Canadian Tire’s Q2 2024 Sees Credit Card Write-Offs Remain High
Canadian Tire Corporation (TSX: CTC.A) released its second-quarter results for the period ending June 29, 2024, revealing persistent high credit card write-offs amidst a challenging retail environment. The financial services segment, while showing some improvements, continues to grapple with significant net credit card write-offs, which remained elevated at 6.7%, up from 5.6% in the same quarter last year.
The increase continues the rising trend of net write-off rate for Canadian Tire’s portfolio of credit cards, reported at 7.83% in Q1 2024, up from 6.66% in 2023 and 4.99% in 2022.
The write-off rate, which indicates the percentage of credit card debt deemed uncollectible and removed from the company’s books, is a critical indicator of financial distress among consumers. A rising rate suggests that more cardholders are unable to repay their debts, which could reflect broader economic challenges such as inflation, unemployment, or interest rate hikes.
The company said that the year-on-year increase “was driven by an increase in net write-off dollars relative to receivables with a return to historic levels of performance, as expected.”
“Past due credit card receivables and the net write-off rate continue to be elevated relative to the prior year, but the growth rate has started to slow,” said CEO Greg Hicks.
Despite the revenue decline, Canadian Tire managed to improve its retail profitability through strong margin and cost control measures. The company’s overall financial performance in the second quarter of 2024 showed a consolidated revenue of $4.13 billion, a decrease of 2.9% from $4.26 billion in the same period last year. The diluted earnings per share (EPS) were $3.56, compared to $1.76 in Q2 2023.
The financial services segment reported an income before taxes (IBT) of $88.5 million, a significant rise from $55.4 million in the previous year. The segment also faced increased net impairment losses and funding costs, indicating the ongoing strain in the financial landscape.
Retail income before taxes rose to $170.1 million, up from $85.6 million in the previous year. This improvement was primarily due to significant reductions in supply chain costs and tighter cost control, which helped offset lower retail revenue and margin dollars. However, consolidated comparable sales dropped by 4.6%, reflecting a cautious consumer behavior that prioritized essential spending over discretionary purchases.
Hicks explained the scenario, stating, “We delivered well in the quarter, as top-line pressures were balanced by strong margin and cost control, improving our retail profitability. In a quarter that traditionally skews heavily to discretionary purchases, consumers remained cautious and weather conditions compounded declines”.”
The quarter was marked by lower consumer spending on discretionary items, particularly affecting Canadian Tire Retail (CTR), where comparable sales fell by 5.6%. The drop was evident across most discretionary categories, including Seasonal & Gardening and Living.
The financial services segment’s revenue increased by 5.1% to $383.2 million, mainly due to higher interest income from growth in receivables. Gross average accounts receivable (GAAR) rose by 3.2%, driven by a 3.4% increase in average account balances. Despite this growth, the net credit card write-off rate remained concerning at 6.7%, indicating that many consumers are struggling to manage their credit card debt.
On a normalized basis, financial services income before taxes was flat compared to the previous year, when adjusting for the GST/HST-related charge of $33.3 million recognized in the prior year.
Canadian Tire’s various retail banners exhibited mixed performance during the second quarter. SportChek and Mark’s experienced modest sales declines, with comparable sales down 0.9% and 0.8%, respectively. SportChek saw strong sales in footwear, which were offset by declines in cycling and casual clothing. Mark’s experienced growth in outerwear categories, yet sales of men’s shorts, accessories, and industrial wear fell short compared to the previous year.
SportChek’s performance was notably supported by strong sales in footwear, but other areas such as cycling and casual clothing dragged overall results. Similarly, Mark’s saw growth in outerwear categories, but sales in men’s shorts, accessories, and industrial wear were disappointing compared to 2023.
Despite these declines, loyalty sales outperformed non-loyalty sales across all banners, driven by innovative Triangle Rewards campaigns and a robust partnership with Petro-Canada. This strategy resulted in elevated loyalty traffic, engagement, and new customer acquisition, driving strong electronic Canadian Tire Money (eCTM) issuance and redemption.
The company’s capital allocation strategy included operating capital expenditures of $128.1 million in the quarter, which is $10.3 million lower than Q2 2023, and total capital expenditures of $139.8 million, compared to $148.2 million in Q2 2023.
Additionally, Canadian Tire declared dividends payable to holders of Class A Non-Voting Shares and Common Shares of $1.750 per share, payable on December 1, 2024.
There were no share repurchases during the quarter as part of its capital management plan announced on November 9, 2023, which intends to repurchase up to $200 million of its Class A Non-Voting Shares during 2024.
Looking ahead, Canadian Tire is focusing on strategic investments to enhance customer connectivity both online and in stores. The company continues its Better Connected strategy, which includes integrating in-store technology, expanding assortments, and refreshing its store network. Notably, 18 CTR stores have been updated as part of this initiative, with more planned throughout the year.
The supply chain capabilities are also being enhanced, with goods-to-person automation set to be completed at the Calgary and Montreal distribution centers by the end of the third quarter of 2024. These efforts aim to improve operational efficiency and customer satisfaction.
Looking to the second half of the year, we are well positioned with the right assortment and inventory to meet the needs of Canadians and are confidently leveraging investments to strengthen our connection with customers, online and in stores,” Hicks added.
Canadian Tire last traded at $138.03 on the TSX.
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