Stock of the week: Canadian Tire Corp.Stock of the week: Canadian Tire Corp.
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Canadian Tire Corp. (TSX-CTC.A) did reasonably well in 2006. Warm
weather in Eastern Canada hurt its fourth-quarter results. But it
expects to earn more in 2007 as it reinvests in all its divisions.
Canadian Tire remains a buy for gains and rising dividends.
In 2006, Canadian Tire earned $348 million, or $4.26 a share,
excluding one-time items. This is up by 10.9 per cent from $314
million, or $3.84 a share, the year before. But its 2006 results were
dragged down by the poor fourth quarter: the company earned $98.8
million, or $1.21 a share, excluding one-time items. This was down by
6.9 per cent from $106 million, or $1.30 a share, a year earlier.
The fourth quarter is a busy one for Canadian Tire's 468 general
merchandise stores. At this time, winter goods account for about a
fifth of its sales. So warm weather and little snow in Ontario and
Quebec caused its operating profit to decline by 1.6 per cent, to $279
million. Then again, same-store sales rose by 2.2 per cent in the
fourth quarter. That's partly thanks to double-digit sales growth at
PartSource's 63 stores. This auto-parts specialty chain is doing well.
In 2007, Canadian Tire expects to earn from $4.65 to $4.85 a share. It
should earn near the high end of this range. That's because it's
profitably reinvesting in its businesses.
In 2007, Canadian Tire plans to convert 61 general merchandise stores
to the Concept 20/20 format. This will raise sales. Last year, for
instance, same-store sales at Concept 20/20 stores jumped by eight per
cent. This beats the 3.5 per cent rise in same-store sales for the
chain as a whole. Part of the appeal of Concept 20/20 stores is that
they're bigger, more modern and offer more products. The company will
also build nine new Concept 20/20 stores in 2007.
Canadian Tire wants to raise the performance of its general
merchandise stores. It'll upgrade and simplify its information
technology systems. This should let the company track which products
are selling and restock the stores accordingly. This will reduce money
tied up in inventory.
Canadian Tire plans to improve the supply chain at its PartSource
outlets. Also, it'll open eight new PartSource stores. And it'll keep
expanding this profitable chain by acquiring small independent and
regional stores. Mark's Work Wearhouse remains the most successful
division. It, too, was hurt by warm weather in the fourth quarter. Yet
in 2006 its operating profit jumped by 42 per cent, to $94 million.
Same-store sales climbed by 13 per cent. That's why
Canadian Tire wants to open 29 new Mark's stores and upgrade 26
existing ones. The chain now operates 339 stores.
Canadian Tire Petroleum was the only division to lose money last year
- an operating loss of $4.8 million. Margins on gasoline shrank in
Central Canada in the fourth quarter. But the outlook is improving.
For one thing, the Gas Advantage MasterCard issued by the financial
services division is drawing drivers. For another, convenience-store
sales are rising fast. So the division will open five new outlets and
rebrand five existing ones. It now operates 260 gas stations, 251
convenience stores and 74 car washes.
Canadian Tire's financial services division is more and more
profitable. Last year, its operating profit rose 23 per cent, to $179
million. This year it plans to expand its Gas Advantage MasterCard
franchise beyond today's four million cards. It'll also introduce
other credit cards. And it's figuring out how to best offer high-
interest savings accounts, guaranteed investment certificates and
mortgages.
Canadian Tire's cash flow slipped by 0.5 per cent, to $697 million.
Still, this exceeds 2007's projected capital spending of $580 million
and dividend payments of $52 million. Also, the company has cash of
$741 million and a comfortably-low net-debt-to-cash-flow ratio of only
0.6. So it has the money to keep rewarding you.
Canadian Tire has raised its dividend for four years in a row. It
should do so next year. After all, the company aims to pay out 15 to
20 per cent of its profits. With expected earnings of $4.82 a share in
2007, it has room to raise the 74 cents a share it now pays.
Canadian Tire buys back its own shares. This exceeds dilution from
stock-based pay and the dividend reinvestment plan. We expect the
number of shares to keep declining.
Canadian Tire remains a buy for long-term gains and rising dividends.
(Click below for a profile of this week's stock.)
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