Noah Zivitz

Managing Editor, BNN Bloomberg

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Canadian Tire Corp.'s profit tumbled in the second quarter, but it wasn't for all the same reasons that battered Walmart Inc. and other major U.S. retailers recently.
 
For Canadian Tire, it was the company's lower-profile financial service division that weighed down the bottom line.
 
Net income in the retailer's fiscal second quarter, which ended July 30, sank 31.5 per cent year-over-year to $177.6 million, the company said Thursday. That was attributed in part to a $36.5-million charge tied to initiating Helly Hansen's exit from Russia after initially halting operations in that country.
 
Excluding that charge and other one-time costs, Canadian Tire said it earned $3.11 per share, down 16 per cent from a year earlier and falling fall short of the average analyst estimate for $3.60 in normalized per-share profit. Total revenue in the quarter rose 12 per cent to $4.40 billion; on average, analysts tracked by Bloomberg were expecting $4.21 billion in revenue.  
 
Canadian Tire blamed the eroding profitability on a jump in expected credit losses in its financial service division as receivables (ie, credit card activity) increased during the period. The company said its ECL allowance totalled $868.4 million in the quarter, compared to $811.7 million a year earlier. However, in its management discussion and analysis, the company said its credit card portfolio "continues to perform well despite ongoing economic uncertainty."

"Our results reflect our continued ability to effectively navigate a challenging and dynamic environment. Our retail team’s outstanding focus on inventory and margin management have enabled us to continue to execute well ... Also, receivables and new account acquisitions at Canadian Tire Bank remained strong, in line with our expectations to drive long-term growth," said Canadian Tire president and chief executive officer Greg Hicks in a release.

It was a mixed picture across Canadian Tire's portfolio of retail brands. The Mark's business stood out as same-store sales surged 20.9 per cent in the quarter. SportChek's sales at stores that were open for at least a year rose 4.1 per cent, while the namesake Canadian Tire banner saw its comparable sales rise 3.9 per cent.

Profit from Canadian Tire’s retail operations was held back as selling, general and administrative expenses jumped 10 per cent year-over-year to $1 billion in the quarter, which the company attributed to marketing as well as costs tied to store operations due to the lack of COVID-19 public health restrictions.
 
“We anticipate a negative reaction to this morning's report, although we would argue the operations appear to be performing well in a challenging environment,” wrote TD Securities analyst Brian Morrison in a report to clients Thursday. He has a buy recommendation on Canadian Tire shares, with a 12-month price target of $250.00, implying a potential total return of 49.5 per cent from Wednesday’s closing price.