• Bull.




Takeaway: Canadian Tire is facing a trifecta of 1) a sales slowdown, 2) GM risk (bloated inventories), and 3) credit blowup risk. Best Idea Short.

Best Idea Short Canadian Tire (CTC.A-CN) beat but set up for a series of guide downs. Put up EPS of 9.34CAD vs Street 7.46CAD and revenues of 5.34bn CAD vs the Street of 5.18bn CAD. Revenue growth for the quarter was up 4% YY but decelerated from prior quarter in virtually every division. The 25% EPS beat came both from the topline beat of approximately 4% and margin beat of 140bps. One thing we can’t quite connect is the deteriorating credit quality at the Synchrony’s and Capital One’s of the world, and CTC putting up 14% credit income growth with otherwise healthy margins. Sounds to us like they’re not reserving for delinquencies at the same rate as US banks. That’s a big red flag, especially with the Canadian consumer arguably in worse shape. Retail revenue was up slightly over 3%, ahead of our estimate but slowing sequentially while inventories ballooned to +30% yy. This is in stark contrast to US department stores that are keeping inventory tight – not so at CTC. Setting up for Gross Margin misses at the same time loss reserves should increase. Another surprise was that the company plans to repurchase 5.1mm shares between March of 2023 and March of 2024, which is approximately 10% of the float. It should be focused on lightening its $6bn+debt burden, not buying back stock while the business is decelerating. Maybe it sees better earnings in its model than we do in ours – but this company’s forecasting accuracy has left much to be desired in the past. Our estimates are coming out at $14.30 for the year vs the Street at ~$17. If we’re right on the mean reversion in sales per square foot (currently 30% above pre-pandemic), gross margin risk due to high inventories, and credit exposure, even our estimate might prove aggressive. We’re definitely staying short this name as we expect to see a series of downward earnings revisions throughout this year and at least 30% downside from its current $173.