'With 10 interest rate hikes in less than 18 months, and persistent inflation impacting the cost of living and leading to reduced savings cushions, Canadian consumers are experiencing increased financial strain and facing tougher spending decisions,' Canadian Tire CEO Greg Hicks said on a conference call Thursday.Fred Lum/The Globe and Mail
Canadian Tire Corp. Ltd. CTC-A-T has withdrawn a three-year financial forecast, as inflation has dampened consumer spending and put pressure on retail sales, marking what its chief executive officer called “a turning point in the Canadian economy.”
On Thursday the Toronto-based retailer reported declines in both revenue and profit in its second quarter ended July 1, as Canadians tightened their belts and continued to cut down on purchases of discretionary products such as gardening supplies, recreational items and casual clothing.
“With 10 interest rate hikes in less than 18 months, and persistent inflation impacting the cost of living and leading to reduced savings cushions, Canadian consumers are experiencing increased financial strain and facing tougher spending decisions,” president and chief executive officer Greg Hicks said on a conference call to discuss the results.
For months Canadian Tire has been among the retailers pointing to changing consumer patterns, as higher interest rates and soaring prices for everyday essentials such as groceries have led people to cut back on non-essential purchases. But spending has now taken a further downturn, with the company’s credit card data showing that consumer spending declined in the second quarter for the first time since 2020.
Mr. Hicks said this has led to a bifurcation in demand for essential products versus discretionary purchases. That’s a meaningful change for Canadian Tire, where non-essential products make up roughly two-thirds of the product assortment. Sales in essential categories such as automotive parts, pet care and kitchen cleaning grew 6 per cent overall, while non-essential purchases declined more than 3 per cent.
The cutback in spending was most pronounced among debt-burdened households – especially in Ontario and British Columbia, which have the highest concentration of debt to disposable income in the country.
“I think the objective of quantitative tightening is being delivered upon,” Mr. Hicks said. “I can’t speak whether it’s too much, but we can certainly tell you that across our portfolio of discretionary categories, especially in Ontario and B.C., the policy is having its intended effect.”
Lower retail sales, as well as investments the company is making in the business, led to a decline in profits.
Canadian Tire’s net income fell to $126.9-million, or $1.77 per share, in the second quarter, compared with $177.6-million, or $2.45 per share, in the same period last year. That 28.5-per-cent decline in profit included $74.6-million in costs related to a March 15 fire at one of the company’s largest distribution centres, in Brampton, Ont. The decline also included a $33.3-million retroactive tax charge in Canadian Tire’s financial services segment. Normalized diluted earnings, excluding those costs, declined 1 per cent.
The company’s share price fell 4.54 per cent by midday Thursday after the earnings report.
Last year the company forecast it would achieve 4-per-cent average annual sales growth on a comparable consolidated basis by 2025. The forecast also set a target to more than double its diluted earnings per share from 2019 to 2025, to reach more than $26 per share. Canadian Tire has now withdrawn that forecast.
“Overall, the macroeconomic environment and consumer demand differ significantly from our expectations when we set out our strategy in early 2022,” Mr. Hicks said. The company’s leaders remain confident in the long-term health of the business, chief financial officer Gregory Craig said on the call.
Canadian Tire continues to invest in its multiyear strategy announced last year, which aims to improve the company’s digital operations, launch thousands of products, expand the Triangle Rewards loyalty program and improve supply-chain efficiency. However, Mr. Craig said the company is deferring costs where possible.
Comparable sales – an important industry measure that tracks sales growth not tied to new store openings – were roughly flat in the quarter, excluding declines in petroleum sales. Total revenue fell to $4.3-billion in the quarter, a 3.4-per-cent year-over-year decline.
The company’s Sport Chek chain of stores benefited from sales growth in footwear and products related to team sports, but sales of athletic clothing and outerwear fell. And footwear sales also grew at its Mark’s stores, while sales of casual clothing declined.