Where Will Canadian Tire Find Revenue Growth?

Motley Fool Industry Focus: Consumer Goods podcast host Jason Moser and guest analyst Asit Sharma continue their discussion of Canadian retail giant Canadian Tire in the video below. In this segment, the two analyze Canadian Tire's plans to reaccelerate revenue expansion after a few years of modest sales increases.

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This video was recorded on May 28, 2019.

Asit Sharma: What do you think about this company, Jason? I know you've had a chance to look at it over the last few days.

Jason Moser: Yeah, I took a look at it. The first thing that struck me was, it does seem like they've hit a little bit of a wall on top-line growth there. But that could be for a number of reasons. I guess when it comes to retailers, though, generally, you have to at least ask yourself the question, how much can they grow from where they are today? I think the one hang-up I have, generally speaking, when it comes to retail plays that are branded to the market in which they serve -- in this case, Canadian Tire, obviously hitching its brand to its Canadian identity. Not that there's anything wrong with that. But I do wonder how much that brand resonates outside of its home market opportunity. I think that would be the big question for me. In a world where we've got a lot of choices as consumers, if we're looking at Canadian Tire and trying to figure out where the growth might be coming from, other than acquisitions, how much is this company going to be able to grow beyond its home market? How much growth do you think is left there in its home market? Do you have any thoughts where that's concerned?

Sharma: Sure. I think those are really good points. In fact, historically, the company has had two forays into the U.S. which weren't very successful. The tool segment, is a great example, it just could not make it, and turned its focus back to Canada. I think that Canadian Tire's answer to that question is this expansion into alternate business lines, very lucrative consumer finance segment and also this REIT, which invests in properties.

One of the strategies the company is employing is growth through acquisition, which still begs your question, Jason. If not through acquisition, how will the company keep expanding? The primary vehicle that it's used to do this, really since the 1960s, 1958 is the core year, they have developed a loyalty program which is really popular in their market. It's called CTM or Canadian Tire Money. And this, funnily enough, is actual paper money, it looks like Monopoly money, but actually close to Canadian bank notes, which you get every time you make a purchase. I think it's 0.4% of your total purchase, you get paper money that you can then use at a subsequent visit to the stores. And it's so popular in Canada that a lot of mom-and-pop stores will accept Canadian Tire Money because mom and pop are shoppers at Canadian Tire. They have really updated this whole system in the last two years. Now it's a card-based system very similar to what we see in the U.S. It's basically credit cards, loyalty cards, and they've upped the rewards. They still have that paper money, which is so popular in Canada. But now, this program, which many big-box retailers in the States have had for 10 to 15 years based on consumer finance models, they're still touching the surface of that. I see some growth in this segment, the more profitable segment.

We usually look at one side of the equation, which is, how will a company grow? An advantage of this company is that it's very hard to compete against. The company, because it sells so many different products under one roof and owns a lot of smaller brands, it considers a wide range of U.S. retailers as its competition. There's no one direct competitor. In fact, their annual report named Walmart, Costco, Home Depot, Cabela's, Bass Pro Shops, Lowe's, and Nordstrom as primary competition. Why I think this is important is, about five years ago, Target tried to enter the Canadian market in a big way. And they bumped up against this company. This was one of the reasons that Target actually exited Canada in 2015. In fact, Canadian Tire took over about 12 Target locations. So, one thing I like about it is its insulation against encroaching competition.

But as far as growth is concerned, they have this two-prong strategy. They are going to acquire and they are going to try to grow the loyalty of the customers.

One last interesting stat on the loyalty program, they count 12 million customers in their loyalty program spread across all their brands. The population of Canada is only 37 million. So essentially, almost a quarter of Canadians are enrolled in this program under one brand or another. Another very interesting competitive advantage the company has.

Moser: Yeah, I mean, it's a small market, but it sounds like they maintain a very dominant presence in it. Having your own currency, there's some puts and takes with that. It reminds me a little bit of Gymboree back in the day, when Gymboree was still a publicly traded company. They had those things called GymBucks. Gymboree I was always a big fan of because it made it easy for idiots like me to buy clothes for their daughters. Unfortunately, Gymboree was taken private and then private equity pretty much ruined the company. But I will say, GymBucks were smart in that they encouraged that repeat business. Certainly, I can see where Canadian Tire's currency would do the same. Asit, great look at the Canadian Tire. Definitely a company worth getting on one's watch list.