Slowing Inflation and Canadian Tire's Terrible Quarter

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[00:00:15] Welcome back to the Canadian Investor Podcast.

[00:00:17] I'm here with Dan Kent and we are back for a Thursday episode of some news and mostly

[00:00:23] earnings but I think it'll be a fun one. underneath so I was ready to do it so I ended up doing that on the weekend and I'm saving like 60 bucks a month so more money to invest. Yeah it's kind of like a budgeting hack no haircuts no shampoo saves you a lot of money. Yeah and you look like you're always you know like well-kept too right? So yeah exactly. I have to do this every day.

[00:01:43] Okay so I'll go with the once a week I think that's that's the advantage but which is lower by 0.3 compared to December. And when we look to year over year numbers, food increased 3.9%, which is quite a bit lower than it has traditionally been increasing over the last while. Shelter is still very high, 6.2% increase, and a 1.2% increase in transportation costs.

[00:03:01] I pulled these three numbers just because

[00:03:03] I would consider them to be the largest factors

[00:03:05] in terms of overall inflation impacting most people. prices and telephone services. I'm not exactly sure what this would be, but they did mark that as a pretty big decline. And as you'll mention in the Canadian Tire Earnings Report, I think Canadian consumers are pretty tight right now and a big chunk of inflation is simply coming from kind of the bank of Canada's own doing and that being policy rates.

[00:04:21] So I mean if you look at a 3.3 a lot of exposure to the US that makes the value of your investment look a little better in Canadian dollars. Yeah, but definitely. It could be a problem point though for Canada if the Canadian dollar weakens too much compared to the US because then we

[00:05:41] could start importing some inflation as well because said that prices for airline tickets declined 14.3% in December, year over year of course, and sorry 14.3% in January and that was following a 9.7% decline in December. That's year over year. Looking at the sequential decline

[00:07:00] would not make a lot of sense because prices typically are higher in December We'll have to see where it goes going forward. Yeah, not much else to say. I mean, it's a pretty good, uh, pretty good print and trending downwards. I mean, it's better than coming in way above expected, but I mean, shelter and rent are still, they're still high, which is going to continue to be high, I guess, as long as policy rates stay high.

[00:08:20] So it's kind of a tough situation.

[00:08:23] Yeah.

[00:08:23] Yeah, exactly.

[00:08:24] So damn, if you do, damn, if you don. But I mean, like you're going to go over Canadian tires earnings here, they were pretty ugly. Yeah, exactly. And that's a nice segue. Thank you then for going from CPI to Canadian tires.

[00:09:41] So you might as well go on there.

[00:09:42] I think we've talked enough.

[00:09:43] Yeah, about CPI. for complete details of this offer for our listeners. Now, I'll be mostly focusing on Q4 results for this one. The reason why quarterly is much more important here is because Canadian Tire was performing, you know, pretty decently in the first half of 2023, and then things started taking a turn for the worse

[00:11:00] in the back half of 2023,

[00:11:03] when they came out with their Q2 results

[00:11:05] after obviously the second quarter, quite a way management said like it's gonna get bad and you know it kind of took the damage then but it's much more than just like a big shock surprise. Yeah exactly now let's let's see what the numbers actually told us so retail sales were down 7.1% to 5.3 billion now you'll see that sales and revenues are different here my understanding is retail sale there are some non Canadian

[00:12:24] tire-owned stores so I think can't remember the exact number but it was still a significant drop in net income. Free Castle was down 18% to $612 million for the quarter however a bit flat in Q2 2023, same for Q3. And then Q4 is a massive decline. So it's definitely something that not as definitely worse than I was expecting when it came to that. Definitely. I mean, it's not like when you consider their brands, I mean, they don't exactly

[00:15:00] have, you know, sport checks, really expensive.

[00:15:02] Marks is really expensive. behind the cards. So they get some really good data there and also some data in terms of the general spend for Canadians because they have a pretty wide net in terms of across Canada, people that have these cards. Now revenue was up 6.4% due to higher credit card balances, which, you know, can be a little bit worrying from a Canadian economy standpoint.

[00:17:23] And what's interesting and to add to what you were saying, they said that rising rates negatively impacted discretionary

[00:17:27] or non-essential spending.

[00:17:29] And they also specified that around 60% of their sales

[00:17:33] are discretionary and around 40% are essential.

[00:17:36] So that does provide a little bit more insight

[00:17:39] on why they've been impacted so much.

[00:17:42] And for me, I thought they'd have more essential sales,

[00:17:44] but I guess now thinking about it,

[00:17:46] there's a lot of stuff that. So we'll have to see how they progress throughout the year. Yeah, that, I seem to remember us, that credit card write-off rate, wasn't that like three and a half percent when we looked at them like a quarter ago or two quarters ago, or was that the past due receivables?

[00:19:00] I can't remember.

[00:19:01] I think that would have been,

[00:19:02] I think, yeah, the past due, yeah.

[00:19:04] Yeah, because if I was gonna say that's gone up quite a bit,

[00:19:07] but it might be something else I was thinking. considered essential. So, no, I mean, at the end of the day, it wasn't a good quarter. It'll be really interesting to see what it looks like going forward because they are definitely a bellwether company for Canada. So, bellwether company, if that's the first time you hear that, is just a company that's a good kind of gauge in terms of how the economy is doing as a whole.

[00:20:21] They're not the only ones, like a Canadian National Rail CP. like that. So they come out with some pretty strong quarterly results. So on the day of earnings, it went up five or 6% and this is a pretty low beta stock. Like it's not very volatile at all. So like a five to 6% hop is quite a bit. And the reason they went up that much. So earnings per share came in pretty much in line

[00:21:43] but it was a net operating income per share

[00:21:47] that really surprised people. it decreased 9%. So the decrease was pretty much from the company exiting its UK personal lines of insurance last year. It's had a lot of trouble in the UK, like catastrophe losses and everything have really hit the company hard in that segment of the business. But overall the United States is its fastest growing segment.

[00:23:00] That in Canada are probably high single digits.

[00:23:03] So the company's combined ratio,

[00:23:05] which is probably, it's the most important thing

[00:23:07] you're gonna look at when it comes to had higher than it usually is because it made a major acquisition in the UK to get into the commercial lines of business. So not necessarily, you know, personal insurance, but more business commercial lines. So debt to capital again, simple explanation. It's a portion of the business that is financed via debt versus capital.

[00:24:20] So I mean the quickest, quickest way to explain it possible, if you need a hundred thousand

[00:24:25] dollars to start a business, you had 70,000 in cash, but, uh, intact has been the much better performer over the longterm and yet. Uh, it's been a pretty strong year for them. Yeah. I mean, I was pulling up the free cashflow per share and it's been quite the last 10 years. It just keeps increasing. Yeah. And they have, uh, they're one of the largest PNC insurers in North America

[00:25:42] and they still only have like 17% market share.

[00:26:44] In the UK, it was mostly, I think like, like a very cold period.

[00:26:47] The weather was really, really bad there in terms of like freezing cold and it ended up causing a bunch of, a bunch of insurance claims would even hear like

[00:26:51] the wildfires, the flooding, all of that.

[00:26:53] And they can still, they can still turn out some pretty crazy growth.

[00:26:58] Yeah.

[00:26:58] They must have like some really, I mean, they must have some really strong

[00:27:01] underwriting, that's, that's all it is with the insurance business, right?

[00:27:05] Which is, you know, that's yeah.

[00:27:07] Underwriting is all it is.

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[00:28:15] for complete details of this offer for our listeners.

[00:28:18] But now we'll move on to a company I alluded to,

[00:28:21] and I had a couple of people send us an email too

[00:28:25] that were asking if we would talk about them.

[00:28:27] So our Canada. fuel for you know, Air Canada or something unless they hedge most of it, but I would imagine they can you know tickets are going down along with a decline in volume, so It's definitely like when you look at full year growth of 32% and then see 11% like there is definitely a notable slowdown Which is why it's like you said it's pretty important to go, you know quarter over quarter to kind of see the trends

[00:29:44] Yeah, and there's a lot of 1.7 billion last year. So again for the full year other quarters however it was also slightly down when comparing to Q2. And it was actually down 0.9% versus Q4 of last year. So overall, I mean, the metrics, it's hard to say again because there's cyclicality behind

[00:33:40] airline travel.

[00:33:42] But again, when I was looking at the different debt levels. So in 2019, they had around $5.5 billion in debt. And by the end of 2022, they had 17 and a half billion. There's like, they would typically pre pandemic, they would have a debt to equity of about

[00:35:02] 1.3 and now it's, it's almost 15.

[00:35:05] So it's crazy.

[00:35:06] Like the situation, this company was put in during the pandemic. on Air Canada, it does look like people are slowing down now their spend on services and experiences and traveling. That excess savings that was being directed there seems to be evaporating quite quickly. It's either evaporating or going to more essential places, I guess.

[00:36:23] So yeah.

[00:36:24] Yeah. It's gotta be like 10 years ago now. It would have been pretty close to that. Yeah, that sounds about right. Tim Hortons was pretty fast growing when they bought it and then they tried everything to turn it around, like weird questionable food strategies there and like different types of coffee and it never really worked, but now things are looking pretty good for Tim Hortons.

[00:37:43] It's posted like some of the strongest comparable sales

[00:37:46] out of all of its brands.

[00:38:45] Tim Hortons has been the company's fastest growing segment. It used to rely really heavily on Popeyes chicken, like, especially I think during the pandemic, and maybe even a little

[00:38:50] bit pre pandemic, like Popeyes chicken was like it was insane growth. But now it's kind

[00:38:57] of slowed down a bit. And although like it's still Popeyes is still very strong, but Tim

[00:39:02] Hortons is actually overtaken it. But it's international segment actually reported 17.6% growth in sales. And overall it makes up around 40% of the total business for the company.

[00:40:22] And comparable sales came in at around 9%.

[00:41:24] States aggressively and they even said it will be the largest contributor of net restaurant growth over the next five years in North America and like Tim

[00:41:28] Horton's kind of failed very badly in the United States like when I went to New

[00:41:34] York I'm pretty sure I saw a couple in New York like on on the eastern side but

[00:41:39] I know for the most part it it failed pretty bad in the United States so I'm

[00:41:43] kind of interested as to why they're, and I don't even know, you know, they've kind of had a lot more food. They have burrito bowls now. Yeah. They got like, they got everything. I remember for a long time they had, they were doing some really weird stuff. Like potato wedge, poutines and like, it's, it's weird.

[00:43:03] Burger King's always doing that type of stuff, but not Tim Hortons.

[00:43:06] So what's your, uh, take on their coffee?

[00:43:08] The coffee is not, not good. And it's funny, I guess like a medium coffee, it's like a buck 80, a buck 90, I think now, which is still way cheaper than like going to Starbucks or something, which is good luck getting under $5 for whatever you get at Starbucks. And I mean, they must be doing pretty well on the food side of things, which is probably what's driving a lot of this growth, because I don't think you get this type of sales growth

[00:44:22] from just coffee.

[00:44:23] Although they're all, they're kind of like competing

[00:44:25] with Starbucks in a way with like the cold brews

[00:44:27] and all that kind of stuff. So, we move in the last one. I was gonna do Cineplex, but I don't think we'll have time. And I've been wanting to talk about this next company for a couple of episodes now. No, yeah, I got nothing else to say. Pretty good quarter. So, you're gonna put all your life savings in Tim Hortons before we, or QSR? Yeah. No, I used to own it.

[00:45:42] I don't anymore.

[00:45:43] I moved on.

[00:45:44] I got tired of Tim Hortons dragging them down.

[00:45:47] Well, maybe start being a bit of an owner Notice that people buying things after 2 a.m. There's a greater chance of them defaulting on the loan, which is really interesting. I don't even get that. What would that be? I guess it's people either. Maybe they're intoxicated. Yeah, that could be part of it and making some stupid purchases.

[00:47:00] It could also be people feeling kind of stress,

[00:47:04] you know, not having any other choice.

[00:47:06] I'm not quite sure, but I read an article or make a purchase using installments. My understanding is that it's a bit like of a hybrid of a debit slash credit card. You can also apply through their loans through that. You may also ask how the hell do they make money if it's for installments without interest, for example. Well, they get a fee whenever a purchase is made

[00:48:20] using their service from the merchant.

[00:48:21] So that's a way of them getting money.

[00:48:24] If payments are not done on time by clients,

[00:48:26] there are late fees that are applied. But what happens if the if the person defaults it would probably be on a firm, right? Yeah. Yeah, it's on a firm Yeah, so pretty much. Yeah, like say somebody subscribed to us like we would get that subscription money They would take a fee but then if they didn't pay the business on wouldn't be liable. It would all be on a firm Yeah, and they take a pretty fat fee as well. Like I would be

[00:49:41] I think I can't remember but it's definitely like

[00:50:47] Yeah, I mean in the bit and the banks kind of always win. I mean we saw with those high interest savings ETFs they kind of mentioned to the regulators and within you know, a couple six months or whatever they tuned down the interest rate on them

[00:50:53] it was

[00:50:56] It's kind of I mean, it's a good business model on on like for a firm

[00:51:00] I mean they take a cut and then just kind of assume the risk

[00:51:03] I mean, I imagine there's a lot of riskinquency rates so I guess the risk portion you're talking about on monthly installment loans have risen since their quarter ending

[00:52:22] In June of last year composition from, you know, point of sale versus a firm transaction. So we've seen an increase of a firm based transaction. So that kind of debit card and app I was talking about. So in 2023, it was the same quarter. It was 19% for a firm, 81% point of sale. And then this quarter for 20.

[00:53:42] Sorry.

[00:53:43] Yeah, exactly.

[00:53:44] So Q2 of 2024, they have this is the kind of information whenever you look at credit delinquencies, there is always a delay for that. So depending on when the purchase were made, so it'll be interesting how that evolves throughout the year, whether it gets worse better. My inkling is that it'll probably either stay stable or get worse. But it's

[00:55:01] an interesting company to look at because unfortunately probably gives us a better perspective then you split it in four installments. Yeah. Yeah. That's what I mean. More of like a discretionary, you know, items where people are just, and what happened, like I'd be curious. So there's just late fees on the pay in four. If you don't pay, it doesn't roll over to an interest bearing loan. It's just a big late fee. Probably. I think there are late fees, but if you, if you put that on an annualized basis

[00:56:24] and you kind of use the late fees compared to the whole thing up front. But whereas they can split it among these payments, they might make that purchase, which ultimately isn't really all that good for the consumer. Yeah. And I think one of the big issues with consumers is some people will just lose track of it

[00:57:42] too.

[00:57:43] Yeah.

[00:57:44] And that's one for our episode today. We've ran a bit long before you start rambling too much I think well, I think it's a good point to to sign off here for those who are new to the podcast

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