Canadian Tire Closes 2022 With Solid Marks, but We See Near-Term Challenges

We don’t plan to alter our CAD 198 fair value estimate materially for no-moat Canadian Tire after the company reported 2022 results. We maintain our view that the market fails to fully appreciate the firm’s vast product lineup (owned, national, and multitier), which affords flexibility during economic downturns. The shares trade roughly 13% below our intrinsic valuation even after a 5% pop on the earnings report, providing a buying opportunity.

Full-year revenue came in right at our CAD 17.8 billion estimate, up 9.3%, though normalized diluted EPS of CAD 18.75 outpaced our CAD 17.40 forecast. Strength was highlighted in the namesake stores and Mark’s (retail segments with respective 40% and 60% owned-brand penetration), posting 5% and 10% full-year revenue growth, respectively, both in line with our estimates. While Canadian Tire’s owned brands extend throughout its commoditized categories, we believe those offerings will continue to resonate as consumers’ search for value persists in a challenging macro climate. Longer term, benefits stemming from its rewards program (personalized promotions and selections) should be augmented by the firm’s efforts to encourage store pickups by introducing in-store automation, electronic shelf labels, and pickup lockers. These should prove valuable as Canadian Tire attempts to ward off online and brick-and-mortar rivals, given its presence in Canada’s less populated areas.

Against this backdrop, Canadian Tire reported significantly higher inventory levels (up 30%) due to the carryover of spring and summer goods, early receipts of merchandise, and inflation. Although management expects normalization throughout 2023, we anticipate depressed top-line growth over the next few quarters and markdowns in discretionary categories to clear the higher inventory. Regardless, we see this as a transitory situation and maintain our long-term forecast for low-single-digit revenue growth and low-double-digit operating margin.