Ad spending, Forzani purchase lead Canadian Tire to lower Q2 profits

Canadian Tire Corp. says its profits dropped in the second quarter as it spent more on advertising, costs associated with its purchase of Forzani Group and felt the pinch of bad weather on sales. The retailer also spent more to beef up its automotive section as it ramped up its offerings in the lucrative department. […]

Canadian Tire Corp. says its profits dropped in the second quarter as it spent more on advertising, costs associated with its purchase of Forzani Group and felt the pinch of bad weather on sales.

The retailer also spent more to beef up its automotive section as it ramped up its offerings in the lucrative department.

“Sales and revenue were strong this quarter and we are continuing to meet our expectations in key areas, such as automotive, kitchen and backyard living,” president and CEO Stephen Wetmore said in a statement Thursday.

The Toronto-based retailer earned $105.8 million of $1.29 per share in the quarter ended July 2, compared with $122.8 million of $1.50 per share a year ago. Revenue increased 4.1% to $2.57 billion from $2.47 billion.

Analysts polled by Thomson Reuters had on average expected the company to earn $1.48 per share.

Analyst Brian Yarbrough from Edward Jones said the automotive department is going to be key for Canadian Tire as U.S. retailer Target looks to start opening stores in Canada.

“That’s the one category they really need to get right. It’s the highest profitable category but that’s one of the ways they’re going to differentiate themselves from Target,” he said.

Yarbrough said Canadian Tire is making the right moves in its attempt to beat U.S. Target in the tools, automotive and sporting goods departments to make up for the 15-20 per cent overlap of products that both stores sell.

“Target is a great operator and Target is going to take market share.”

Same-store sales at Canadian Tire were up 0.% compared with a gain of 0.8% a year ago, while sale store sales at its Mark’s banner were up 0.1% compared with 3.4% in the second quarter of 2010.

Canadian Tire, which sells everything from sporting equipment, to hardware, to patio furniture, attributed its increase in sales to its backyard living, kitchen, and household cleaning departments.

But the company said this growth was partially offset by lower sales in some of its departments, due to the cool, wet weather at the beginning of the quarter.

“In weather-related categories such as outdoor tools and gardening, we had a weak start to the quarter but finished with a strong June and with positive momentum continuing into July,” Wetmore said.

Canadian Tire said retail sales at its gas bars grew 22.8% due to higher gas prices, and the opening of new gas stations along major Ontario highways.

Meanwhile, Canadian Tire’s financial services unit took a big hit in the quarter, with earnings before interest, taxes, depreciation and amortization dropping 13.4 per cent to $65.8 million.

Revenue in the division decreased 2.9 per cent to $234.8 million, mainly due to the fact that auto club services revenue was reported in the retail division’s results, where it had been included in financial services last year.

Excluding the change, Canadian Tire said financial services revenue declined slightly on a small drop in average credit card receivables.

The company has offered $771-million to buy the Forzani Group Ltd., which operates some 500 stores in malls under various banners, including Sport Chek and Athletes World, but also more niche brands like Nevada Bob’s Golf and Hockey Experts.

Canadian Tire has long sold basic sporting equipment such as skates and bikes, but Forzani will open its doors to those looking for more specific equipment and trendier brands.

The deal will make Canadian Tire owner of the No. 1 and No. 2 sporting goods retail chains in the country.

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