Over the past 10 years, shares of Canadian Tire Corporation Limited (TSX:CTC.A) are up roughly 100%, almost three times the return of the TSX.
Despite an already impressive historical return, management has a three-year plan in place that should continue the company’s strong underlying financial growth. For each year through 2017, management is targeting 8-10% annual EPS growth with Returns on Invested Capital of nearly 10%.
As an investor however, it is important to understand the company’s plan for achieving these targets as well as the probability of success.
Growing sales across all operating segments
In 2014 Canadian Tire had sales of $12.5 billion, with the majority derived from its retail locations.
Its biggest operation, Canadian Tire Stores, comprised roughly half of all sales. This franchise is one of Canada’s most trusted and iconic brands, with over 490 locations and a weekly advertising flyer that reaches 12 million people (one-third of Canada’s total population). Nearly 90% of Canadians are located within 15 minutes of a Canadian Tire store.
While these stores are the crowning jewel of the company’s business lines, there are ample growth opportunities in smaller segments. For example, Canadian Tire is also Canada’s largest sporting goods retailer, owning and operating store brands such as Sport Chek, Sports Experts, and Atmosphere.
Revenues are only $1.9 billion, but the sporting segment has experienced double-digit growth rates, with 11.5% sales growth in 2014 alone. In the future the company plans to open two million square feet of retail space by 2017, leveraging its premier locations and already strong ties with sporting brands and distributors.
Canadian Tire’s smallest segment, at $1.1 billion in sales, is its Mark’s retail stores. These offer industrial apparel, footwear, and accessories to a target market of 35-50 year old Canadians. The company is aiming to continue its 5% annual sales growth by focusing on specialty brands such as Merrell, Buffalo, and Silver. A large portion of these stores are going through an interior refresh, which should help market it to a larger range of customers.
Prudently allocated capital
Fortunately, Canadian Tire is both an efficient operator and shareholder friendly. The company is finishing a $400 million share repurchase program this year after purchasing a similar amount over the past two years.
Dividends have also been increased annually since their introduction. At the current $2.10 per share, the dividend yield is only 1.6% at current prices. The payout has been increasing at double-digit rates over the past couple years, however, so expect this to grow over time. Even through the 2009 financial crisis, the company was able to maintain its dividend payout, avoiding a cut.
Not exciting, but reliable
With markets nearing all-time highs, it’s not unusual for many investors to avoid talking about boring stocks such as Canadian Tire Corporation. Since the company has been public however, management has consistently grown the underlying businesses while keeping a close eye on improving shareholder returns.
With a multi-year plan in place to continue the company’s past successes, investors can do a lot worse than investing in this proven winner.
