Canadian Tire Earnings: Solid Start to Year Despite Consumer Trade-Down; Shares Trade Fairly

Our CAD 188 fair value estimate for no-moat Canadian Tire CTC.A should not change much after the company announced first-quarter results that have it on track to meet our full-year targets. Consumers continue to pull back on discretionary spending amid high inflation, also trading down the quality spectrum. Canadian Tire’s multitier assortment, including a private-label lineup that constituted a little more than 35% of sales, should continue to be an asset in all economic conditions. We believe omnichannel improvements and cost leverage will support low-single-digit revenue growth and midteens EBITDA margins over the next decade. We suggest prospective investors seek a greater margin of safety.

Quarterly retail sales slid 2.8%, with comparable sales particularly challenged at the namesake banner (down 4.8%) as customers refocused on consumables and traded down to lower-priced items. Our full-year target for roughly flat retail revenue remains in place, as we believe a warm winter and late-arriving spring weighed temporarily on results. While the consolidated normalized EBITDA margin fell 260 basis points (to 11.1%), more than our full-year target (which assumes roughly flat profitability), we expect improvement as the year unfolds as dealer inventories as well as freight and labor costs stabilize.

Canadian Tire is benefiting from Bed, Bath & Beyond’s demise, acquiring 10 real estate leases from the doomed chain. We are encouraged that the units will primarily be used to bolster the Mark’s banner’s footprint, with relocations enabling expanded assortments. While Canada was hardly a significant reason for the U.S. retailer’s demise, the chain joins no-moat Target among scaled retailers that have failed to make a lasting mark north of the border. However, we still believe Canadian Tire’s brand is insufficient protection against rising competitive forces, as there are many digital and physical alternatives for shoppers looking for the goods stocked at the firm’s banners.