Canadian Tire

From car tires to hockey sticks to credit cards

I'd like to open this article with a story about NASA and its ballpoint pens. In the 1960s, it was discovered that ballpoint pens didn't work properly in zero gravity. So NASA poured millions of dollars into developing the Space Pen, a pen that would work smoothly even under the toughest conditions. The Soviets, on the other hand, simply used a pencil. Ok, admittedly, the story isn't 100 percent true, but it illustrates my investment style pretty vividly: Keep it simpel! You certainly don't need to be a rocket scientist or a financial expert to find sensible candidates for a stock portfolio.

Today I'd like to introduce one such candidate: Canadian Tire Corporation Limited. For decades, revenue and earnings seem to have known only one direction. On top of that, investors are rewarded here with an attractive dividend. So let's not hesitate and take a closer look at Canadian Tire.

The history and business model of Canadian Tire Corporation Limited

The story of today's retail giant has its origins in Toronto, Canada's largest city, with the two brothers John William (b. 1897) and Alfred Jackson Billes (b. 1902). Even in their early childhood, the two boys delivered newspapers together. Nobody back then could have guessed that they would later build one of Canada's largest retail chains. After finishing school, John W. decided to study accounting before starting work as a sales manager at the Hamilton Street Tire and Garage Company, an auto parts dealer. The sudden death of their father in 1917 plunged the family into financial difficulties, so Alfred J. had to drop out of school to go to work as well. He quite quickly found a job as an ordinary employee at the Dominion Bank (today TD Bank). Over the next few years, the two brothers supported the family and saved some money. In 1922 they pooled their savings of CAD 1,800 and decided to take over the Hamilton Street Tire and Garage Company completely.

The automotive industry was undoubtedly still in its infancy, but the Billes brothers believed in rising car sales and therefore in the growth potential of their small auto parts business. Besides tires, they carried a small stock of repair and replacement items such as batteries and automotive fluids. Unfortunately, shortly after their store opened, an important access bridge was closed for construction, and sales collapsed dramatically. So while the two felt forced to close their store, they had no intention whatsoever of giving up on the industry. In early 1923 they moved their entire inventory to a more suitable location in Toronto and opened their auto parts store there, including the new gas pumps, under the name Canadian Tire Corporation. Business developed superbly, and soon they were able to open a second store nearby. While John W. took over management, Alfred J. took care of marketing, at which he was exceptionally skilled. Among other things, he created advertising flyers that also included road maps - these were still rare back then and were therefore greatly appreciated by customers.

Soon a comprehensive product catalog followed, which was sent to all car owners in the region and gave them the opportunity to order by mail. Thanks to its low prices and high quality, the Canadian Tire Corporation was able to keep growing even during the difficult Great Depression. It continuously opened new stores, and to finance this growth, it went public in 1944, issuing a total of 100,000 shares. By that time it was already managing over 100 stores spread across all of Canada. Toward the end of the 1950s, it decided to open its first own gas stations, where customers were rewarded with the so-called Canadian Tire Money. These discount coupons could then be redeemed at Canadian Tire stores. It also continuously expanded its product range and, in addition to auto parts, increasingly focused on sporting and leisure goods as well as household products. In 2001, with the acquisition of the apparel chain Mark's Work Warehouse, it broadened its position in this segment too - in 2018, Helly Hansen followed as another strategic acquisition in this area. Today, Canadian Tire Corporation Limited manages over 1,700 locations and is one of the leading companies in its industry.

How can Canadian Tire continue to develop in the future?

Before I get to this question, I'd like to briefly sum up the Canadian Tire Corporation's business model once more. It's a family of companies that, in addition to the retail segment, also includes a financial services division and a real estate division. The retail business is, of course, led by the Canadian Tire stores themselves. The subsidiary PartSource focuses exclusively on auto parts for professionals and commercial customers. Under the name Gas+, it operates its network of gas stations. With SportChek, Pro Hockey Life, Mark's, Helly Hansen, Atmosphere and Party City, it's also very well positioned in sports, apparel, outdoor and party supplies. Under the name Canadian Tire Financial Services, it offers various products and services. Probably the most important and best-known one is the Triangle Mastercard - the credit card that more than 2.1 million Canadians now use to take part in the company's rewards program. Last but not least, with CT REIT it manages a closed-end real estate investment trust that currently comprises around 350 commercial properties, mainly located in its home country of Canada.

Now let's take a look at the figures for the most recently published quarter (Q2 2021 - ended July 3, 2021). Total revenue in the second quarter of 2021 came to CAD 3.92 billion, an increase of just under 24 percent over the prior-year quarter. The company was especially proud of the e-commerce division's sales here - these rose by 63.2 percent to CAD 856.7 million. Earnings increased by about 11 percent compared to the previous year to CAD 259.1 million. That corresponds to earnings of CAD 3.68 per share. All in all, quarterly results that are undoubtedly impressive.

As for the company's future, I'm extremely confident. Sure, the retail business has changed, but you can see at Canadian Tire too that the investments in this area are paying off and that it's growing very strongly here. It surely owes part of that to its loyal customers, who take part in the rewards program in such large numbers. It will also keep growing in the future through sensible acquisitions of suitable companies. That always carries the risk of overreaching with an acquisition at some point, but it has proven its skill in this area several times in the past.

By the way: Canadian Tire has two different share classes. CTC is the symbol for the common shares with voting rights. CTC.A, on the other hand, comes without voting rights.

What about the dividend?

During my research I found out that Canadian Tire shareholders have been receiving a quarterly share of the company's profits in the form of dividends since at least 1987. While the retailer hasn't managed to raise the dividend every single year (most recently from 2008 to 2010), fortunately it has never been cut. Looking at the last 10 years, the average dividend growth rate is 16.9 percent - looking at the last 5 years, an impressive 18.1 percent. The current dividend yield of 2.3 percent and the payout ratio of 31.2 percent also signal absolutely healthy and investor-friendly payout behavior.

Conclusion:
Through quality and smart marketing, the Canadian Tire Corporation built a remarkable business, and I see no reason why an equally successful future shouldn't lie ahead of the company. Long-term investors who'd like to add a promising Canadian stock to their portfolio should take a closer look at the company.