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Canadian Tire’s namesake retail business has made up just 40 per cent of profits so far this year.Christopher Katsarov/The Globe and Mail

When Canadian Tire Corp. Ltd. CTC-A-T said that its second-quarter profits got dinged because it was setting aside more money for possible bad debt in the future, the iconic retailer said it was good news: Its credit-card business was seeing customers running up their balances, which means more profits from the interest it charges.

That is how it may indeed play out. There are other, less appealing scenarios, however. And if they come to pass, the implications are serious for Canadian Tire – and perhaps for Canada as a whole.

This may be confusing for folks who think of Canadian Tire as a seller of hardware, cookware and hockey gear. But today’s Canadian Tire is also a credit-card-issuing bank and, with its majority interest in CT REIT, a real estate company, too. Canadian Tire’s namesake retail business has made up just 40 per cent of profits so far this year.

The financial-services segment – a third of the company’s profits, year-to-date – is led by Canadian Tire Bank. But it’s not a bank like Canada’s Big Five, with branches, business loans and investment dealers. Instead, it’s essentially a credit-card lender. As in, high-interest, unsecured consumer loans.

Canadian Tire is excited because those loan balances are getting bigger. In the second quarter, total card-account balances increased 14.6 per cent over the prior year, and the number of accounts not being paid off every month – and therefore paying interest – increased 7.6 per cent. The average account balance increased 6.5 per cent year-over-year.

This is all good news, unless you look at those growing credit-card account balances and wonder whether the numbers are increasing because cardholders are just spending more – or increasingly having trouble paying them off.

The statistic that catches the eye is Canadian Tire’s past-due credit-card receivables, which have been at 2.4 per cent of overall balances in each of the first two quarters this year. While they’re still below prepandemic levels, the current figure is 40 per cent above last year’s second quarter.

“We remain comfortable with the risk metrics at the bank,” spokesperson Jane Shaw said in an e-mailed response to queries.

She said Canadian Tire is “keeping a close watch on macroeconomic conditions” as it makes more money from credit-card balances, which are “a critical component of our overall business strategy.” The company “has developed and successfully implemented, over a number of years, a playbook that includes mitigation actions such as reducing or stopping new account growth and reducing outstanding credit limits – which can be implemented very quickly when necessary.”

Canadian Tire uses customer data from loyalty rewards program to boost sales

Bay Street analysts don’t appear to be too concerned with the number, as most have “buy” ratings on the company’s shares and estimates of growing profits across the enterprise. They say the recent share price, which has ranged from $150 to $170, is a great value. (The stock closed at $162.13 Tuesday.)

But Kathleen Wong of Veritas Investment Research, the sole “sell” on the Street, believes losses on bad debt in the card portfolio will, by the end of this fiscal year, be double last year’s numbers, and higher than prepandemic levels. That will continue with higher loss levels in 2023, she models.

That translates to a sharp decline in earnings for the financial-services unit – and is behind her fair-value estimate for the stock of $167 a share. While the company is much better positioned now than in the 2008-09 financial crisis, she said, “Canadian Tire is one of the most vulnerable stocks in my sector coverage if there is an economic downturn,” she wrote in an e-mail.

The even bigger question is whether Canadian Tire’s recent increase in past-due accounts is the canary in the coal mine for Canadian consumers.

Canadian Tire’s latest numbers are for the three months from April through June, before the full effect of rapidly rising interest rates could be seen in Canadians’ curtailed spending, rising debt and declining wealth. Numerous studies have suggested Canadian consumers are among the world’s most overextended.

We don’t always get such granular detail of credit-card delinquencies at the big banks. The credit-card portfolios represent only 2 per cent to 4 per cent of their total loans, Ms. Wong estimates, making disclosure more limited at some of the banks. And yet there’s still a lot of credit-card debt out there: Ms. Wong said Toronto-Dominion Bank has the biggest credit-card portfolio among Canadian banks at $34-billion.

Certainly, both Canadian Tire and the Canadian consumer that drives its success have triumphed over their doubters repeatedly in the past decade or so. So we might be able to look back on this as just a blip in Canadian Tire’s long-term growth.

Or, perhaps the retailer that keeps offering its “big red” sales events has offered up a big red flag.

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