Operator: Good morning. My name is Valerie, and I’m the conference operator for today. At this time, I would like to welcome everyone to the Canadian Tire Corporation, Limited Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

. We ask that you limit your time to one question, plus a follow-up question before cycling back into the queue. This morning, Canadian Tire Corporation released their financial results for the second quarter of 2021. A copy of the earnings disclosure is available on their Web site and includes cautionary language about forward-looking statements, risks and uncertainties, which also apply to the discussion during today's conference call. I would now turn the call over to Greg Hicks, President and CEO.

Greg?

Greg Hicks: Thank you, operator. Good morning and welcome everyone. I'm joined today by our CFO, Gregory Craig; as well as TJ Flood, President of Canadian Tire Retail, who will be participating in the Q&A portion of the call. I want to start this morning by recognizing the phenomenal efforts of all of our team members across the country and the globe. There's no question that for everyone, the last 17 months have been incredibly challenging.

And yet, our people continue to step up for our customers and each other. Our longstanding purpose of being there for life in Canada, which has served as our North Star throughout the pandemic continues to shine and galvanize our teams. At this time, even as restrictions are lifting and our country reopens, we remain committed to doing our part in the fight against COVID-19 by prioritizing health and safety and being there for our communities in the ways they need us most. For example, through our workplace vaccination clinic at the A.J. Billes Distribution Centre, we've helped Peel Public Health vaccinate thousands of people, including our own employees, their families, and members of the community and the hard hit region of Peel.

And our efforts to reconnect kids with sport continue. We've already disbursed more than 75% of the $20 million that CTC and Jumpstart jointly committed to the Jumpstart’s Sport Relief Fund. Since the start of this year, we've helped nearly 900 community sport organizations keep their doors open. The need is most definitely there, and we expect the next round of disbursements to happen in August. Jumpstart remains firmly committed to breaking down barriers to support in play.

They will hold their annual Jumpstart Day and Jumpstart Month fundraisers in September, and are on track to open five inclusive playgrounds and three multisport courts by the end of 2021. Whether it's on the playground or striving for the podium, Canadian Tire has always believed in the power of sport. As a premier national partner of Team Canada, we are so proud of how our Canadian athletes overcame the challenges of COVID-19 to compete at their best in Tokyo. And we should be proud, not just of what Canada's athletes achieved, but of how they achieved it; through years of hard work, unshakable courage, and the relentless pursuit of their goals. We look forward to cheering on our Paralympic athletes competing later this month.

And we will continue to be there for Team Canada at Olympic and Paralympic Games to come through our renewed eight-year commitment to the Canadian Olympic and Paralympic Committees. With that, let's dive into our second quarter results. I am very pleased with our Q2 results, which we achieved despite the challenges in the retail landscape. Last year, if you told me that we would still be talking about restrictions and closures in the second quarter of 2021, I would have been hard pressed to believe you. And yet here we are.

In the second quarter of this year, we once again faced multiple closures and restrictions across the country. We were hit especially hard in Ontario, where most of our stores were closed 70% of the quarter in a province that represents close to 40% of our store network. Against these odds, we delivered solid results and delivered overall comparable sales growth of 3%, fueled by strong growth against last year's closures at Mark's and SportChek. And it was a strong revenue quarter with retail revenue up 23% to over 3.6 billion and consolidated revenue up 20% to 3.9 billion. For the last four quarters in a row, we've delivered exceptional retail earnings.

Normalized income before taxes was up $275 million in retail and up $74 million in financial services, with much of the increase there attributable to changes in expected credit allowances between the quarters. Our earnings growth translated into an increase of almost $4.00 in EPS compared to the second quarter of last year, with normalized diluted EPS landing at $3.72 for the quarter. Considering the circumstances, we delivered a very good second quarter. Shortly, Gregory will provide the details of each banners financial performance. But first, I want to touch on how our results illustrate the evolution of our omni-channel offering and customer engagement, and what the overall retail landscape looked like for us in the second quarter.

Our strong results clearly demonstrated our omni-channel capabilities and the growing customer connection to our brand. As our customers embraced our digital channels, the way we engage with them continued to evolve, driving eCommerce sales and doubling the volume of orders compared to last quarter. Ultimately, we had our largest quarter for eCommerce sales at CTR at more than $600 million, which is equivalent to our 2019 full year eCommerce sales. On a consolidated basis, our total eCommerce sales for the quarter were more than $850 million. And while we expect eCommerce penetration to normalize to somewhat lower levels once we exit the pandemic, we now understand and have the capabilities to scale up our digital and eCommerce channels.

We handled upwards of 196 million visits to our Web sites. We processed close to 9 million orders in the quarter, which is double what we processed in Q1 and up 38% compared to a year ago. A good portion of these orders are fulfilled through our curbside pickup service, which is delivering a highly competitive turnaround time and customer experience. Striving to provide a seamless customer experience continues to be paramount. Our results demonstrated the growing customer connection to our brand.

We continue to increase our focus on managing the entire customer lifecycle of our loyalty members by engaging them early and creating personalized offers that communicate the incredible value of our program. We know that the earlier we engage customers, the more likely they are to become valuable members. In the second quarter, almost 600,000 new members joined the Triangle Rewards program. And we will be taking the same active management approach with them as we are with the 1.8 million new members who joined the program in 2020. What we've seen from these 1.8 million new members, many of whom are younger than our average members, is that they're responding well to our enhanced efforts.

For example, so far in 2021, over 800,000 of them have shopped with us. What's more, approximately 40% of those 800,000 have shopped multiple banners. They activated more one-on-one offers than the average loyalty member in Q2, and their spending on average more than 2018 and 2019 cohorts at the same point in their membership lifecycle. This is becoming a major differentiator for us. By growing these customer connections to our brand and translating our rich customer data into insights and ultimately action, we continue to connect with our customers in a more meaningful way.

In the quarter, we saw increased customer spend as well as changes in spending behavior as Canadians began traveling as restrictions eased in certain provinces. In our financial services business, payments remained elevated and credit card spend was still below 2019 levels. But we saw a pronounced increase in spend compared to 2020, up 34% from the lows of a year ago. Travel and entertainment doubled compared to 2020, continuing the reversal against last year that we saw in Q1. Purchases of gas on our 2.1 million credit cards increased significantly.

We also saw increased volumes of gas purchases in our retail business along with increases in our automotive adventure categories and camping at Canadian Tire as Canadians plan their summer travel. Categories such as gardening, backyard living and seasonal recreation benefited from the continued trend to spend more time outdoors, growing despite a strong comp last year. At Mark's and SportChek, demand for casual wear and athletic footwear and apparel was strong. In CTR, we continued to see elevated levels of sales relative to 2019, with sales up 18% over 2019 driven by comparable sales growth in over 70% of our categories. And on a consolidated basis, retail comparable sales across all banners were up 15% over 2019.

From an operational standpoint, what we were able to achieve in the quarter through our supply chain capabilities was incredible. Despite the closures, restrictions and some headwinds around transportation and supply availability, we continue to move product through our supply chain at significantly elevated levels. Our retail supply chain is a monster machine that needs to do its job before the customer order gets fulfilled. Earnings momentum comes from revenue at CTR, which is based on inventory shipments to dealers. To sustain a higher level of revenue, we need to continue to invest in working capital.

To do this, we leverage relationships with vendors, transportation providers, and third party logistics facilities to get inventory to the dealers. Through recent quarters, our teams have aggressively chased inventory, container and shipping capacity, leveraged our strong dealer relationships and engaged new warehouse space and third party logistics providers. Dialing up inventory management and securing demand planning is critical, and we're focused on further strengthening our supply chain capabilities over the long term. Which brings me to our recent equity investment in Ashcroft Terminal, a 320-acre inland, transload and storage terminal in British Columbia, Ashcroft Terminal is strategically located at the intersection of the CN and CP railway networks. This $40 million investment will enhance the flexibility of our supply chain and drive longer-term savings and lower carbon emissions by allowing us to stage more inventory in BC rather than shipping it back and forth across the country.

The deal secures railway capacity against our future requirements, allowing us to work across a smaller number of partners. It will see us working more closely with PSA, one of the world's largest port operators with 60 terminals in 26 countries. We've spoken before about our how our merchants work with our vendors to get enough product into the country to meet the demand at the right time. Equally important to our sourcing capabilities is having goods available in the right geography. And that is dependent on our ability to transport goods around the country as effectively, efficiently and sustainably as possible, and our investment in Ashcroft is a step in making that happen.

As I mentioned, the quarter clearly demonstrated our omni-channel capabilities and the growing customer connection to our brand. When it comes to our future plans in these areas, there is considerably more insight we are committed to sharing with you. Many of you know that it has long been our intention to hold an Investor Day. And for a brief moment earlier this year, we thought vaccination rates might permit us to reach a point where we could hold it live. But given the circumstances, we've elected to hold a virtual event that will take place in September.

We look forward to sharing our strategy for continuing to drive long-term value for our shareholders. And with that, I'll hand it over to Gregory to take you through the financial highlights of the quarter.

Gregory Craig: Thanks, Greg. Good morning, everyone. As Greg has said, it was a great quarter for CTC from both a revenue and as well from a profitability perspective.

Our diluted reported EPS of $3.64 was well above last year's diluted loss per share of $0.33 and 27% higher than 2019’s level of $2.87. Normalizing for $7 million in operational efficiency charges, diluted EPS was $3.72 in the quarter compared against the normalized loss per share of $0.25 in 2020. As a reminder, last year’s second quarter results reflected a number of COVID-related impacts. So let me walk you through them briefly. Not including the revenue losses associated with the national store closures at Chek and Mark's, our results were affected by several COVID-related impacts; among them, operating expenses of $41 million for the temporary support payment to frontline employees and enhanced safety protocols to protect our customers and team members.

Additionally, $28 million in other income and expense, which was due to impairment costs related to our Musto sailing brand and select SportChek stores. Offsetting these impacts was a $28 million benefit recorded in operating expenses due to a mark-to-market adjustment on our equity hedges related to share-based compensation. This adjustment was driven by the partial recovery of the share price in the second quarter of 2020 after a significant loss in share value in the first quarter. Consistent with our approach in Q1, comparable sales growth is reported on a shifted basis. And once again, this drove a larger than usual difference between the comparable sales growth of 3% and retail sales growth of 8%.

The adjustment will continue to drive a difference between the two metrics in the third quarter, and be even more pronounced in the fourth quarter when we once again will be lapping store closures and restrictions. Now, let me take you through the highlights of our financial performance. Let's start with the top line results at our retail banners. Excluding petroleum, retail revenue increased 612 million or 23% versus the prior year. CTR was the most significant driver of that growth, with revenue up 321 million or 16%.

Continuing dealer orders in response to strength in consumer demand were the primary driver of the seasonal categories driving a significant share of the growth as stores were getting replenished following the strong start to spring-summer season in Q1. Non-seasonal categories in our living and fixing business were less of a driver, which was consistent with the trend we observed in retail sales as home-centered activities were not the primary focus of customers in the quarter. As a reminder, approximately 40% of our CTR network is located in Ontario, and these stores were closed until mid June with capacity restrictions remaining in place until the end of the quarter. As a result, the positive performance we had at the start of the quarter and a partial recovery in June wasn't quite enough to keep us in positive territory. But we ended the quarter with comp sales down 2% versus prior year but up an exceptional 18% compared to 2019.

Within our results, there are a few standout performers, and the strongest was our gardening business. Garden centers were not impacted by the closures in Ontario and remained open across the country. And gardening was the best performing business of our 40 major lines of business, driving over 10% of CTR’s total sales in the quarter. And with the lifting of retail restrictions and resumption of car travel within Canada, we also saw an uptick in our automotive outdoor adventure and tire businesses. Overall, own brands penetration at CTR was up to 39% driven by CANVAS, Outbound and Woods, and this was contributed to solid product margin and to overall own brand penetration across the banners of 38%.

Moving to SportChek where top line metrics grew in the double digits benefiting from operating in a less restrictive environment compared to the nationwide closures a year ago, comparable sales were up 29% versus the prior year and 5% ahead of 2019. Strong performance in athletic apparel and footwear, primarily driven by regular demand improved in stock positions, as well as a more targeted promotional approach led to growth. Improving product availability is a focus of the team at SportChek and we were pleased to see the significant improvements in the customers’ stat scores in that area. At Mark's, similar to SportChek, comps sales growth increased 43% reflecting our improved ability to serve customers in the store compared to last year when most of our sales in the quarter were through eCommerce. Relative to 2019 comp sales at Mark's were up 1%.

We saw strong performance in the men's and ladies industrial footwear and workwear categories, and Helly Hansen was a big driver in workwear, growing 24% over 2020. Mark's continued to grow its appeal to younger demographics with select national brands such as Saks, Levi's, Carhartt, Timberland Pro and Skechers. We are pleased with the progress that Mark's team is making in engaging and retaining these younger customer segments in our Triangle loyalty base. And at Helly Hansen, external revenue grew by 46% with strong increases in Europe, Scandinavia and the U.S. We also saw positive results from our Musto brand, which grew its revenue by 85% in the quarter.

Now moving to margin, where I'm pleased with the standout performance across all of our businesses. Retail margin dollars, excluding petroleum, increased 314 million, or 42%, while margin rate, excluding petroleum, was up 425 basis points. A higher regular price mix and a more targeted approach to promotions was a significant contributor to improvements across the banners. At CTR, a more favorable product mix reflected higher contributions from the more profitable seasonal categories and a higher penetration of own brands. And at SportChek and Mark's, stronger contributions from in-store sales and a shift to the buy online, pick up in store lead to further improvements in margin.

The teams also had good success in mitigating headwinds related to freight and commodity costs, which we identified back in Q1. While these headwinds still exists as we look ahead, as I've said in the past, we have numerous levers at our disposal to help mitigate their impact. Now, let me turn to financial services. The business has consistently performed well through the pandemic. Customer payments have remained strong and our delinquency rates are at all-time lows.

The second quarter saw a small but welcome uptick in active accounts, up 3% versus the prior year. And as Greg has already touched on, an increase in spend on the cards against last year. A 4.1% decrease in receivables in the quarter and overall reduction in credit acquisition over the last 12 months led to a revenue decline of $14 million, or 4.5%. Despite lower revenue, gross margin improved 87 million or 69%. Offsetting the revenue decline were lower net impairment costs, which reflected a $31 million reduction to the allowance for loans receivables and $31 million favorability in net write-offs in the quarter.

This is against a $44 million incremental allowance expense in the prior year. The health of our credit card portfolio was evident in the strength of the metrics such as the PD2 plus rate at 1.74%, which was down 68 basis points and the net write-off rate at 4.8% which was down 154 basis points. As a percentage of receivables, the allowance rate at 13.9% is now approaching the past normal range of 11.5% to 13.5%. We will continue to evaluate the level of allowance on our books in response to changes in our receivable balance, our credit performance trends and, of course, the macroeconomic environment. All-in-all, financial services saw a $74 million improvement to the bottom line with IBT at 125 million.

Looking towards the back half of the year, we expect to continue to invest in the acquisition of new accounts at financial services with a higher mix of in-store acquisition. Now turning briefly to operating leverage and OpEx trends. With our strong revenue growth outpacing operational spend growth and the ongoing progress with our operational efficiency program, we were able to realize good operating leverage and our consolidated normalized OpEx expense ratio improved 105 basis points to 24.4% of revenue. Operational spend increases to support our business operations were partially offset by additional savings from the OE program, which continues to deliver benefits and we remain on track to deliver our previously stated goal of 200 million plus in savings by 2022. At the end of Q2, our inventory was up 454 million against much lower levels in 2020 due to strong sell-through, and 290 million or 13% higher than in 2019 primarily as a result of higher inventory levels at CTR to support demand in what is typically our second largest retail quarter.

Concerns around availability of shipping containers has led us to securing product earlier, and we are comfortable with the level of inventory on hand as we're in a strong position to meet both dealer and consumer demand. Moving on to CapEx. We continue to invest in critical real estate and digital initiatives to drive our business. And our operating capital spend in the quarter was $129 million, more than double the levels of the prior year and more in line with our spend in 2019. Our ROIC performance in the quarter was also exceptional, coming in at 14.1%.

Improving ROIC has long been one of our biggest focus areas, and we are very pleased with the progress we've seen recently. This result reflects a significant strength in our retail business in the last 12 months, with CTR’s earnings growth being the primary driver of this performance. Overall, we are pleased with the performance in the quarter and the ongoing resilience of all of our business against the countless challenges we faced over the past year. Assuming no significant changes in the external environment, we look forward to updating you on our longer-term aspirations and capital allocation plans at our upcoming Investor Day. I look forward to speaking with you then.

With that, I'd like to hit it over to Greg for his closing remarks.

Greg Hicks: Thanks, Gregory. Before I close, I want to give you some insight into what we're seeing so far in Q3. As you're aware, we started Q3 with our Ontario stores open, but restricted with respect to capacity levels and some weather variability in the first part of the quarter. And as you know, we are comping exceptional Q3 sales last year, especially in CTR where we had 25% growth over 2019 and over 80% of categories were up to double digits.

It’s still early in the quarter with a lot of game to play. However, we are holding sales relative to the retail sales we experienced in 2020. As we head into the fall, we remain connected to our purpose of being there for Canadians, while continuing to protect the health and safety of our employees and customers. Although we are still operating with some uncertainty around patterns in customer shopping behavior for the coming quarters, what we do know is that our brand is in an extremely strong position. We have fantastic assets, incredible talent, and inventory that leaves us well positioned in the short term.

With that, I'll pass it over to the operator to open it up for questions.

Operator: Thank you. . We ask that you limit your time to one question plus one follow-up question. We'll pause for just a moment to compile the Q&A roster.

Our first question is from Irene Nattel with RBC Capital Markets. Please go ahead.

Irene Nattel: Thanks and good morning, everyone. Actually I want to start with your last comment, Greg, around the Q3 performance to date. When you look at the sell-through, do you have any sense of how much of that might be sort of demand from Q2 that might have been pulled forward a little bit because of the restrictions? And sort of where you think you sit today in the non-seasonal categories as we reopen?

Greg Hicks: Sure, Irene.

Why don't I start and I think TJ can add a fair amount of color as that most of that travels through CTR. It's tough to say how much of Q2 was pulled into Q3. For sure, TJ and our entire team believe we left sales on the table in Q2 as a result of the restrictions. But connecting it causally to what's happening in Q3 I think is quite difficult. But why don't I let TJ talk.

I think you're hitting on something important with respect to ending inventories around seasonal categories, et cetera. And I think TJ and the team are living this every day around inventory. So why don't I ask him for a little bit more color?

TJ Flood: Yes, sure. Thanks, Irene. We've seen a bunch of different dynamics in Q2, and it's really difficult to foreshadow what's going to happen relative to what has happened, given that there's so much noise within Q2.

But maybe I can give you a little bit of insight into our inventory approach and some color in terms of the categories that we're looking at as we go forward. Since the beginning of the pandemic with a strained global supply chain, our strategy has been to be aggressive in securing inventory to fulfill the customer demand that exists. And we've continued to deploy this strategy throughout 2021 and inventory availability has been fueling our growth. We use our customer data to forecast and plan our inventory purchases and where we have long lead times, we review the trends that we have in front of us. We establish our risk appetite, take a position and commit.

And where we have short lead times, we leverage our optionality and cut purchase orders out of cadence which gives us the most time to understand consumer patterns and demand. We have very strong relationships with our vendor partners, which gives us a lot of flexibility and protects us and them from downside risk because we take a longer-term view given we're not dealing with obsolescence issues like our retail peers in grocery or fast fashion. And as we move through the first few months of the year, we continue to see high demand for our product categories, particularly in our spring-summer assortments as Canadians were gearing up to enjoy the warmer weather. This persisted into Q2. And as you suggested, it's persisted into Q3 as well, Irene.

So we, as a corporation, continue to purchase inventory to meet this demand, and our dealers have also ramped up their supply. And there are two particular areas where we've invested heavily. First is our spring-summer seasonal categories, given the demand patterns we're seeing, and we are seeing those persist into Q3. And the second is our non-seasonal product that sells year round, because we wanted to pull forward our purchases to secure inventory, given the global supply challenges and the fact that these categories represents 65% of our volume in the back half of the year. You would have noticed that our inventory is higher ending in Q2, but it needed to be, given how depleted our inventory levels were at the end of Q2 last year and the step function change we have seen in demand.

And as Greg articulated, we've been holding that demand. Inventory's a bit higher than we had planned given the store closures in Ontario, but we are still operating at elevated turns relative to pre-pandemic levels, and the dealers are as well operating at elevated turns. And as we look forward, we feel very good about our inventory composition going into the back half of the year. Given that step function change in demand, we saw as I was describing the fact that we've held those so far in 2021, our focus has been on securing ample inventory for the back half of the year. And we ramped up our supply chain capacity as both Greg and Gregory articulated in their remarks by utilizing two additional distribution centers for outbound shipments as well as three PL facilities to support increased inbound and storage volumes.

And we know securing inventory will be an ongoing challenge. The global supply chain continues to be strained and things could be choppy in pockets. But we continue to work with our vendor partners every day to explore innovative ways to navigate the supply chain. As an example, the team was able to charter three vessels transporting about 2,000 containers each. And the entire vessel is dedicated only to CTR product.

And this is the first time we've ever chartered our own boats. So we're up against some tougher comps in the back half of this year, but we want to put ourselves in the position to fill as much consumer demand as we can. And that's exactly what we're doing. So hopefully that provides you a little bit of color as to how we're seeing the market play out.

Irene Nattel: Yes, that is really, really helpful.

Thank you. And just a follow up, if I may, and it ties into the gross margin. As we think about heading into the back half and into 2022, obviously a lot of discussion around the impact of those tight supply chains on inflation. What do you -- where do you sit right now? What is your thinking? And what kind of visibility do you have into gross margins for next year?

TJ Flood: Yes. Irene, it's TJ again here.

This is a topic we thought might be a little bit hot today. So I wanted to provide you a little bit of detail here, because I think it's something folks are interested in. And it's very difficult to talk about margin and inflation separately. So I'm going to try to provide a little bit of context. As Gregory mentioned, CTR was up just over 200 basis points in the quarter with product margins driven by favorable product mix, some promotional mix favorability, and growth in our own brands penetration, offsetting freight and product cost inflation.

And that also was margin rates above 2019 and a little bit higher above 2019, about 270 basis points relative to '19. And no doubt there's been some inflationary pressure on a couple of fronts. So freight costs have been on the rise given global supply pressure on containers and ocean carriers. And we've seen certain product categories have experienced increases. As examples, we would have seen commodity cost pressure and products made with plastic resin, like storage containers, and categories like exercise, weights and dumbbells have experienced cost pressure given strong global demand.

And we've also experienced some headwind in FX in the quarter given our hedged rates. But having said that, and as we've talked about on previous calls, we've built strong capabilities to help us navigate this inflationary pressure and manage our margin rates. I wanted to talk to you a little bit today about a few of those capabilities. First is our pricing and promotional modeling. We have a scientific approach to promo and pricing management which is guided by our data.

Our elasticity curve models are getting stronger and stronger, allowing us to price accordingly. We're trying to strike that delicate balance between consumer demand creation and efficiency to help manage our overall margin rates. We're also finding new ways to create enhanced value for our customers through our Triangle program. From the personalization offers that Greg alluded to earlier to the ability for our customers to swap offers, we’re able to target specific needs so we inspire customers with relevance instead of just discounting. For example, we've had great success with more focused and relevant offers with pet owners as well as customers that we know from our data have moved.

And as the reach of our Triangle and our digital channels increases, and we use customer data, we have greatly improved our ability to deliver promotions and add value to customers beyond just investment in price. Second capability is own brand management. Gregory would have articulated that we grew our own brand penetration to 39% in the quarter and the margin rate delta between owned and national brands is significant for us. We have a huge back half plan in the own brand space with new technology in smart home with the launch of our NOMA iQ line of products, a whole new line of Sherwood Hockey products as Canadians return to the ice, and a lot of product innovation under Mastercraft to help celebrate its 75th anniversary. And third is our supply chain management.

We have very strong long-term relationships with our vendor base. And even though the ocean freight spot market is setting record highs, we've been able to protect a large percentage of our container volume at contracted rates, something many of our smaller competitors aren't able to do. So these are just three capabilities we'll continue to build and mobilize as we go forward. And as we look forward, we would expect commodity and freight prices to remain elevated through the first half of 2022, offset a bit with some FX tailwind in the Canadian dollar relative to both the U.S. dollar and the RMB.

So given all these moving parts and there are a lot of moving parts, and all the capabilities we have built and continue to build, we feel like we're in good shape to manage our margins tightly. Things may be choppy in the marketplace as we navigate through the next few quarters here, and we'll pivot as we have to maintain momentum, the momentum we have with our consumers. But as I said before on previous calls, we're not going to give an inch on being priced competitively and we'll use our customer data and algorithms to help guide us through here. So hopefully that gives you a bit of insight on how we're managing margin in a slightly inflationary period.

Irene Nattel: That is great, really comprehensive.

Thank you.

Operator: Thank you. Our next question is from Patricia Baker with Scotiabank. Please go ahead.

Patricia Baker: Yes, thank you very much for taking my questions and good morning everyone.

TJ, I want to follow up on that discussion. And thank you very much for sharing with us all of the science behind your management of the margin. And when Gregory was discussing the margin performance in the quarter, he did indicate what's promotional activity and selling more at regular price. And then your discussion there where you talked about managing the margin and engaging the customers by doing things beyond just investment and price. So if we take that out and extend it, could we see over the medium or longer term that trend where in Q2 this year, you were selling things at a more regular price, could that be part and parcel of how we see part of Canadian Tire going forward?

TJ Flood: Yes.

Patricia thanks. That's a great question. It's very, very difficult to predict what the consumer and competitive landscape is going to look like going forward. We believe we've got a lot of tools in our arsenal to manage what pressure we have, be that competitive or be that inflationary. We're going to be watching very intently on what the competitive landscape looks like in terms of the promotional intensity.

As less restrictions are in place across the industry, it will be interesting to see how competitive intensity either heats up or maintains its levels. But we feel quite good about our ability to manage through that, given the capabilities we've been building.

Patricia Baker: Excellent. And then my follow-up question is there's a lot of interesting trends and numbers in this quarter, but one of the most interesting ones is, of course, your performance at retail ROIC of 14.1%. Can you speak to how sustainable you think that might be, because it's been a long time since we've seen a number like that from Canadian Tire retail?

Gregory Craig: Yes.

Thanks, Patricia. It's Gregory here. And look, I think ROIC is absolutely a focus for us. And I think if we rewound the clock 10 years -- whoever was on this call 10 years ago, probably would have said, it's a focus for them at that point in time as well. And let's be honest.

The last four quarters have probably been record performance across the retail division. I don't recall kind of four historic quarters like that added up together before. And it's also been helped a little bit by reduced capital spend in the pandemic, et cetera. So we've had kind of all the right -- we’ve had tailwinds for us in that metric. But I don't want to discount your point on the performance.

So, I think what's important for this management team, and as we move forward, is continuing to focus ROIC on a key driver, a key deliverable. We've developed the OE program. We want to continue to show operating leverage. TJ talked about the capabilities that's been built from a margin perspective. So from my point of view, I just would want to reinforce that this is a critical driver for us as we move forward and ensure we've had probably a little bit of tailwinds by some of these record performances over the last little while.

But it's not going to stop me from pushing TJ as we're looking forward, for sure. That's how I'd answer your question, Patricia.

Patricia Baker: Okay. Thank you very much, Gregory.

Operator: Thank you.

Our next question is from Mark Petrie with CIBC. Please go ahead.

Mark Petrie: Good morning. So I just want to follow up on the comments with regards to the sales performance of the non-seasonal categories in Q2 at CTR. Can you just follow up and clarify your comments? And maybe give us a sense of how that might have varied in regions of the country where store closures were less of a factor?

TJ Flood: Hi, Mark.

It's TJ. I can give you a little bit of insight on that. As Gregory would have mentioned in his opening remarks, we saw a lot more buoyancy in the categories that were more outdoor focused. Canadians were really looking to explode and get outdoors, as we looked at Q2 performance. And some of the -- so when you look at businesses like gardening and water marine fun and auto travel, Canadians were literally trying to explode out into the outdoors.

Some of our more what we would describe as indoor businesses were a little bit softer. But there's a lot of noise in those numbers. And it's really important to keep in context that we had significant restrictions in Ontario closures in these numbers. And although they did -- some of the categories like kitchen and home décor would have been a little bit softer, they were still at massively elevated levels to 2019. And we're up against a lot of headwind.

A couple other categories that bounced back a little bit too were in automotive. Our automotive growth last year mostly came from what I would describe as launch categories; auto outdoor adventure, car cleaning, as people were using car cleaning as boredom busters, and some of our need-based categories like tires and batteries and things like that were a little bit softer. And we saw those bounce back a little bit in Q2. So hopefully that gives you a little bit of color. It was a noisy quarter.

So it's really hard to kind of draw a lot of inference in terms of some of the indoor kind of categories. But they were still very, very strong relative to 2019.

Mark Petrie: Yes. Okay, that's helpful. And then just another one also just to sort of clarify the comments around crowd inventory.

And again, appreciating there's a lot of noise in these numbers. Do you think dealers have effectively caught up in terms of their inventories? And I guess there's a seasonal component heading into fall, winter, and then the non-seasonal component. But how do you sort of think about the potential for restocking still in the CTR business? Are we effectively kind of caught up at least depending on how retail demand plays out?

TJ Flood: Yes, it's a great question. I think dealers, much like us, have responded to last year and really restocked their shelves. They are sitting at elevated levels to 2020.

But they needed to be. They were very, very depleted last year, and they are slightly up in inventory relative to 2019. It's really difficult to predict where customer demand is going to be as well as dealer demand as we go forward. As we sat here at the end of Q2 last year, we found ourselves in a position where POS growth significantly outpaced shipments to dealers on a year-to-date basis. And to a great extent, that differential corrected itself by the end of the year.

And as I said, it's very difficult to predict consumer and dealer demand. But usually those two move in the same direction and tend to converge over time. But what I do know is that the Corp. and dealers, both us and the dealers are investing in inventory to give ourselves the best chance to deliver against whatever consumer demand is there. So hopefully that helps, Mark.

Mark Petrie: Yes, helpful. I’ll pass the line. Thanks a lot.

Operator: Thank you. Our next question is from Luke Hannan with Canaccord Genuity.

Please go ahead.

Luke Hannan: Yes. Thanks. Good morning. I appreciate the comment on the performance in Q3 to date so far.

I'm just curious if you could give a little more color maybe on how your back to school assortment is shaping up, maybe relative both to 2020 as well as 2019, and how much of a driver that's been thus far in the quarter?

Greg Hicks: I'll probably stop -- we still got a lot of back to school kind of in front of us. So I'll probably stop short of giving too much detail. But, like TJ talked about, every month, every micro-season, every macro-season, I think the teams are really using data to determine how we go to market. And we identified back to school as a real opportunity, both in Mark's and Chek from an apparel standpoint, but also back to dorm in NCTR. I know the team worked pretty closely with the dealers to really think through the assortments and make sure that all of our kind of forecasting curves both corporately and for dealers were ready and altered, because there was very little demand last year.

So I think very tactically, we've approached back to school from an inventory perspective, which is a similar theme you've heard in terms of how we're approaching the entire business. We've got some much stronger marketing campaigns this year over last year, as we're comping minimal activity. And the same would apply for a category like hockey, which cuts across many of our banners. So I think that continues to be the beauty of a multi-category assortment. There's puts and takes all over the place.

And I think from a planning perspective, I'm really happy with the way that the team is approaching the calendar and really attacking these seasons, these opportunities, these categories that present opportunity on a year-over-year basis. So, hopefully that helps a little bit, give you some insight in terms of how the teams managing back to school, but also just in general how we exploit category opportunity.

Luke Hannan: Yes, it does. That's helpful. My next question, this is probably one that's more suited for Aayaz, but I'd appreciate, Greg, if you could give your thoughts on it.

He came in, in June, and I appreciate that it's very early days, but I'm curious to know if you can share anything on your digital strategy in CTFS moving forward, how that evolves and maybe using that as an acquisition channel for customers maybe in combination with acquiring customers in store?

Gregory Craig: Yes, it's Gregory. Let me take that one. So you're right. We're thrilled to have Aayaz join the organization and he's been really helpful. I think you probably know I was at the bank for quite some time and it's great to have somebody with a different perspective and background to kind of help further develop the channels and certainly when I was there.

So I know Aayaz and team are really starting to build this out. And I think you're going to see more activity in that as we move forward to Q3 and Q4, and into next year, absolutely. That's not to say -- that store channel is still absolutely strong and fundamental for the financial services team. But I think you'll see more and more kind of Aayaz and team start to really build out digitally and looking for different ways, and to take advantage again of the assets of the corporation. I've long felt that we're not in financial services integrated as we should be into the digital assets we have at the corporation.

Physical assets, absolutely. So I'm really looking forward to see what that team is going to do in the coming months and years as they get a chance to really kind of test and learn their way into this.

Luke Hannan: Okay. I appreciate the color. Thanks.

Operator: Thank you. Our next question is from Peter Sklar with BMO Capital Markets. Please go ahead.

Peter Sklar: Good morning. Greg, in your commentary regarding the outlook for Q3, I think you said that you're holding your retailing sales versus 2020.

Can you explain what do you mean by that? You mean if you take all the banners and look at their retail sales, it is like sales are flat versus the same period to date in the quarter versus 2020. Is that what you're saying?

Greg Hicks: Yes. That's the way you should interpret it, Peter.

Peter Sklar: And so do you think you can sustain that through the rest of the quarter given that, as I recall, Q3 is the quarter when Canadian Tire just had that huge same-store sales comp of 25%. So you're up against such a big bogey.

So what's your thinking about that?

Greg Hicks: Well, I think that's the question of the day. As we've talked about, it's the consumer demand that's really difficult to forecast. And we kind of feel like we've never been in this position before in terms of how hard it is. And there's a lot of focus here today on CTR. The model on CTR is fairly simple in terms of how inventory and revenue, et cetera, work.

And all of those I guess mechanics, think about inventory turns in the store, revenue -- dealers chasing revenue in front of sales or ordering product in front of sales, which impacts our revenue, all those things are playing out during the pandemic, obviously, in greater proportions. But it's that consumer demand that ends up being quite tricky. And if we -- the model is pretty simple in some respects. If we continue to buy inventory and the consumer demand falls off, and the ending inventory position for the dealers is high, then that's going to impact revenue on a go-forward basis. And so I don't have a crystal ball with respect to what's going to happen for the remainder of Q3, but our approach, as TJ walked you through for CTR and it's very applicable for Mark's and Chek to is, as we're buying aggressively, we don't want to leave anything on the table.

And I subscribe to the theory that some of the most profound things are exceedingly simple. You got to have inventory to generate sales. And so we continue to buy inventory, assuming that the customer will come. But I think if Gregory was answering this question, he’d probably start with nice try. But we’ll see.

Gregory Craig: That was a good answer. That was helpful. But just to be clear. That guidance relates to retail sales, not Canadian Tire revenue.

Greg Hicks: Consolidated retail sales.

Gregory Craig: Yes, and I’ve even called it the word guidance, Peter, just to be clear which is kind of where we've trended up, just so we know where we are here.

Peter Sklar: Gregory, yes, I get that. Sorry. And then my last question, Gregory, is for you. Given this very strong performance of the company and the cash flow and the fate of the balance sheet, kind of what's your attitude on share buyback now?

Greg Hicks: Yes, it's a great question.

I think what we wanted to do, we had a long discussion. I think we wanted to kind of have that broader discussion, frankly, at Investor Day and share with you our thinking around a number of different elements as it relates to capital at that point, Peter. So I think from my perspective, stay tuned for more of an update on that in September would be how I would answer it.

Peter Sklar: Got it. Okay.

Thank you.

Operator: Thank you. Our next question is from Brian Morrison with TD Securities. Please go ahead.

Brian Morrison: Thank you.

Good morning. I appreciate all the color on the retail side. Maybe just with respect to the cost on the retail, the $200 million efficiency program, where are you in terms of your achievements on this front? And what types of areas you're targeting on a going forward basis?

Gregory Craig: Yes, it's Gregory here, Brian. I'll start off. I think we've refrained from giving kind of a quarterly scorecard on kind of where we're trending.

I just didn't want to dance frankly on the head of the pin with we had X dollars or Y dollars. And instead, every quarter we look at is tracking our progress internally and how do we feel? And I'll tell you, we feel really good about the progress we've made towards that ultimate goal of $200 million plus. I’ll reemphasize as I was correct on one of my first conference calls and rightfully so. But I think there's still a pipeline of initiatives that are in various stages of completion. So some of them are further along than others, but I think we've got some more work to do still, but very comfortable with where we are on the target.

And I think as important is I like the fact that the mindset is starting to kind of -- but that's been developed around kind of continuous improvement. I really feel it started to spread at the corporation. So as we even look at new capabilities that maybe wouldn't have been part of the original design of an OE type of initiative, you kind of bring that kind of process thinking to it about how do we make some of these digital processes more efficient, if you see what I mean. So I actually really like the mindset kind of spread across the corporation, but feel very good about where we are. There's still initiatives in the pipeline for us.

Some have been concluded, obviously, but some are still being actively worked on. It depends on what initiative you're talking about. But we still have initiatives that we think can continue to add more fuel to this.

Brian Morrison: Okay. Thank you.

And then I want to ask a question on the financial services side, Gregory, so I’ll keep you if you can. You've seen another big increase in Triangle members; really, really impressive. And then you've seen the first sequential increase in card since the pandemic. So can you maybe talk about the focus on the acquisition rate, and your ability to convert your loyalty members to cardholders at this point?

Gregory Craig: Yes. It's Gregory again.

I'll start and if Greg wants to jump in at the end, I know he will. The teams have tried that historically. And it gets to my point on us not necessarily leveraging the digital assets maybe as much as we should have. So we've done it before. And for the times that we've been able to acquire customers, the results have been quite strong.

We just haven't found a way to scale it yet is what I would say. So I think that's been a critical focus. It's interesting when you bring in new people into the organization. And I think Aayaz’s eyes lit up when he saw kind of the acquisition of these Triangle customers. So I think given the interest that we have in growing acquisition, given his background on some of this, I really feel that's going to be an area that I know the teams is going to be looking to shop in to drive acquisition, because they're very active.

They're great Canadian Tire shoppers. And we just haven't found a way necessary to hook them with them with the best value prop in the company, which is the Triangle MasterCard. So I think that will be a very, very rich pool that the teams is going to continue to build on as we move forward. But it hasn't really been -- as I said, it's hard to compete with the store channel. I know it's going to sound like an excuse.

But that's why to some extent, being forced to kind of develop these other channels is fantastic news for all of us, as we look to build out capabilities and frankly just to build out our customer pool across all these channels, as you've identified. So suffice it to say, I think when we talk next year around now, I would expect a different storyline to say on where we've been around loyalty and converting them to or upselling them I guess to a credit card.

Brian Morrison: Thank you.

Operator: Thank you. Our next question is from Vishal Shreedhar with National Bank.

Please go ahead.

Vishal Shreedhar: Hi. Thanks for taking my question. I'll keep it brief. There are many changes going on at Canadian Tire and the consumer backdrop, and results, they continue to come in very strong, despite challenges associated with closures.

I was just hoping you could help me distill some of the initiatives that Tire is working on which are delivering these results, maybe the key initiatives? Obviously, many initiatives are interrelated. And obviously, it's probably a difficult question to ask, but would it be correct to say that your improvements in omni-channel and your loyalty data analytics initiatives and the strong consumer backdrop, those are kind of three key factors that have helped supporting these results, or would you characterize it differently?

Greg Hicks: It's Greg. I think you're on to the major components there, Vishal. We're certainly looking forward to kind of unpacking how we're viewing not only what's driving the performance right now, but how that catalyzes kind of our long-term competitive posture going forward. We believe we have critical, differentiated advantages.

We think our reach is extremely, extremely strong in this country. We think the trust that Canadians have with our brand is playing a role. And as you think about how we're deploying new and emerging capabilities, some of them not so new, like own brands, but real emerging capabilities around customer and Triangle and personalization, and really developing experiences that are relevant and curated, we didn't get a chance to talk a lot about customer today. We've got unbelievable storytelling opportunities in terms of how this company is changing. And I guess we'll leave that to September.

But I'd say we're scaling more capabilities and businesses and designing them to work together in a mutually reinforcing way. And I think we feel confident, and so we're now moving with even more speed and aggressiveness. And so again, I think you'll see all this at Investor Day that I think we have the strategy, we've got the team and we have the capabilities. And I think the most important thing is, we know where the customer is going. And I think that's just so critical right now in terms of all the changes in the retail landscape.

Vishal Shreedhar: Okay. Thanks for that color. I'll leave it at that.

Operator: Thank you. That's all the time we have for questions today.

I will now turn the meeting back over to Mr. Hicks for closing remarks.

Greg Hicks: Well, thank you all again for joining us today. As I just said, we didn't talk much today about the customer. And we're really excited about what's going on with respect to how we're engaging customers and creating much stickier relationships.

But I guess we'll leave that to our Investor Day in September, which we look forward to. So enjoy the rest of your summer and continue to stay safe. Thank you.

Operator: Thank you. This will conclude today's call.

You may now disconnect.