Canadian Tire Corporation Limited (CDNTF) Q4 2022 Earnings Call Transcript

Canadian Tire Corporation Limited (OTCPK:CDNTF) Q4 2022 Earnings Conference Call February 16, 2023 8:00 AM ET

Company Participants

Karen Keyes - Head, IR

Greg Hicks - President and CEO

Gregory Craig - EVP and CFO

TJ Flood - President, Canadian Tire Retail

Conference Call Participants

Brian Morrison - TD Securities

George Doumet - Scotiabank

Luke Hannan - Canaccord Genuity

Mark Petrie - CIBC

Peter Sklar - BMO Capital Markets

Operator

Thank you for opinionated by. My sanction is Paul, and I will beryllium your convention usability today. Welcome to nan Canadian Tire Corporation Earnings Call. All lines person been placed connected shut up to forestall immoderate inheritance noise. [Operator Instructions].

Now I will walk on to Karen Keyes. Head of Investor Relations for Canadian Tire Corporation. Karen?

Karen Keyes

Thank you, Paul. And bully morning, everyone. Welcome to Canadian Tire Corporation's 4th fourth and 2022 afloat twelvemonth results convention call. With maine coming are Greg Hicks, President and CEO; Gregory Craig, Executive Vice President and CFO, and TJ Flood. President of Canadian Tire Retail.

Before we begin, I wanted to tie your attraction to nan net disclosure, which is disposable connected nan website. It includes cautionary connection astir forward-looking statements, risks and uncertainties, which besides applied to nan chat during today's convention call. After remarks today, nan squad will beryllium happy to return your questions. We'll effort to get successful arsenic galore questions arsenic possible. But we do inquire that you limit your clip to 1 mobility positive a travel up earlier cycling backmost into nan queue. And we invited you to interaction investor relations if we don't get done each nan questions today.

I'll now move nan telephone complete to Greg.

Greg Hicks

Thank you, Karen. Good greeting and invited everyone. I will commencement by saying that overall, I'm pleased pinch our results, which demonstrate we proceed to negociate good done a move economical environment.

I'm going to walk immoderate clip this greeting discussing what we're seeing successful position of user demand. But earlier I do, I'll springiness you immoderate colour connected our q4 and 2022 results. In Q4, we achieved a grounds normalized EPS of $9.34, which brought afloat twelvemonth EPS to $18.75, a awesome decorativeness to a singular centennial twelvemonth and hardly awkward of past year's record. This was contempt nan truth that successful 2022, we knowledgeable elevated proviso concatenation and merchandise costs and higher overseas speech while investing heavy successful nan initiatives wrong our amended connected strategy.

Comparable income successful nan 4th were accordant pinch past year's exceptional growth, representing a 21% summation connected a 3 twelvemonth stacked basis. Revenue was up and stronger unit gross separator led to maturation successful our Retail Segment IBT. Strong net astatine CTFS driven by higher gross and little OpEx besides contributed to our grounds EPS.

We proceed to turn and fortify our relationship to Canadians done our Triangle Rewards loyalty programme and in installments paper pinch loyalty income up 8% and loyalty penetration approaching 60% for nan year. Additionally, successful 2022, we successfully delivered our stated extremity of much than $300 cardinal of operating efficiencies.

So arsenic I said, I'm pleased pinch what we achieved. But I'm arsenic pleased pinch really we achieved it. Through our team's diligent guidance of our business and our unwavering attraction connected our strategy. As I ideate we're each reference galore of nan aforesaid headlines. I cognize I don't request to show you that we proceed to run against a backdrop of uncertainty. What I will show you is what we're seeing successful position of user request done our Triangle in installments paper data, and our loyalty program. Our in installments paper information tells america that we are successful a different economy. Credit paper spending remains elevated but maturation materially softened connected a year-over-year ground starting successful precocious September. Growth successful q4 was 4%, compared to 16% connected a afloat twelvemonth basis.

Within our Triangle Rewards Loyalty membership, specifically, we are seeing different walk patterns look based connected family income levels. Triangle members successful each family income conception grew their walk pinch america successful nan 4th and each 4th of 2022. However, higher income Triangle members walk maturation softened successful nan 4th comparative to erstwhile quarters.

There were 2 Triangle personnel segments that accelerated their walk and delivered outsized maturation for nan quarter. The first conception is little income members, who traditionally person had little levels of engagement pinch CTC. The 2nd conception is mediate income members who person traditionally had higher engagement pinch us. We deliberation these are bullish indicators of our accrued relevance successful a tougher economical backdrop.

Specifically astatine CTR, we are seeing grounds of waste and acquisition down successful our champion level assortments, particularly successful basal categories. We are not seeing a meaningful displacement successful our discount mix, but we grew categories we would deem arsenic essentials, offset by a diminution successful non-essentials. Given nan macro backdrop mixed pinch what we are seeing successful nan capacity of our business, we are expecting a much constrained request situation arsenic we look forward, particularly successful nan first six months of this year. We judge it's adjacent to opportunity that our customers are successful a position wherever they're looking for much value. And that's wherever you tin expect america to beryllium laser focused successful 2023

It was conscionable astir a twelvemonth ago, that we announced our shot Brand Purpose, we're present to make life successful Canada better. And this committedness includes providing worth to Canadians successful this move environment. This isn't a caller thought for us. It's thing we've been doing for much than 100 years, and we've seen successful flooded our stock of challenging times.

What is new, however, is that we are amended prepared and a much resilient institution than we've ever been. Through our unsocial capabilities, learnings from nan pandemic and by remaining assured and committed to our amended connected strategy, we will proceed to present worth to customers, because we cognize that's what they need.

We are responding not reacting by reorienting our strategies while remaining anchored successful our strategy. We're doubling down connected our unsocial endeavor capabilities, including our Triangle Rewards loyalty program, wide and owned marque multi-category assortment, improved omnichannel experience, and financial services business to present much paths to worth for our customers successful 2023.

I'll commencement pinch what I judge is our astir important way driving worth for our customers, our Triangle Rewards Loyalty Program. We welcomed a plethora of caller customers during nan pandemic and our wished attraction ever since has been to person these customers into Triangle Rewards Loyalty Members. This is astir much than getting our loyalty cards into nan hands of our customers, it's astir encouraging them to registry their cards redeem ECTM, shop crossed aggregate banners prosecute and link pinch our marque connected a deeper much individual level.

By converting shoppers into members, we tin supply them pinch much worth done ECTM and offers for nan products they want and need. In an situation wherever relevance will beryllium critical, wave matters and offering nan correct products to nan correct customers astatine nan correct clip is critical. When our customers go registered members, we tin do this for them. Triangle is already 1 of our strongest capabilities for providing value. So we're moving disconnected a very powerful platform.

When you see wherever we were 5 years ago, we knew very small astir our members, and they were earning and redeeming their ECTM astatine mostly 1 banner, Canadian Tire Retail. In a comparatively short magnitude of time, we built an incredibly beardown capacity for our business. And this year, we're reinforcing this spot successful 2 main areas.

The first is continuing to thrust registration, arsenic that enables customers to spot and afloat recognize nan worth of Triangle Rewards done redemption. In 2022, maturation from our registered members outpaced maturation from different loyalty members, and drove nan $800 cardinal summation successful loyalty sales. And registered members person consistently accrued walk successful some basal and discretionary items astatine CTR. Although maturation rates person declined since earlier successful nan year, their behaviour is importantly different than non-registered and non-members. This further supports our belief and engagement and Triangle and ECTM is enabling members to clasp their spending.

Additionally, each clip a registered personnel shop aliases redeem, we study much astir them, which helps america find really champion to present worth to them successful nan future. This continuous rhythm creates a flywheel effect successful which worth begets much value. I'll besides adhd that we issued $350 cardinal of ECTM to our rank successful 2022, an summation of 16% compared to 2021. So nan flywheel is primed for worth transportation and 2023.

Our 2nd attraction area wrong triangle is helping customers gain CCTM faster done nan usage of strategical promo offers and driving transverse shop crossed our banners. During this telephone past year, I went reasonably heavy connected Party City capacity to show nan powerfulness of nan Triangle Rewards program. As a reminder, past year, we disclosed nan truth that nan standalone Party City Business was up 26% for nan afloat year, and that we had almost 400,000 Triangle members shop nan banner, and that these members complete indexed connected our cardinal 30 to 49 twelvemonth aged families customer segment.

In 2022 we continued to thrust customers to Party City done transverse banner engagement. Another 400,000 members shopped nan banner for nan first clip successful 2022. And afloat twelvemonth comp income successful our standalone stores were up 18%. On past year's telephone I besides mentioned we had precocious activated Triangle rewards of Pro Hockey Life. The powerfulness of nan triangle has manifested successful this business arsenic well, pinch 127,000 triangle members shopping nan banner and our afloat twelvemonth income of 19%.

In summation to making our banners stronger done transverse shop initiatives, adjacent month, we will motorboat nan wide trading of Triangle Select our subscription exemplary that includes a number of perks including ECTM entree operators connected products pinch our ain brands portfolio. You'll callback that passim past year, we ran a beta trial of Triangle Select, what we learned is that Select really accentuates our differentiators our ain brands, our beingness stores and Canadian Tire Money. Subscribers gain ECTM faster successful ample part, acknowledgment to nan program's ECTM accelerator offers. For example, successful our beta trial nan mean member's yearly incremental net done Select circumstantial bonuses were much than 3 times this subscription fee.

We besides saw that nan programme drives importantly much walk and transverse shop crossed our banners and members that transverse shop walk an mean of 3 times much than those who shop astatine only 1 banner. We've been moving connected this programme for rather immoderate clip and judge this timing is cleanable for adding moreover much worth to our membership.

Another captious way for delivering worth to customers is their unsocial multi class merchandise assortment. We've agelong been known for nan breadth of our assortment, and by continuing to grow our scope of bully amended and champion products complete nan past galore years, we are successful a amended position now than ever. The breadth of our assortment, particularly successful our ain brands portfolio enables america to proceed gathering customers wants and needs while providing overmuch needed worth if and erstwhile they are looking to waste and acquisition down.

At CTR, we've designed full categories, specified arsenic barbecues, room appliances, bikes and tents to person good, amended and champion merchandise representation. This strategy has enabled nan engineering of profit astatine each value tier. For example, wrong room appliances, we connection MASTER Chef which is our bully tier product, Vida PADERNO arsenic our amended and PADERNO is our best.

At SportChek, we are very pleased pinch our ain marque performance, including ford pinch creation and woods, some of which are positioned wrong nan amended tier comparative to beardown champion level nationalist brands. And astatine marks you've heard america talk astir going nan different way. And rounding retired our assortment architecture pinch champion level nationalist brands, specified arsenic Carhartt, Sketchers, and Levi's to supply upsell alternatives to our ain brands and pull caller customers.

Additionally, arsenic a precocious debased retailer, crossed our banners, we person ever been capable to connection worth to customers done our pricing and promo strategies. Now we person much devices to aboveground worth crossed each our banners, namely Triangle Rewards and our usage of first statement information done which we tin optimize promos and nonstop offers straight to a personnel arsenic opposed to relying only connected wide marketing. As I mentioned earlier, we are starting to spot immoderate bifurcation betwixt basal and non-essential products. And this displacement is aligned to what we antecedently planned done our strategical attraction connected pet, automotive and fixing arsenic we rotation retired a refresh conception link astatine CTR stores, wherever we tin we are accelerating shifting much of our resources into basal categories.

For example, we are good connected our measurement pinch rolling retired our enhanced Petco shop and shopping acquisition crossed our CTR network. Most of our stores person been highly engaged this period implementing nan caller concept. We person complete 80% of nan shop web setup. And we'll person 90% complete by nan summer. We're besides looking astatine really we attraction our inventory purchases and trading walk into these types of categories.

For example, astatine Mark’s, we're looking to grow our business workwear assortment, including testing a caller Mark’s Pro shop conception later successful nan year. Overall, each of these merchandise examples exemplify nan resiliency of our offering, and our expertise to pivot arsenic different depletion patterns emerge.

Finally, earlier I move it complete to Gregory, I want to walk immoderate clip talking astir our wished attraction connected providing a seamless omnichannel customer experience. The acquisition we offer, some successful shop and online is each portion of nan larger worth equation for nan customer. We stay assured and committed to these important investments arsenic they will further our competitory posture and thrust operational ratio complete nan agelong clip -- agelong term.

You'll callback from our investor day, that acquisition is 1 of nan apical 5 pillars wrong our amended connected strategy. In 2022, we made bully advancement against these initiatives. And I'll springiness you a fewer of nan highlights. To thief our CTR stores run much efficiently and amended their in--stock position, we've implemented a caller assortment guidance level we telephone Tetris, which empowers stores to build customized assortments and inventory extent astatine nan point level. We've been building this level for 2 years. With nan thief of a committee of subordinate dealers and a business pinch Montreal based IVADO Labs, who are world people leaders successful AI, instrumentality learning and optimization. The AI exertion has been rolled retired to complete a 3rd of nan web pinch nan remainder scheduled to beryllium completed this quarter.

On nan customer facing side, we proceed to rotation retired successful shop automations that CTR. 80% of stores now person pickup lockers and much than half person physics support labels. Since we launched our caller online automotive work assignment strategy successful precocious September, complete 80,000 customers person booked utilizing nan strategy successful much than 80% of our stores. This year, we expect nan number of stores offering online booking to scope 90% and correspond complete 10% of our full work visits.

In position of our e-commerce experience, we've moved person to having a azygous integrated website done nan motorboat of our 1 integer level astatine CTR successful 2022. Party City migrated to nan caller level a mates of weeks ago, and our people since SportChek banners will migrate this spring. Additionally, we proceed to heighten nan ways successful which customers tin shop pinch america by expanding our vessel to location options, including done our business pinch DoorDash. As discussed successful our Q2 telephone past year, done this partnership, we rolled retired to our aforesaid time transportation crossed our SportChek network. We've been very pleased pinch nan results and nan customer acquisition scores person been highly positive.

Earlier this week, we launched an definitive aforesaid time transportation aviator pinch DoorDash astatine 10 CTR stores successful Ottawa. If nan programme scales affirmative experiences nan aforesaid measurement it has for SportChek, our volition will beryllium to rotation retired this programme nationally.

In position of our proviso chain, we proceed to usage 3PLs arsenic needed, while expanding our capacity done our caller distribution halfway successful nan Greater Toronto area, which will amended e-commerce fulfillment rates for Mark's and SportChek. Overall, our ongoing investments and attraction areas show really we're providing much worth to our customer and enhancing their shopping experience.

And pinch that, I'll walk it complete to Gregory.

Gregory Craig

Thanks, Greg. Good morning, everyone. Overall, our beardown operational capacity done nan twelvemonth and nan beardown decorativeness to nan 4th fourth against exceptional comps helped america execute an outstanding consequence successful a move economical environment. We were very pleased to study afloat twelvemonth normalized EPS of $18.75, wrong 1% of past year's grounds EPS contempt nan headwinds we proceed to look passim nan year, which included higher freight and proviso concatenation costs, and a stronger U.S. dollar to sanction a few.

For nan quarter, normalized diluted EPS was up 11% to $9.34, aft $20 cardinal of normalization costs related to nan operational ratio program, which represented astir $0.25 connected a per stock basis. Q4 gross was up successful some unit and financial services and that on pinch an betterment successful nan unit gross separator rate, translated into higher gross separator dollars. We negociate operating expenses cautiously arsenic we proceed to put successful nan business and run pinch elevated proviso concatenation costs.

IT came successful astatine 6% higher for nan quarter, which erstwhile mixed pinch nan effect of stock repurchases successful 2022 drove nan 11% summation successful EPS.

Let maine now return you done nan capacity of nan business connected a conception ground starting pinch retail. Retail income were up conscionable complete 1% to $5.7 cardinal successful nan quarter. In our petroleum business, higher prices astatine nan pumps erstwhile again offset level volumes, driving a 10% summation successful income and contributing positively to unit income growth.

Now turning to retails comparable sales, which exclude petroleum. Comparable income were successful statement pinch an exceptional Q4 past year, erstwhile they were up 11.3%. And connected a three-year stack ground comparable income were up 21%. Mark's and Helly Hansen were nan standouts from a maturation perspective. Mark's comp income were up 4% against a 15% comp past year, and Helly Hansen gross was up 21% connected apical of beardown maturation successful 2021.

Let's now look astatine nan highlights for each of nan banners starting pinch Canadian Tire. At Canadian Tire Retail, we proceed to meet nan changing needs of Canadians done nan breadth of our assortment, allowing america to clasp comparable income level against a 9.8% comp. The automotive section erstwhile again posted beardown growth, arsenic it has done for 10 consecutive quarters now.

Automotive was up 5% and car attraction and ray car parts did peculiarly good some astatine Canadian Tire and Part source. Diesel and farming was successful statement pinch past year. A awesome consequence considering nan diminution we saw successful Christmas categories against nan important maturation complete nan past 3 years pinch categories for illustration Christmas lights and decor up 15% connected a compound yearly maturation complaint ground since 2019.

The Living section was besides up somewhat connected past year, pinch coagulated capacity and room and maturation and basal pet and location categories. Party City besides saw beardown maturation some wrong Canadian Tire and astatine nan standalone stores, pinch income up 30% and 10% respectively. Our fixing and playing divisions were down successful nan 4th compared to past year, pinch playing seeing diminution successful workout categories, which grew good during nan pandemic and arsenic we started to rhythm nan return to lucky and wintertime sports past year.

Investment connected our Canadian Tire shop web remains a cardinal constituent of our strategy turn nan apical line. 36 Canadian Tire stores were refresh, expanded, aliases replaced successful 2022 and we were pleased pinch nan results, which proceed to way up of our expectations. Another 23 projects are expected to travel connected watercourse successful nan first half of 2023.

As I've done previously, I want to sum up wherever we ended nan twelvemonth successful position of nan narration betwixt income and gross growth. Sales maturation slowed astatine CTR successful nan 2nd half of nan year, arsenic we started to comp quarters without immoderate of nan impacts of pandemic restrictions, and pinch a softening user request situation towards nan extremity of nan year. Turning to gross for CTR, we saw a akin pattern. Revenue is very beardown successful nan first half of nan year, up 7% connected 2021, but decelerated for nan past six months pinch Q4 up 1%. However, connected a afloat twelvemonth basis, gross maturation outpaced income maturation by adjacent to 300 ground points.

As we person mentioned previously, fixed our trader model, gross and income maturation tin beryllium retired of sync successful immoderate fixed quarter. Therefore, we would expect nan maturation patterns for gross and income to converge complete nan people of nan coming quarters arsenic they typically do. I will speak much astir this successful a infinitesimal erstwhile we get to inventory.

Moving complete to SportChek, comparable income grew successful 2022, up almost 2% driven by 4% maturation successful nan first half of nan year. Q4 comparable income were down 2% against nan 16% comp past year, erstwhile we had nan use from nan post-COVID resumption of squad sports. A item successful Q4 was Fanwear, our caller sanction for licensed apparel, pinch maturation driven by World Cup related demand. We besides had amended nationalist marque merchandise readiness arsenic proviso concatenation started to normalize. However, nan softening user request situation and milder upwind resulted successful little income successful class for illustration outerwear, skiing and snowboarding.

From a triangle rewards perspective, SportChek continues to pull caller to CTC members and personalized tribal personnel offers proceed to thrust engagement for nan banner, pinch much than a cardinal customers activating 1 to 1 offers.

Moving retired of Mark's, we recorded our 10th consecutive 4th of affirmative capacity pinch comp income up 4% and adjacent nan twelvemonth up a important 10%. In nan quarter, income of casual and business footwear were cardinal performers pinch casual footwear income up 10% driven by nan innovative IceFX technology, which is embedded successful galore of our ain marque footwear products. We sold complete 150,000 pairs of IceFX boots successful Q4 up an awesome 50% complete Q4 of past year. We proceed to thrust towards a patient operation of nationalist and ain marque income of Mark's and are very happy pinch nan outcomes nan strategy is delivering.

Impressively income of ain brands astatine Mark's deed $1 cardinal for nan first clip successful 2022, partially driven by nan spot of casual and business brands, Denver Hayes, and Dakota Pro. Mark's besides continues to attraction connected increasing nationalist marque income arsenic a customer acquisition vehicle, and brands for illustration Carhartt were up 27% for nan year. Our strategical initiatives person besides helped Mark's proceed to pull caller customers to our Triangle program. And successful 2022, we proceed to spot an summation successful progressive Triangle members and nan nether 30 conception astatine Mark's.

Now connected Helly Hansen, gross was up 21% pinch beardown waste done a some sportswear and workwear crossed wholesale and e-commerce channels. We had double digit gross maturation crossed astir markets, including North America and Europe. In nan U.S., a continued attraction connected e-commerce, direct-to-consumer and unit channels drove exceptional growth. We besides proceed to build our income done CTC banners successful Canada, and connected a afloat twelvemonth basis, income for CTC banners were up 8%.

Moving to separator now, you will callback nan Q4 has historically been nan strongest separator 4th for nan unit segment, but this twelvemonth was our highest yet. Retail gross separator complaint excluding petroleum and accrued 40 ground points successful nan 4th to 39.9%, pinch nan afloat twelvemonth unit gross separator complaint somewhat down past twelvemonth astatine 35.6%. At Investor Day past March, we said we were aiming to clasp nan gross separator description we had achieved for nan pandemic. And we were really pleased pinch nan awesome occupation nan squad did managing done merchandise costs and freight headwinds to get america wrong scope of past year's separator rate.

As expected, and arsenic discussed successful nan erstwhile calls, though still elevated, we started to spot immoderate easing this 4th connected some freight and merchandise costs inflation. And we were capable to group these costs pinch higher merchandise margins astatine CTR. Better operation besides helped pinch publication from Mark's and Helly Hansen, which was partially offset by higher promotional strength astatine SportChek.

Looking forward, we consciousness bully astir our negotiated freight contracts for nan twelvemonth and expect to spot commodity deflation activity its measurement done our negotiations arsenic we move passim nan year. Our extremity continues to beryllium to clasp and protect our unit separator rates complete nan longer term, while striking nan correct equilibrium betwixt request creation and being value competitory arsenic needed to guarantee we're driving worth for our customers.

Let's now move connected to really Financial Services performed successful 2022. The Financial Services business had its strongest twelvemonth connected grounds generated $442 cardinal of IBT. Receivables besides exceeded $7 cardinal for nan first time. Q4 IBT was up 38% to $87 million, arsenic higher receivables and higher spend, contributed to higher gross and improved markets and reduced acquisitions drove little trading expense.

Cardholder engagement remained strong, progressive accounts and mean relationship balances were some up by astir 6%. Gross mean accounts receivable was up by 12.4% successful Q4, but lagged nan afloat twelvemonth maturation of 13.2% arsenic we slowed acquisition, and saw slowing paper sales. While paper income grew 4% for nan 4th walk maturation has slowed considerably from nan 21% maturation successful paper income we're seeing connected a Q3 year-to-date basis.

Risk metrics are continuing to inclination up arsenic we expected. The PD2 positive [ph] complaint was backmost to humanities levels astatine 2.9%, and while write-off rates are still good beneath historical norms astatine 4.9%, did summation successful nan quarter. Looking ahead, we expect write-offs to proceed returning to much historical levels, arsenic nan accrued finance successful caller accounts, a cardinal strategical inaugural that we outlined astatine Investor time useful its measurement done nan portfolio and mature relationship capacity stabilizes.

Despite ongoing economical uncertainty, cardinal indicators for illustration employment stay robust. Our portfolio remains patient and continues to execute well. We proceed to support a adjacent watch connected macroeconomic information and are fresh to enact our playbook for further measures to negociate consequence arsenic needed.

Finally, nan allowance complaint astatine 12.6% continues to beryllium wrong our targeted scope of 11.5% to 13.5%.

Now I'll move connected to operating expense. This 4th marked nan culmination of our 3 twelvemonth operational ratio program. And I want to return a infinitesimal to convey nan teams internally that person worked truthful difficult to instrumentality astir 250 initiatives crossed nan business that person delivered much than $300 cardinal successful annualized run-rate savings, ranging from nan dense lifts of our workday implementation to nan smaller time to time process optimization projects crossed nan business that mean we are operating acold much efficiently. While, astatine this clip we don't expect to put a caller programme successful place, we will proceed to bring up nan operational subject we person developed to really we tally our business. Improving ratio continues to beryllium an important attraction for america arsenic we move forward.

The OE savings we achieved mixed pinch little adaptable compensation disbursal contributed to afloat twelvemonth normalized consolidated OpEx arsenic a percent of gross of 25%, up only somewhat versus past year. The summation was chiefly driven by normalized unit OpEx, which proceed to tally somewhat supra gross maturation driven by higher IT investments arsenic we modulation to a unreality based infrastructure and higher proviso concatenation costs.

Now, moving connected to inventory. Corporate inventory levels were 30% higher this clip past year. And that's that compares to a 20% summation astatine Q3. Our year-end inventory build was chiefly owed to 3 factors. First, arsenic we discussed past quarter, little than expected planned income successful Q2, and Q3, are responsible for immoderate of nan bills peculiarly successful nan outpouring summertime inventory astatine CTR.

The 2nd facet was early receipts of merchandise, chiefly astatine Helly Hansen, wherever inventory levels were little past year, arsenic we built inventory successful support of nonstop user and beardown wholesale demand. And portion costs ostentation remained an important contributor to nan summation successful firm inventory. A cardinal attraction for america remains managing done nan higher level of firm inventory.

Overall, we're managing our seeds and expect firm inventory levels to normalize complete nan people of nan year. And we judge a beardown and banal position crossed each of our banners remains important to thrust income successful a competitory environment.

Dealer ending inventory is up a much humble 10% comparative to past year. A mild December intends dealers are now sitting connected immoderate carryover wintertime inventories, but we still person immoderate trading model near for these businesses. And we'll springiness you immoderate position connected wherever we onshore successful our Q1 call. We besides talked past 4th astir nan dealers ending heavier successful outpouring summertime inventory. We are expecting this to effect outpouring summertime waste done to dealers by astir $150 million, which will thrust package gross astatine CTR successful nan first half of nan year. We expect nan largest effect of this to beryllium successful nan first quarter.

Turning retired operating capital. In 2022, operating superior expenditures for nan twelvemonth were successful statement pinch our Q3 expectations astatine conscionable nether $750 cardinal arsenic we proceed to put successful nan shop network, our proviso concatenation and nan superior elements of our IT transformation. And full superior expenditures astatine $850 million. We expect adjacent year's operating superior expenditures to autumn successful a akin scope of betwixt $750 cardinal to $800 cardinal arsenic we proceed to put successful our amended connected strategy.

Finally, turning to superior allocation, we proceed to negociate our rate and aft superior expenditures, we person generated important disposable unit rate travel complete nan past 2 years. This has allowed america to money beardown returns to our shareholders pinch $750 cardinal paid retired to shareholders successful 2022, of which $325 cardinal was paid retired successful dividends. We besides proceed to beryllium progressive and buying backmost our shares, targeting a full of betwixt $500 cardinal and $700 cardinal successful stock repurchases by nan extremity of 2023.

In summary, nan operating situation has changed astir america arsenic we've travel done 2022 and it remains a small uncertain arsenic we participate 2023. But we delivered a beardown group of results pinch nan difficult activity of galore teams crossed nan business. Strong comps successful early 2022 and nan outpouring summertime inventory carryover that we person discussed will supply immoderate headwinds connected some income and revenue, which will effect quarterly phasing successful 2023.

However, we proceed to judge we are amended positioned than we've ever been to run pinch agility. And arsenic Greg discussed, present worth to our customers. We stay convinced that our strategical guidance is nan correct one, and will proceed to present beardown returns to shareholders complete nan longer word arsenic we build an moreover amended business.

With that, I'll manus it complete to Greg for his closing remarks.

Greg Hicks

Thanks, Gregory. I'll extremity my prepared remarks coming by reiterating that we are afloat equipped to navigate this move economical environment. Our business exemplary is resilient, our guidance squad is beardown and we are a overmuch amended retailer coming than we've ever been, because of our unsocial capabilities that we proceed to fortify done our amended connected strategy.

We are of people watching listening and learning from what's happening correct now and keeping a keen oculus connected wherever our customer is going. But we're moving this business for nan agelong term. Our corporate ambition to execute nan initiatives wrong our amended connected strategy has not changed. And this is wherever my activity squad and I will stay focused.

One twelvemonth ago, we made a committedness to our customers, employees, communities and shareholders that we are present to make life better, and that is what we intend to do from providing customers pinch worth done our products, services and shopping experiences, to stepping up pinch support for our communities. I mentioned this connected past quarter's call, but I judge it bears repeating. As Canadian families find themselves progressively stretched, Canadian Tire jumpstart charities tin and will beryllium location to guarantee that nary matter what happens, kids tin proceed to participate successful athletics and recreation.

I'll extremity my prepared remarks this greeting by thanking our frontline team, our subordinate dealers, our firm squad members and our committee of board for their committedness and dedication and making 2022 our centennial twelvemonth truthful memorable. Although 2023 looks to beryllium a small much uncertain, we're moving guardant pinch clarity and assurance successful our strategy, and pinch a clear attraction connected providing worth to our customers.

And pinch that, I'll walk it complete to nan usability for questions.

Question-and-Answer Session

Operator

Thank you. We will now return questions from nan telephone lines. [Operator Instructions] The first mobility is from Brian Morrison from TD Securities. Please spell ahead. Your statement is now open.

Brian Morrison

All right. Good morning. Thanks very much. Gregory, possibly 2 questions here. Maybe we tin dive into nan gross separator and retail. I deliberation past quarter, you thought that ex petroleum, you're going to spot immoderate reprieve from freight and surcharges comparative to Q3, but alternatively than having, a separator diminution of 100 to 200 ground points, you're up benignant of 50 ground points year-over-year. So tin you conscionable spell done possibly breakdown surcharge and freight I deliberation it was a headwind, nan publication from operation astatine CTR and Mark's possibly pricing and leverage. Just springiness america immoderate thought comparative to past twelvemonth that 50 ground constituent breakdown, please.

Gregory Craig

Sure, Brian. It's Gregory. I'll commencement and I deliberation what I'll do is I'll walk it complete to TJ to talk a spot much specifics astir immoderate of nan merchandise separator activity wrong CTR. Here's what I'd for illustration to anchor everybody in. And we've said this Brian for I sewage to consciousness for illustration a surgery record. We've said it truthful often. But I want to bring everybody backmost to what we said an investor day, which was we grew our unit gross separator rate, excluding petroleum by astir I think, was 140 ground points betwixt nan 2019 to nan extremity of 2021.

And what we said astatine that constituent was our semipermanent target, our Northstar is we want to support those gains that we achieved complete that window, and admit that immoderate 4th is going to person sound successful it and immoderate bumpiness astir a benignant of what tin happen, fixed our banners and our operation of businesses et cetera.

And I deliberation what we saw past twelvemonth conscionable reinforces that constituent that we want to get everybody to truthful to me, nan astir important point I dream you tin return from this call, successful my mind is we are committed that is still our target, to fundamentally support that gross separator complaint that we talked astir astatine investor time that afloat twelvemonth achievement, and immoderate quarter, there's going to beryllium immoderate bumpiness.

So fto maine conscionable opportunity a small spot astir Q4, and past I will get TJ to unpack it a small spot more. You're correct to acknowledge. And we said successful nan 3rd quarter, location was some, immoderate headwinds that we saw are starting to dissipate into nan 4th quarter. And substance surcharge is nan 1 that I would tie your attraction to. I cognize we had this nonstop chat connected it was a much meaningful effect successful Q3, and we felt it was going to beryllium little meaningful successful Q4. So that would beryllium a portion of nan equation.

Product margins astatine CTR a large portion of nan equation, I'll get TJ to speak to successful a second. And past moreover conscionable business mix. Like Mark's storage proceed to benignant of punch supra its weight astir results. So that really helped thrust our wide separator rates arsenic well. So possibly I'll fto TJ springiness it a small spot much spirit connected nan awesome activity his squad did successful delivering what I deliberation are conscionable crossed each of our businesses, but I specifically want to springiness TJ whether he'll talk astir CTR.

TJ Flood

Hey, Brian. Maybe I'll conscionable adhd a small spot of colour here, conscionable building connected immoderate of nan things Gregory talked about. Obviously erstwhile you're dealing pinch nan inputs and nan variables associated pinch separator rate. There's a batch of complexity to it, right. We're dealing pinch FX, we're dealing pinch merchandise costs, and we're dealing pinch freight. And each of those headwinds deed america astatine varying intervals passim nan year, and peculiarly erstwhile you deliberation astir copying those variables, year-over-year. And erstwhile we group pricing strategy, we do truthful complete a small spot of a longer word clip horizon.

So you whitethorn spot immoderate variability and really we comp our margins, 4th to 4th to quarter. But nan squad has done an astonishing occupation successful managing immoderate important headwinds connected merchandise costs connected freight, and moreover FX arsenic we went done nan year. When you deliberation astir our promotional elasticity models, really we look astatine reg pricing, really we look astatine our ain brands portfolio and really utilize our triangle ecosystem to beryllium overmuch much targeted successful our promotional activity. I'm very proud astir really nan squad has performed successful managing margins. And you saw that travel to life successful in Q4.

As we spell forward, everything gets -- it continues to beryllium volatile. And there's a batch of different headwinds and tailwind successful beforehand of us. You mentioned freight earlier, we do expect immoderate freight merchandise adjacent year, but we besides expect competitory strength to dial up a small spot peculiar successful nan discretionary category. So we are committed, arsenic Gregory said to our agelong word extremity of maintaining our separator rates that we built complete nan past mates of years successful nan pandemic. So that's really we spot it arsenic we spell guardant here.

Brian Morrison

Okay, convey you. Maybe I tin travel up pinch 1 much mobility pinch respect to you're seeing this easing proviso chain. When do you expect inventory to commencement to spot immoderate a diminution year-over-year aliases mean year-over-year? And I conjecture connected that front, erstwhile should nan 3PL and IT costs commencement to dissipate wrong SG&A thrust immoderate leverage? Should IT beryllium successful nan 2nd half of nan year? And wherever nan 3PL?

Greg Hicks

Yeah, Brian, it's Greg. Maybe I'll return that. I deliberation Gregory spent a adjacent spot of clip going done our inventory position and his prepared remarks. And I deliberation it provided a beautiful bully unpack.

I deliberation nan cardinal is managing nan lead clip down successful our mean acquisition orders. I talked astir this coming retired of Q3, and it's still astir 25 to 30 days higher, which moreover erstwhile we're moving really efficiently impacts turns beautiful significantly. And it is successful nan home proviso concatenation present successful Canada. So we're decidedly focused connected bringing our inventory down, which will thief pinch our costs efficiency, and it'll rotation done gradually. It'll rotation done gradually done nan year. And to nan grade that we tin present that drawdown arsenic we move forward, tighten up nan lead times, we dream to spot nan adaptable costs and nan proviso concatenation commencement to alteration arsenic well.

I deliberation nan cardinal arsenic I deliberation astir it, and really we're talking astir our teams is successful immoderate inventory rebalancing, I deliberation nan cardinal is ensuring that we're being surgical and not overreacting pinch world policies and daze and approaches. We request to provender basal businesses and activity to upwind down non-essential wherever nan request signals are weaker.

But nan teams person been focused connected inventory since time 1 of nan pandemic. So I person assurance that we tin usage our capabilities and beardown vendor relationships to negociate nan business effectively.

Brian Morrison

Okay, acknowledgment very much. Congratulations.

Greg Hicks

Thanks. Thanks, Brian.

Operator

Thank you. The adjacent mobility is from George Doumet from Scotiabank. Please spell ahead. Your statement is open.

George Doumet

Yeah, thanks. Good morning. Congrats connected nan quarter. Thank you for nan separator breakdown. Maybe talk a small spot astir nan outlook and nan sustainability connected nan gains that we made connected nan unit gross separator ex fuel. And possibly really early tin we spot nan benefits of commodity deflation, really should we deliberation of that?

Gregory Craig

Yeah, possibly I'll commencement pinch that. It's Gregory here. And if Greg, TJ would want to heap connected arsenic well, I'm judge they will. Look, I want to return you backmost to what I conscionable said to Brian's question, which is -- and I deliberation TJ said it good astir really difficult it is to negociate this connected a 4th by 4th basis. There's -- truthful we are stay committed towards that target outlook scope of having our unit gross separator complaint beryllium level to what nan gains we achieved up to 2021. And astatine immoderate fixed quarter, location could beryllium immoderate variety wrong there.

Now you pointed retired thing circumstantial astir commodity, which is simply a awesome question. And what happens is that's going to travel to america differently, depending connected nan business statement negotiates their purchases for nan year. So I deliberation that's going to travel passim 2023 to beryllium frank, but arsenic TJ mentioned, for each debit, there's a credit. So there's immoderate FX unit connected a year-over-year basis, but again, truthful what I want you to return from this is that we are targeting complete a semipermanent ground to support those games we had pre-pandemic and beryllium successful that benignant of scope we were astatine successful 2021.

George Doumet

Great, thanks. And conscionable my travel up on, if you tin conscionable talk a small spot astir nan fortify car has it held passim nan quarter? Are you seeing possibly a deferral of possibly immoderate discretionary products? And tin you talk a small spot astir really nan conception usually behaves and past economical slowdowns?

TJ Flood

Hey, George, it's TJ. Maybe I'll return that one. And conscionable wanted to benignant of supply a spot of context, our automotive business has been very resilient complete nan past fewer years contempt nan headwinds nan manufacture has been facing during nan pandemic. We've demonstrated accordant maturation successful this section pinch Q4 representing our 10th consecutive 4th of growth. And we're seeing higher engagement and capacity crossed galore of our repair and attraction categories for illustration lipid and fluids arsenic good arsenic an car service. So we're really liking nan trajectory of nan business.

And arsenic we talked a batch astir astatine Investor time backmost successful March, we're continuing to put successful our automotive section successful a myriad of ways crossed our assortment, our capabilities and our customer experience. And we're connected a travel to modernize nan car work acquisition for our customers done a suite of things that we telephone Auto Care which is updated exertion and capabilities beryllium for illustration nan expertise for our shop unit to prosecute pinch customers straight pinch SMS, caller car work tablets, which thrust ratio for our techs and our connection pinch our customers, and caller online appointments.

So erstwhile you deliberation astir what this business and nan manufacture has experienced, we judge that there's a batch of runway present for america for growth. When you deliberation astir nan mean property of nan fleet successful Canada, it's getting older because of nan shortage of caller cars. And that really provides a batch of tailwind for us. So that successful nan operation pinch nan marketplace stock opportunities successful beforehand of us, we're very bullish astir automotive arsenic we spell guardant here.

George Doumet

Thanks for answers.

Operator

Thank you. The adjacent mobility is from Luke Hannan from Canaccord Genuity. Please spell ahead. Your statement is open.

Luke Hannan

Thanks. Good morning, everyone. Greg, I wanted to spell backmost to thing that you mentioned astatine nan opening of your prepared remarks nan dynamics that you're seeing crossed nan difference, family income cohorts. But that was interesting, because it benignant of differs to what intuitively we would deliberation were nan higher income family would beryllium a small spot much resilient than those mediate and little income cohorts. So you mentioned that nan you're seeing fortify those non-essential alternatively spot successful basal categories, little truthful successful non-essential categories, tin you springiness america a small spot much colour arsenic to what you're seeing successful those higher income households baskets beyond conscionable those basal non-essential mix? And really does that comparison for immoderate nan cardholder information that you spot for walk beyond conscionable what's astatine CTC banners?

Greg Hicks

Yeah, I mean, successful general, Luke, if you deliberation astir income, nan practice of income aliases nan operation of income astatine various income levels. If you return nether $75,000 households, and past complete $125,000 households, historically, those groups correspond astir 30% of our income taxation connected a consolidated ground crossed each of our banners. And what we saw, and I conscionable deliberation this conscionable speaks to nan powerfulness of nan information benignant of analytics that we person here.

And it and it did astonishment america was a existent shift, particularly successful nan 4th quarter, wherever astir nan year, higher up income went from 30% to 20%. And successful nan 4th fourth was moreover little than that. And nan other was existent for nether $75,000 households were nan percent of operation for those income segments went up to 45% successful Q4.

So, we deliberation these are immoderate bullish indicators of nan resiliency of our model, and that we tin adhd value, supply worth to little income segments of nan market.

Generally, erstwhile you get to your mobility pinch respect to discretionary and non-discretionary, done nan pandemic, higher income households person participated much successful discretionary categories. So it would guidelines to logic that arsenic that starts to propulsion backmost crossed each Canadian families that we would spot that successful our higher income households, we're conscionable highly fortunate present pinch our Triangle Rewards programme that we tin firearm successful to different segments to compensate for nan softening we're seeing successful higher income households. So that's astir apt nan measurement you should deliberation astir it, Luke.

Luke Hannan

Got it. Very helpful. And past arsenic my travel up, it was it was mentioned successful nan MD&A, that location was a higher than -- well, higher than past twelvemonth level of promotional strength astatine SportChek. I'm curious, and wherever does that rank benignant of comparative to pre-pandemic levels if you deliberation astir nan mean benignant of level of promotional strength that you usually get done nan vacation period?

Greg Hicks

Yeah, possibly I'll return that. It's Greg again. I deliberation nan promotional strength that we saw successful SportChek really magnified successful nan 4th quarter. And nan magnification stemmed from activity from large brands and nan DTC channel. So we saw a much fierce activity successful position of nan extent of nan discount, and nan timing was overmuch earlier than we would person expected. I deliberation nan teams did a really bully job, you know, managing successful nan successful nan environment. But again, it conscionable it conscionable speaks to really nan competitory situation successful tin alteration connected a dime, and you conscionable person to beryllium capable to publication respond and pivot.

In general, I don't deliberation I would opportunity it was it was immoderate much aggravated than benignant of pre pandemic periods, it conscionable came from a different place. And truthful erstwhile Nike and Adidas aliases DTC shop marks down nan aforesaid inventory that we're carrying successful our stores, it becomes beautiful difficult for america not to react. So a small spot of a nuance comparative to 2019, wherever we wouldn't person seen that type of fierce activity. But I deliberation pinch minimal snowfall present successful nan 4th fourth successful nan outerwear businesses, I deliberation nan trigger sewage pulled conscionable a small spot quicker than erstwhile years.

Luke Hannan

Thank you very much.

Operator

Thank you. The adjacent mobility is from Mark Petrie from CIBC. Please spell ahead. Your statement is open.

Mark Petrie

Yeah, thanks. Good morning. I want to inquire conscionable astir this benignant of displacement from non-essentials to essentials is simply a bigger portion of your business. How would you qualify nan effect of that connected apical line? I would presume it's somewhat deflationary. But if you could conscionable talk astir that. And past also, if location is an effect connected separator rate? Thanks.

TJ Flood

Hey, Mark. It's TJ, acknowledgment for nan question. When we talk astir basal and non-essential, it's really astonishing really our business and our assortment is group up to flex pinch nan needs of consumers and Canadians arsenic they evolve. If you look astatine immoderate of nan discretionary categories that we had large maturation successful during nan pandemic.

So you deliberation of that we put together a handbasket of for illustration bikes, and outdoor kayaks and recreational type products pinch workout and things for illustration that big, large discretionary benignant of portfolio of goods. We declined astir $175 cardinal successful those businesses this year. But successful 2 categories that are much basal based for illustration successful automotive, we had parts and car maintenance, those 2 categories unsocial were much than capable to offset a immense chunk of diminution successful discretionary good.

So overall, arsenic we spell forward, discretionary is simply a large constituent of our assortment, arsenic is non-discretionary. So we person to equilibrium that. And we do judge that we're good positioned pinch our good, amended champion architecture to compete successful basal categories. And erstwhile you deliberation astir nan dynamics we person and nan maturation opportunity we person successful beforehand of america pinch automotive, each of nan activity we're putting astir pet, which we judge is much basal aliases non-discretionary. These are nan areas that we deliberation are going to salary dividends for us. And we're capable to negociate nan margins comparatively well. It's benignant of a mixed container wrong basal and non-essential. I mean, obviously, automotive is very beardown separator rates. So we for illustration nan floor plan there.

But we do consciousness for illustration we're going to person to beryllium a small spot more, person a small spot much promotional strength connected nan non-discretionary worldly successful 2023. So arsenic we said earlier, we consciousness very bully astir our expertise to negociate done each nan margins and our capabilities. And our assortment architecture really lends itself good to nan evolving needs of Canadians.

Mark Petrie

Appreciate nan comments. I'll walk nan line. Thanks.

TJ Flood

Thanks, Mark.

Operator

Thank you. The adjacent mobility is from Peter Sklar from BMO Capital Markets. Please spell ahead. Your statement is open.

Peter Sklar

Hi, bully morning. This rumor of nan carryover of nan outpouring summertime inventory. It sounds for illustration it's astatine nan shop level. Are you besides seeing that successful your DCs and inventories -- do you do person carryover connected nan firm side?

Greg Hicks

Yeah, Peter, it's Greg. I'll return that. I deliberation erstwhile I talked astir benignant of nan factors of inventory carryover astatine nan firm level, we determine nan dealers, arsenic you've said, location was 3 factors we identified. One was inflation, nan 2nd we talked astir was benignant of immoderate of nan preorder activity astatine Helly. And they had to summation their inventories, fixed that their models is changing towards benignant of nonstop to user a small bit.

And nan 3rd was precisely what we conscionable said that outpouring summertime carryover predominantly, and we mentioned that successful Q3 arsenic well. So, we're some a small heavy, america and nan dealers. The measurement we negociate this, and I've already seen TJ's receipt scheme for '23 is fundamentally we negociate benignant of our measurement purchases down. And truthful that's why I opportunity I deliberation by nan extremity of nan year, I deliberation I spot america benignant of getting backmost to that much normalized level of inventory.

Now what I will opportunity is we're ever going to person this ostentation increase. So let's beryllium clear connected that moreover connected a year-over-year basis. And we are supporting a higher level of sales. So I deliberation nan correct measurement to deliberation of this is benignant of connected a move spaces from an inventory perspective. But we spot ourselves benignant of managing that measurement and I would fishy by nan extremity of nan twelvemonth we're going to get to wherever we want to get to from our -- that's our objective.

Peter Sklar

And past business for illustration this, for illustration do you do markdowns and should we expect markdowns? And do dealers person nan discretion to do markdown truthful that has to travel from nan guidance of corporate?

TJ Flood

Hey, Peter, it's TJ. We activity very intimately pinch our trader partners connected managing benignant of inventory and seasonal markdowns and things for illustration that. They do person immoderate discretion wrong their stores, if they are dense successful definite pockets. So you whitethorn spot successful shop specials from different dealers from clip to time. But we negociate that very intimately pinch them. And successful sync, we tin negociate down successful nan pockets of inventory that that we consciousness we're having.

Peter Sklar

Okay, convey you.

Operator

Thank you. There are nary further questions registered astatine this time. I will move nan telephone backmost to Greg Hicks.

Greg Hicks

Well, convey you for your questions and for joining america today. We look guardant to speaking pinch you erstwhile we denote our Q1 results connected May 11. Bye for now.

Operator

Thank you. The convention has now ended. Please disconnect your lines astatine this time. And we convey you for your participation.