Despite a weak dollar that has pushed up purchasing costs for Canadian Tire Corp. Ltd., the retailer has generally resisted passing on those added expenses to consumers in the form of higher prices – until now.
Feeling the currency pressures, Canadian Tire will start to “selectively” look at raising some prices, Michael Medline, chief executive officer of the giant retailer, said on Thursday.
The move to increase some prices is a departure from what Canadian Tire has been doing amid the currency headwinds in its deliberate attempt to grab market share from rivals as many of them raised their prices, he said. Instead, Canadian Tire has absorbed the added currency expense by finding productivity and other savings.
Now, along with its cost-cutting initiatives, “we will selectively look at pricing decisions going forward,” the CEO said during an analyst conference call in a phrase that is retail code for raising prices.
Retailers such as Canadian Tire purchase many of their goods in U.S. dollars, which have risen sharply relative to the loonie over the past year or so and prompted many food, apparel and other merchants to raise their prices to cover those costs. Grocers particularly have increased prices of meat, fresh fruit and vegetables as much as in the double digits, helping boost their revenue.
Canadian Tire has been “remarkable” in its ability to keep a lid on price increases and still manage to boost its profit margins by finding other savings, said Mark Petrie, retail analyst at CIBC World Markets.
“But at the end of the day, some inflation in consumer prices is probably inevitable,” Mr. Petrie said.
In 2015, the Canadian dollar fell 13.6 per cent relative to the greenback and, in the fourth quarter alone, the loonie dropped 14.9 per cent, said Kenric Tyghe, retail analyst at Raymond James. “Retailers at some point have to start passing it through” in higher prices, he said. He suggested Canadian Tire, which also owns Sport Chek and other sporting goods chains and clothier Mark’s, may increase prices of sporting goods and apparel.
Despite a rocky economy and unseasonably warm weather, which dampened sales of winter tires and other seasonal merchandise, Canadian Tire enjoyed a 17-per-cent fourth-quarter profit gain to $241.5-million or $3.01 a share from a year earlier. But its revenue dipped 7.5 per cent to $3.38-billion, due partly to one less week of selling in the latest quarter as well as warm weather, the difficult Alberta economy and lower gasoline prices. Excluding petroleum sales, Canadian Tire’s overall revenue was $3-billion – down 5.8 per cent from a year earlier.
“These results are even more impressive when you consider the magnitude of the factors that we faced, such as the deteriorating value of the Canadian dollar and the unprecedented unseasonable weather across the country in the fourth quarter,” Mr. Medline said.
Canadian Tire’s Class A shares jumped almost 8 per cent on the Toronto Stock Exchange on Thursday.
The retailer generated savings with productivity measures and by gaining better rates from its suppliers, he said. It is consolidating some of its purchasing with its top suppliers, helping it get better prices from them.
For example, if the retailer stocks five kettles from four different suppliers, it may decide to switch to selling four kettles from just two suppliers, he said. “You arm the business with the analytics and business kind of drivers in terms of maximizing margin to go and have those discussions with suppliers. And it’s amazing what can happen out of that.”
But he said Canadian Tire will continue to struggle to bolster its sales in Alberta with oil at its lowest level in 12 years and the industry in cyclical decline. Its Mark’s business is expected to feel the most pain in industrial wear and footwear “for the foreseeable future.” However, Canadian Tire has seen strength in British Columbia, Ontario and Quebec that “is more than offsetting the weakness we are seeing in Alberta,” Mr. Medline said.
Since Canadian Tire unveiled its strategic direction and financial aspirations 17 months ago, the economy has shifted dramatically amid the declining loonie and price of oil, he said.
“The retail marketplace has become much more difficult but our strategy and execution, especially our productivity gains, have made us stronger over all,” Mr. Medline said. “And while we do not believe the foreign exchange environment will become easier in 2016, every one of our businesses is focused on the challenge and is executing plans to mitigate the pressure, as we did in 2015.”
Mr. Medline said the retailer was able to strengthen its fourth-quarter margins by resisting deep discounting seasonal goods to clear them out as a result of the warm weather. Canadian Tire is also working at weatherproofing its business by focusing on less weather-dependent categories, such as home goods, analysts were told. About 25 per cent of the retailer’s sales in its fourth quarter were “winter-related” merchandise, chief financial officer Dean McCann said.
Fourth-quarter same-store sales at Mark’s dropped 5.2 per cent and 0.4 per cent at the FGL Sports division over all, although they were up 1.6 per cent at its Sport Chek stores. Canadian Tire same-store sales rose 2 per cent from a year earlier. Those sales at outlets open a year or more are considered a key retail measure.
For the full year ended Jan. 2, the company had a profit of $735.9-million, up from $639.3-million a year earlier. Revenue was $12.3-billion, down from $12.5-billion.Report Typo/Error