February 7, 2008 / 6:32 PM / in 10 years

Canadian Tire sees 2008 profit growth moderating

OTTAWA (Reuters) - Fourth-quarter profit at Canadian Tire Corp CTC.TO CTCa.TO rose 15.5 percent, the country’s biggest auto parts and household goods retailer said on Thursday, but earnings gains in 2008 will be “tempered” by big investments in growth and productivity and forecasts for softer economic growth.

<p>Canadian Tire Corporation President and Chief Executive Officer Thomas Gauld (L) speaks to shareholders at their annual general meeting in Toronto May 10, 2007. Fourth-quarter profit at Canadian Tire Corp rose 15.5 percent, the country's biggest auto parts and household goods retailer said on Thursday, but earnings gains in 2008 will be "tempered" by big investments in growth and productivity. REUTERS/ Mike Cassese</p>

The retailer, which also operates gasoline bars and a financial services unit, said net profit in the quarter increased to C$125.1 million, or C$1.53 a share. The results include a gain of C$11.4 million, or 14 Canadian cents a share, on tax recoveries.

Net profit in the same period last year was C$108.3 million, or C$1.33.

Adjusted to exclude nonoperating gains and losses, earnings were 29 percent higher at C$1.56 a share. On average, analysts had expected a profit of C$1.36 a share before exceptions, according to Reuters Estimates.

“It was a beat on the bottom line, but not as robust a beat as it would appear, because there were some unusual (items) in there,” said an analyst, who asked not to be named.

“The outlook for 2008 implies a more muted outlook and one that definitely is lower from where consensus is and you will see numbers coming down.”

The Toronto-based company, which also sells sporting goods and clothes, hiked its 2008 quarterly dividend by 13.5 percent to 21 Canadian cents per share.

Sales rose 3.1 percent to C$3 billion in the fourth quarter, it said. Same-store sales at its core Canadian Tire and PartSource stores dropped 1.8 percent because of lower tool sales.

The company tried to aggressively scale back promotional pricing on tools to improve its margins, but that hurt tool sales much more than expected, Mike Arnett, president of Canadian Tire’s retail unit, told a conference call.

“We believe that the sales lost in tools is absolutely recoverable,” Arnett said. Although the company will adjust tactics to rebuild tool sales, it will not revert to offering unsustainably big discounts, Arnett said.

Looking ahead, Canadian Tire forecast 2008 earnings in a range of C$5.15 to C$5.40 a share, excluding nonoperating items. The company reported full-year 2007 earnings of C$5.03 a share, so its outlook suggests that profit growth will slow to between 2 percent and 7 percent, versus 18 percent growth in 2007.

That is because “substantial investments” will be made in 2008 to support future business, and economic growth may slow in Central Canada, the company said.

Its planned investments include C$55 million, or 46 Canadian cents a share, on productivity and growth initiatives and C$28 million, or 23 Canadian cents a share, to continue its retail banking initiative.

“It’s not just one big project, it’s literally dozens of projects, so we’re not taking any huge risk, and we do have the flexibility to play with this a little bit in terms of the timing,” Chief Executive Tom Gauld said on a conference call.

Some of the projects include launching a revamped Canadian Tire Options Mastercard, replacing IT infrastructure, and improving dealer order and supply processes.

The 2008 profit outlook also reflects a new accounting standard for inventories, which is expected to reduce earnings by C$6.8 million, or 6 Canadian cents a share, while gains from an amended dealer contract should amount to about C$15 million, or 12 Canadian cents a share, the company said.

Capital spending in 2008 is estimated in a range of C$430 million to C$455 million, down from C$594 million in 2007, and will mostly be spent on store and network expansions.

The company operates Canadian Tire, Mark’s Work Wearhouse, and PartSource chains as well as Canadian Tire gas bars and a financial services unit.

Stronger margins helped lift adjusted earnings at Canadian Tire retail by 33 percent to C$74.1 million and by 6.6 percent at Mark’s Work Wearhouse to C$56.7 million.

On the Toronto Stock Exchange, the company’s class A shares dropped to C$62.82 a share on Thursday, down 78 Canadian cents or 1.2 percent.

($1=$1.01 Canadian)

Reporting by Susan Taylor, Leah Schnurr and Lynne Olver; Editing by Peter Galloway

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