Why is Canadian Tire stock so cheap?

Important facts to remember about Canadian tire warehouses:

· Canadian Tire is improving its loyalty program as competition among online retailers grows and consumers cut back on non-essential purchases — which recently contributed to 3% layoffs.

· Canadian Tire Financial Services’ 20% buyback comes as expected in the form of in-store financing and credit cards to increase customer accounts.

· The majority of Canadian Tire Money issued is distributed to Canadian Tire Financial Services customers, fostering loyalty in the retail segment – ​​with online competition increasing.

If you think Canadian Tire (CTC.A), are you considering a GIC or TFSA? So why, while Canadian Tire is under pressure from online retailers, is the company betting a billion dollars on Canadian Tire Financial Services?

Canadian tire money could be a clue, as each year 75% of it is returned to Canadian Tire Financial Services customers and its 2.3 million active credit cardholders. After buying a 20% stake in Scotiabank, the company is looking to expand its loyalty and credit card programs — which makes sense, given that chief equity analyst David Swartz predicts an increase in the number of customer accounts generated by in-store financing.

Canadian Tire continues to grow, but online sales need to increase

Canadian Tire is not completely dependent on customers borrowing money for their gifts in the run-up to Christmas, as we continue to see long-term sales growth of 2 to 3% at chain stores despite very strong competition. However, we hope to see more Canadian Tire money spent online in the coming year.

Bull

· A greater online presence and growing use of digital in-store tools should help the company improve the in-store experience while allowing it to better compete with its digital rivals.

· Brands owned by Canadian Tire and sold exclusively in its stores differentiate its offerings from those of virtual and physical retail competitors.

· Canadian Tire’s proximity to its customers, favored by a dense network of stores, allows it to develop its presence in click-and-collect digital sales.

Bear

· Competition is intensifying, with multinational digital retailers (like Amazon) expanding rapidly in Canada and brick-and-mortar retailers in the US looking north for growth.

· The company is affected by macroeconomic instability and the financial division is exposed to high credit risk.

· Fuel prices affect sales both directly (through Canadian Tire’s vehicle fuel activities) and indirectly (with its stores in Alberta, where the energy sector accounts for more than 25% of economic output).

By Andrew Willis, Editor-in-Chief, Morningstar Canada

Translated by Mélanie Pilon