Canadian Tire:Value Under the HoodMay 2006
Pershing SquareCapital Management, L.P.
1
Disclaimer
Pershing Square Capital Management's ("Pershing") analysis and conclusions regarding Canadian Tire Corporation (“CTC” or the “Company”) are based on publicly available information. Pershing recognizes that there may be confidential information in the possession of the Company that could lead them to disagree with Pershing’s conclusions.
The analyses provided include certain estimates and projections prepared with respect to, among other things, the historical and anticipated operating performance of the Company. Such statements, estimates, and projections reflect various assumptions by Pershing concerning anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies and have been included solely for illustrative purposes. No representations, express or implied, are made as to the accuracy or completeness of such statements, estimates or projections or with respect to any other materials herein. Actual results may vary materially from the estimates and projected results contained herein.
Pershing manages funds that are in the business of trading - buying and selling - public securities. It is possible that there will be developments in the future that cause Pershing to change its position regarding the Company and possibly reduce, dispose of, or change the form of its investment in the Company.
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What is Canadian Tire?
Largest Canadian general merchandise retailer… in reality, a real estate and franchise business
Leading Canadian brand with an 84+ year operating history
FY ’06E Revenues of $8.3bn and EBITDA of $847mm (1)
Enterprise value of $6.3bn and equity value of $5.4bn
EV / ’07 EBITDA: 6.8x (1)
Price / ’07 EPS: 13.5x (1)
(1) Based on Pershing’s estimates. Assumes a $65 stock price for CTC.
Note: Throughout this presentation,all $ in Canadian.
Ticker: CTC/A CNExchange: TSXRecent price: $65
3
Four Business Segments
Canadian Tire Retail
Financial Services
Marks Work Wearhouse
Canadian Tire Petroleum
■ Largest Canadian general merchandise retailer
■ Real estate and franchise business model
■ $3.3bn portfolio
■ 2nd largest MasterCard issuer in Canada
% Total EBITDA 66% 21% 10% 3%
■ Leading specialty apparel retailer
■ Favorable growth trends
■ Canada’s largest independent gas retailer
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Recent Trading Statistics and Multiples
$ in millions, except per share data
Note: Projections are based on Pershing’s estimates. (1) Maintenance FCF = Net Income + D&A – Maintenance capex
Summary Financial Data: FY'05A FY'06E FY'07EGross operating revenue $7,789 $8,287 $8,874
Adjusted EBITDA $770 $847 $924Margin 9.9% 10.2% 10.4%
Recurring EPS $3.84 $4.30 $4.80
Maintenance FCF per share (1) $4.93 $5.77 $6.42
Trading Statistics: FY'05A FY'06E FY'07EEV / EBITDA 8.2x 7.4x 6.8x
P / E 16.9x 15.1x 13.5x
P / Maint. FCF Yield 7.6% 8.9% 9.9%
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Five Year Stock Price Performance
18.0
28.0
38.0
48.0
58.0
68.0
5/22/01 4/22/02 3/22/03 2/22/04 1/22/05 12/22/05
Over the last five years, Canadian Tire’s stock price has increased 185%, while its business value has grown at an even higher rate.
Pershing recently began accumulating
shares of CTC.
Canadian TireRetail
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462 general merchandise stores operated by independent dealers across Canada
58 Partsource stores, a smaller format DIY auto parts retail chain with 50+ franchise locations
CTC owns the land and building at ~75% of its locations, with the balance principally under long-term leaseholds
Major retail categories include Automotive (parts and service), Home Products and Leisure Products
Canadian Tire Retail: Overview
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Canadian Tire Retail: Business Model
“Real Estate and Franchise” business model
Canadian Tire Corporation (“CTC”) owns the land and building which is leased to the Associate Dealer (franchisee) for a % of sales
Dealer buys all the store FFE and is responsible for all maintenance capex (net lease)
CTC’s Maint. Capex is less than its D&A, hence Maint. FCF is > NI
Dealer buys all of its inventory from CTC and prices subject to CTC maximum price
CTC books profit on sale of inventory to dealer
Dealer bears substantially all inventory risk
Unique business model is not readily evident in the Company’s financials, which appear to be like that of a “Traditional Retailer”
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Predominantly real estate and franchise revenues
97% franchised
Maintenance capital is the responsibility of the Franchisee
Restaurants run by entrepreneurs
Substantial real estate assets
Strong growth opportunity in US expansion
Trades at 12.5x 2007E EBITDA
Not Your Typical Retailer
Predominantly real estate and franchise revenues
100% franchised
Maintenance capital is the responsibility of the Dealer
Stores run by entrepreneurs
Substantial real estate assets
Strong, low-risk growth opportunity in “20/20” conversions
Trades at 6.8x 2007E EBITDA
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Canadian Tire Retail: Real Estate
The Company owns substantial real estate
“Best-in-class” retail real estate, given the Company’s 84-year old history
Owns land and building at ~ 75% of store locations, with the balance principally under long-term leaseholds
20+ “strategic sites” with higher/better use that are being sold or developed
e.g., owns 2 sites totaling 5mm sq ft of FAR of fully-entitled, developable land in Toronto, currently generating no income
~58% of Canadian Tire petroleum stations, often co-located with Canadian Tire Retail stores
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Historical Financial Performance
EBITDA growth has been driven by a steady mix of comparable sales growth, square footage growth and margin expansion.
FY 2002 FY 2003 FY 2004 FY 2005
Operating Data:
Comparable store sales 1.4% 3.2% 3.4% 3.0%Ending net retail footage growth 3.1% 3.1% 5.2% 4.9%
Financial Data:
Revenue $4,339 $4,641 $4,899 $5,108Growth 3.7% 7.0% 5.6% 4.3%
Adjusted EBITDA $386 $404 $472 $523Margin 8.9% 8.7% 9.6% 10.2%
Growth 6.3% 4.7% 16.8% 10.8%
$ in millions
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Growth Acceleration and Margin Opportunity
High return square footage expansion opportunities
Management plans to expand retail square footage by ~9% per year via converting current store base to the “20/20” format
Expands selling space of a typical store by ~20% by converting non-productive warehouse space to retail space
Pre-tax unlevered returns on investment of approximately 20%
Yet, Wall Street analysts have lowered near-term estimates due to short-term sales and earnings disruption associated with the expansion plan, resulting in a recent stock price decline
Overseas outsourcing opportunity
In 2005, ~35% of product sold in Canadian Tire was made outside of North America. The Company is targeting ~50% by 2009
Canadian TireFinancial Services
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Canadian Tire Financial Services: Overview
Core Financial Services Products
~$3.3bn of ending managed receivables (primarily Canadian Tire MasterCard)
2nd largest MasterCard issuer in Canada – represents 5% of Canadian bank card market
Loans funded primarily in the securitization market
Expanding into other products (loans, mortgages, home equity)
Ancillary Businesses
Canadian Tire Automotive Assistance
Other Warranty & Credit Insurance
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$2,066
$3,042
$2,573
FY 2003 FY 2004 FY 2005
$1,164
$1,698
$1,449
FY 2003 FY 2004 FY 2005
Strong Receivables Growth
Gross Average Receivables Avg. Balance per Account
Growth in receivables and earnings has been driven by increasing average balances per account
$ in millions $ in millions
21% CAGR21% CAGR
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$123
$171
$144
FY 2003 FY 2004 FY 2005
Financial Services Adjusted EBITDA
18% CAGR ’03 – ’05$ in millions
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Further increases in average balances
Balance growth driven by private label to MasterCard conversion
CTC’s customers currently have average balances of $1,619 versus the Canadian credit card average balance of ~$2,450
Expand new businesses
Personal term loans
Mortgage origination
CDs
Grow Warranty & Credit Insurance businesses
Growth Opportunities
Marks Work Wearhouse
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334 specialty apparel stores across Canada selling work and industrial clothing/footwear
Low fashion content and associated risk
~75% of sales are private label
Since FY 2002, EBITDA has grown from $34mm to $82mm in FY 2005
CTC acquired Marks for just $112mm in 2002
Marks Work Wearhouse: Overview
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Strong Same Store Sales
Strong same store sales growth has led to substantial EBITDA growth
FY 2003 FY 2004 FY 2005
Same store sales 6.6% 15.1% 17.1%
Revenues 458 546 684Growth 19.2% 25.3%
Adjusted EBITDA 41 54 82Margin 9.0% 9.9% 12.0%Growth 31.7% 51.9%
$ in millions
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Continued same store sales growth due to category expansion
Women’s
Uniforms
Healthcare
Square footage growth
New stores
Expanding square footage of existing stores
Growth Opportunities
Canadian TirePetroleum
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Owns/controls 259 gas stations across Canada
Operated by independent agents
FY’05 Revenues of $1.3bn / only $22mm of EBITDA
Negative free cash flow
FY’05 EBITDA – Capex of ($7)mm
Asset value based on ownership of 58% of locations
Strategic value in a sale / joint venture transaction
Canadian Tire Petroleum
Pershing’s View of Canadian Tire
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Trades at 6.8x ’07E EBITDA, despite its real estate / franchise business model
Cheapest real estate/franchise business of which we are aware
Component parts are clearly worth more 6.8x EBITDA
High return internal growth opportunities
“20/20” store conversions
Strong same store sales growth at Mark’s
Shareholder friendly management w/ strong execution history
Several “embedded options” for value creation…
Why Do We Like Canadian Tire?
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Monetization of credit card portfolio
Sale leaseback of core real estate
Sale of “higher/better use” properties
Canadian income trust conversion
“Embedded Options” for Value Creation
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Rationale for Credit Card Portfolio Monetization
Monetizing the credit card portfolio through an alliance with a major bank would allow CTC to:
Sell receivables at a premium to book
Maintain a substantial portion of cash flows associated with thecredit card business
Participate in future credit card income growth
Improve balance sheet and credit rating
Pursue share buybacks using an estimated $1.3bn in proceeds plus incremental leverage from improved rating
Banks are willing to pay a high premium, given their funding advantages and the scarcity of any remaining large portfolios
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Highly Accretive Transaction
Canadian Tire could monetize its Credit Card Receivables in a highly accretive transaction
After monetizing its Credit Card Portfolio, Canadian Tire could still retain
High margin Warranty and Credit Insurance businesses, which are discrete from the Credit Card business
Direct relationships with customers afforded by Credit Card business
A significant portion of existing Credit Card income and participation in future Credit Card business growth
Most major retailers have sold their portfolios in highly accretive transactions
Canada
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Case Study: Sears Canada Credit Card Sale
Based on our estimates, we believe Sears Canada monetized its Credit Card Portfolio for a 27x EBIT multiple.
$ in millions
Managed receivables at sale $2,524
Adjusted pre-tax proceeds (1) $3,320Premium 31.5%
LTM Credit EBIT (2) $182Less: EBIT retained by SCC (60)
Equals: EBIT acquired by JP Morgan Chase $122
Pre-tax proceeds $3,320
EBIT acquired by JP Morgan Chase 122
Transaction Multiple 27.2x
(1) See Sears Canada 2005 annual report, p 26.(2) LTM Credit Operating EBIT (Q3’05), adjusted for $20mm of EBIT recorded in merchandising segment.
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FY 2007E Comments
2007E EBITDA less Financial Services $735
Plus: EBITDA from Insurance & Warranty businesses 50 Based on Pershing's estimate of $160-$180mm in revenue
Royalties from recurring Credit Arrangement 50 In line with Sears Canada residual EBITDA contribution
Pro Forma EBITDA $835
Current Enterprise Value 6,290
Less: After Tax Credit Proceeds (1,226) Assumes 20% premium to gross receivables
Pro Forma Enterprise Value 5,064
Pro Forma EV/EBITDA (After Proceeds) 6.1x
Appropriate Multiple 8.0x
Incremental Value Created $1,615
Incremental Value/Share $19.42
Pro Forma Share Price $84.42Percent Upside to Current Price 29.9%
Credit Card Monetization: Value Creation
Assuming a 20% premium to book (versus SCC transaction at 32%), $50mm of retained credit income and a pro forma 8x EV/EBITDA multiple, the monetization of the Credit Card portfolio could result in ~30% upside for the stock.
$ in millions, except per share data
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FY 2007E Comments
PF Enterprise Value after Credit Sale $6,679 Assumes 8x EV/EBITDA Multiple
Assumed pre tax Real Estate Value 2,500 Premium to Net Book Value of ~ $1.8 Billion
Less: Cash taxes 126 Assumes 18% Capital Gains Tax Rate
After-tax cash proceeds 2,374
Enterprise Value PF for Real Estate sale $4,305
EBITDA pre Sale Leaseback 835
Less: Rent expense at 7.0% cap rate (175) 7.0% cap rate based on current market
Adjusted EBITDA 660
Pro Forma EV/EBITDA (after proceeds) 6.5x
Appropriate Multiple 8.0x
Incremental value created 974
Incremental Equity Value per share $11.71
Assumed share price after credit card sale $84.42
Plus: Incremental value per share $11.71
Pro Forma share price $96.13Percent upside to current price 47.9%
Sale Leaseback of Core Real Estate
Assuming a 7% cap rate, a sale leaseback transaction could create an additional $12 of equity value per share for Canadian Tire. In January 2006, the Company completed a $230mm sale leaseback transaction.
$ in millions, except per share data
Note: Pre-tax real estate value based on Pershing’s estimates.
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Alternative Use Real Estate: Value Creation
Based on our estimates, a sale of its fully-entitled non-income generating properties could add an incremental $4 per share of equity value. The Company has recently hired advisors to sell two of its largest such properties.
(1) Based on Pershing’s estimate of $350mm - $450mm of value.
$ in millions, except per share data
Development Projects Description
Sheppard Avenue 4 million sq ft40 acres of Residential / mixed use
Dundas and Kipling 1 million sq ftResidential / mixed use
Southdown and Lakeshore 300,000 sq ftResidential / mixed use
~20 Additional Properties
Mid point of Estimate (1)
Total Value $400After-tax value per share $3.94
Share price post credit card sale / sale leaseback $96.13Plus: Incremental value per share $3.94Pro Forma share price $100.08
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Income Trust Conversion Rationale
Well known brand with strong retail following
Stable, real estate and franchise-based cash flows with limited maintenance capex
Reasonable market cap for Trust Market
Given current investment opportunities, trust conversion would make most sense when the Company has reached a higher degree of maturity
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FY 2007E CommentsPF Enterprise Value @ 8.0x EBITDAafter Credit Card sale / Sale Leaseback $5,279
`Core EBITDA $660Less: Maintenance Capital Expenditures (100) Distriubution/IT maintenance capitalLess: Interest Expense (119) Assumes 3x Debt/EBITDA at 6%Pre-Tax Free Cash Flow $441% Distribuatble 90.0%Distributable FCF 397Assumed Yield 7.0% Appropriate yield given comparablesImplied TEV 7,655 Assumes 7% yield with 3x Debt/EBITDA leverage
Incremental Value Created 2,376Incremental Equity Value Per Share $28.57
Share price post alternatives $100.08 Post credit card sale, sale leaseback, excess RE salePlus: Incremental value per share $28.57
Pro Forma share price $128.64Percent upside to current price 97.9%
Income Trust Conversion: Value Creation
Assuming a 7% FCF yield and 90% FCF payout ratio, an income trust conversion could add an incremental $29 per share of equity value to Canadian Tire.
$ in millions, except per share data
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Value Creation Potential
$60
$70
$80
$90
$100
$110
Sale of credit card portfolio
Sale leaseback
transaction
Trustconversion
Sale of excess real
estate
Recent: $65
Canadian Tire Potential Stock Price
$8430%
$96 48%
$10054%
$12998%
98%
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Investment Takeaways
Opportunity to nearly double your money in a low leveraged $5.4bn market cap company
Company trades at 6.8x ’07E EBITDA but its component parts are worth significantly more
Segment Description
Canadian Tire Retail Real estate / franchise business model
Financial Services Credit card and warranty businesses
Marks Work Wearhouse Growth retailer
Canadian Tire Petroleum Asset value exceeds its cash flow generating value
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Concluding Thoughts
Several catalysts for value maximization
Pershing has met with CTC Management, including the recently appointed CEO…
Management is receptive to shareholder value enhancing initiatives
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