August 8, 2008 / 1:01 AM / 9 years ago

Canadian Tire lowers forecasts as profit slides

TORONTO (Reuters) - Canadian Tire Corp Ltd reported a lower second-quarter profit as it was hurt by tough economic conditions and unseasonable cold weather, prompting it to cut its earnings forecast and sending its shares sharply lower.

<p>Canadian Tire President and CEO Tom Gauld speaks at the annual general meeting in Toronto, May 8, 2008. REUTERS/Peter Jones</p>

The country’s largest auto parts and household goods retailer said its net earnings fell to C$97.7 million ($93 million), or C$1.20 a basic share, from C$122.5 million, or C$1.50 a share, a year earlier.

The company said it expects earnings per share for 2008 will be in the range of C$4.75 to C$5.05, falling below earlier estimates of C$5.15 to C$5.40.

Shares of Canadian Tire, which also operates gasoline bars and sells financial services, slumped more than 7 percent on the Toronto Stock Exchange, making it among the day’s biggest net decliners.

The company said the cut to its forecast was due to the lower quarterly earnings, an inventory adjustment at clothier Mark’s Work Wearhouse, and higher retail inventory at the end of the second quarter.

“The issue is that these guys when they came out with the first quarter, they kind of had that hockey stick expectation for the back half that things would improve, and I think now it’s more realistic,” said Brian Yarbrough, an analyst with Edward Jones.

“If consumer spending in Canada slows even more then I think, obviously there’s a risk to those numbers, but right now when I go through my model ... I think it’s realistic -- but, once again, that depends on the environment staying like it is and not getting any worse.”

Adjusted earnings fell to C$94.7 million from C$109.8 million, hurt by a C$6.4 million after-tax investment to relaunch the Options MasterCard, as well as the inventory adjustment at Mark‘s.

Analysts had expected a profit of C$1.35 a share before items, according to Reuters Estimates.

Chief Financial Officer Huw Thomas said in an interview that the lower outlook was a result of these factors seen in the first half of the year, and he still expects the second half of the year to be better than the last half of 2007.

Gross operating revenue rose to C$2.5 billion from C$2.3 billion.

The company, which also sells sporting equipment and clothes, said retail sales at its core Canadian Tire and PartSource stores edged up 1.5 percent to C$2.2 billion, while same store sales were down 0.5 percent.

Retail sales across all categories were hurt by the sluggish economy, while seasonal leisure items were particularly soft due to cold, wet weather in May and June.

However, business improved in July with warmer weather, it said, making for a 5.1 percent increase in overall sales and a 3.1 percent increase on a same store basis.

To spark sales growth, Canadian Tire is opening “small market” stores designed for smaller towns and testing “smart stores,” which will focus on higher-profit products with improved store organization and display.

The company has already opened two of the small market stores and will open two more later this year. It plans to open two smart stores this year, and expects 25 more to follow in 2009.

Canadian Tire’s more actively traded class A shares finished down C$4.02 at C$48.40 in the late afternoon.

($1=$1.05 Canadian)

Additional reporting by Susan Taylor; editing by Rob Wilson

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