the rebranding push at Mark’s and new digitally focused store designs at Sport Chek.

Weaknesses

The major issue Canadian Tire has faced since entering the retail environment is that it’s only located in Canada. Like many other companies, such as Wal-Mart and Loblaws, these companies offer similar services but are international. It is difficult for a Canadian company to compete with one that is global, considering the fact that customers around the world are able to purchase goods and services. As of 2014, studies have shown from previous years that the company have lacked the recognition of its customers and providing them with high quality service. This is one reason why the company has occasionally lost market share.

Opportunities

Canadian Tire has the opportunity to take advantage of its status as a Canadian retailer. Building new locations around the country will definitely cause a potential rise in its market share. However, if the company seeks to double its growth, it would sell its brand to a successful outside organization. For instance, Burger King purchasing Tim Hortons created more business in the United States, now Tim Hortons is located in both countries and consumer satisfaction has also increased.

Threats

Just like any other retail store, Canadian Tire is forced to compete with top industries. It is important for the company to fix their lack of customer service issue because it will drift the same customers away to its rival companies.

http://corp.canadiantire.ca/EN/Investors/Documents/Q4%202014%20MDA%20and%20Financials.pdf

Part 3

Cash Generated from Operating Activities:

Cash Flow statements for the year end of 2014, are overall positive, showing a 12% increase in net income as well as an increase of 12% in cash/cash equivalents. Looking at the Operating Activities, we see the increase in net income as mentioned before. We also see nominal increases on lines that typically have inflow and decreases of cash flow in outflow accounts. One of the sources of concern for Operating Activities is the changes in working capital, dropping from 274.1 million to -83.5 million within the year. As explained further in the document, these changes in working capital are characterized primarily by the purchasing of merchandising inventories and other receivables. This does not cause alarm for the cash flow because while Cash Generated from Operating Activities has dropped working capital still generates a significant 574.8M. Values under working capital were used for the purchasing of inventories and other services that are used to make income. Looking at the operating activities, Canadian Tire has shown a healthy increase for this accounting period of 2014 through their activities using their working capital to increase income.

Cash Generated from Investing Activities:

Investing Activities in the Cash Flow statement indicates that Canadian Tire has been investing in the company last year, even more so in the 2014 period. Canadian Tire had invested more in their property/equipment as well as their intangible assets. Also, utilizing the excess amount of money available to the company, they furthered their acquisition of short term and long term investments. This is a common strategy to take advantage of a strong cash position, utilizing these funds in high earning investments opposed to normal, lower earning savings accounts. However, this is a slightly riskier strategy, investing opposed to savings accounts. Typically, this risk is nominal and would likely result in an increase of cash inflow instead of a bad investment. Currently, this strategy had success within the 2014 year as the maturity of Canadian Tire’s short-term investments nearly tripled last year’s cash inflow from last year’s investments. Analysing the company’s investing activities. These short-term investments are being used to offset Canadian Tires investment in their company. Overall, investing activities have resulted in a significant cash outflow from the company. This is good, however as it shows that the company is willing to lose cash flow to invest to make the company more successful in the long term. The outflow was reduced by 33% in the 2014 year due to the maturity of short-term loans. Some of the possible challenges with this information is the possibility of bad investments both into Canadian Tire and other investments. This risk can be managed, however, not eliminated and is not as liquid as cash to investors selling their shares. Another factor to consider is the recent acquisition of Pro Hockey Life Sporting Goods from 2013. While no capital was used this year it did appear on the cash flow statement. This is important to consider as it may impact future reports depending on the success of the company and is a risk factor. However, depending on the success of Pro Hockey Life it would make a positive contribution to the company.

Cash Generated from Financing Activities:

The Financing Activities under Cash Flow displays Canadian’s Tire’s strategic focus. Stated in their reports to shareholders, Canadian Tire has increased the dividends of their company as well as re-purchasing of share capital. This strategy was used to increase the shares of Canadian Tire (CTC.A). In the investor's presentation on September 2014 one of the objectives of Canadian Tire was to return value to shareholders through dividends and share value. The increase of dividends is good to an extent. Giving dividend payments leaves less retained profits to reinvest for the long term success. However, this should not be an issue due to the increase of investment into the company as mentioned earlier. This is why cash outflow has increased within the dividend section in financing activity. Canadian Tire had also continued their issuance of loans payable, but within the same fiscal year paid off their other loans payable, showing their ability to pay off loans to finance their activities. However, a noticeable increase in issuance of long term debt increases substantially to open up cash to invest within the company. This may become an issue in the future depending on how much long term debt is accumulated and how the debt is used. In the present, this is not a major issue. Overall, within this fiscal year of 2014, financing activities generated 88.6 million inflow comparing a significant outflow in 2013.

Cash Flow Summary:

In conclusion, the company’s cash flow statements are overall good. There has been a modest increase in net income and cash outflow that altered the cash generated from operating activities was used for merchandise that can be assumed to be sold. Risk factors include acquisition of another Pro Hockey as previously mentioned. Furthermore, investing activities were used to support the company’s success in the long term. As mentioned before, maturity of investments paid off well supporting this further investment into the company. Risk factors include the possibilities had bad investments. Finally, Canadian Tire’s strategy, increasing share value and dividends can be arrived through the re-purchasing of shares. Also, the acquisition of loans to support the long term development of the company. Therefore, Canadian Tire’s Cash flow statement provides insight towards long term development and the increasing value of the company’s shares.