Canadian Tire (TSX:CTC.A) has been one of the most robust retail brands in Canada for decades. The company has survived through multiple boom-bust cycles and has evolved its brand portfolio and service offering along the way to serve a growing network of new customers.
The stock clearly reflects this successful journey. If you’d invested $1,000 in Canadian Tire stock in late 2008, you would have roughly $3,770 right now. That’s a compound annual growth rate of 9.3% over 15 years.
That’s better than the rest of the stock market. The S&P/TSX Composite Index has barely doubled since late 2008. It’s up 110% over that period, or a compound annual growth rate of 4.7%.
Here’s a closer look at what makes Canadian Tire a top performer and whether this outperformance can continue in the future.
Competitive advantage
Canadian Tire’s competitive advantage is based on the location of its stores and the unique product mix it offers. “Our competitive advantage is that we’re up the road to 90% of Canadians,” Chief Executive Officer Greg Hicks once told BNN Bloomberg.
The company has over 1,700 locations, mostly concentrated in dense urban environments and close to populated parts of the country. That proximity to its customers is a key advantage.
Another advantage is the fact that the stores often stock items that can’t be found elsewhere. Some products are branded specifically for sale in Canadian Tire stores. These include Mastercraft tools, SuperCycle bikes, BluePlanet bulbs, Likewise hardware, Motomaster auto parts, and FRANK food and drinks.
The company also has its own in-house brands such as Canvas, Jobmate, Yardworks and MasterChef, for everything ranging from lawn care to cooking products.
This gives the company an edge over other retailers and serves as a competitive moat that insulates the business.
Valuation and fundamentals
Canadian Tire is undervalued. It trades at just 12.3 times earnings per share, which implies an earnings yield of 8.3%. That’s excellent for this economic environment.
However, the lower valuation is a reflection of the company’s lack of growth in recent months. In the first quarter of 2023, Canadian Tire reported revenue of just $3.7 billion — 4.9% lower than the same quarter last year. Net income, meanwhile, declined by $228.3 million to just $66.6 million during this quarter.
Sales and profits could be slowing down, as Canadian consumers pull back on spending, and the economy enters a potential recession. However, Canadian Tire has lived through recessions in the past and bounced back stronger. If you believe this time is no different, it could be a good idea to add Canadian Tire to your watch list.
Bottom line
Canadian Tire has nearly quadrupled investor capital since the last financial crisis in 2008. Now, with the global economy on the brink of another recession, the company is seeing a slowdown in sales. But it could bounce back in the long term, which is why investors should keep an eye on it for a chance to buy the dip.
