Opinion: Canadian Tire's rise in overdue accounts could be a big red flag

Opinion: Canadian Tire’s rise in overdue accounts could be a big red flag

Canadian Tire’s namesake retail business has accounted for just 40 percent of profits so far this year.Christopher Katsarov / The Globe and Mail

When Canadian Tire Corp. Ltd. CTC-AT said its second-quarter profits fell as it sets aside more money for possible bad debt in the future, the iconic retailer said it’s good news: Its customer credit card business is increasing its balances, which means more interest earnings , which he charges.

That’s how it really can turn out. However, there are other, less attractive scenarios. And if they do, the consequences are dire for Canadian Tire — and perhaps for Canada as a whole.

This can be confusing for people who think Canadian Tire is a retailer of hardware, cookware and hockey equipment. But today’s Canadian Tire is also a bank that issues credit cards and, with a majority stake in CT REIT, also a real estate company. Canadian Tire’s namesake retail business has accounted for just 40 percent of profits so far this year.

The financial services segment – ​​a third of the company’s year-to-date profit – is led by Canadian Tire Bank. But it’s not a bank like Canada’s Big Five with branches, business loans and investment dealers. Instead, it’s essentially a credit card lender. As in the case of high interest unsecured consumer loans.

Canadian Tire is excited as these loan balances continue to grow. In the second quarter, total balances on card accounts rose 14.6 percent from a year earlier, and the number of accounts that aren’t paid off each month — and therefore pay interest — rose 7.6 percent. The average account balance increased by 6.5 percent year-on-year.

That’s all good news, unless you look at those rising credit card balances and wonder if the numbers are increasing because cardholders are just spending more — or having more and more trouble paying them off.

The stat that catches the eye is Canadian Tire’s credit card delinquencies, which were at 2.4 percent of total balances in each of the first two quarters of this year. While still below pre-pandemic levels, the current number is 40 percent higher than in the second quarter of last year.

“We remain comfortable with the risk metrics at the bank,” spokeswoman Jane Shaw said in an emailed response to questions.

She said Canadian Tire is “closely monitoring macroeconomic conditions” as it earns more money from credit card balances, which are “a critical part of our overall business strategy.” The company “has developed and successfully implemented a playbook over a number of years that includes mitigation measures such as reducing or stopping the growth of new accounts and reducing outstanding credit limits – which can be implemented very quickly when needed.”

Canadian Tire uses loyalty program customer data to increase sales

Bay Street analysts don’t seem to be too concerned with that number, as most have a “buy” rating on the company’s stock and expect rising earnings across the business. The recent share price, which has ranged from $150 to $170, is said to be a great value. (The stock closed at $162.13 on Tuesday.)

However, Veritas Investment Research’s Kathleen Wong, the only “sell” on the street, believes bad debt losses in the card portfolio will be double last year’s levels and higher than pre-pandemic levels by the end of this fiscal year. This will continue with higher losses in 2023, it models.

That’s translating into a sharp drop in earnings for the financial services unit — and it’s behind its estimate of the stock’s fair value at $167 per share. While the company is in a much better position now than it was during the 2008-09 financial crisis, she said, “Canadian Tire is one of the most vulnerable stocks in my sector coverage if there is an economic downturn,” she wrote in an email.

An even bigger question is whether Canadian Tire’s recent surge in overdue bills is a canary in the coal mine for Canadian consumers.

Canadian Tire’s latest numbers are for the three months from April to June, before the full impact of rapidly rising interest rates took hold in Canadians’ tight spending, rising debt and declining wealth. Numerous studies indicate that Canadian consumers are among the most overburdened in the world.

We don’t always get such detailed details about credit card delinquencies at major banks. Credit card portfolios represent only 2 to 4 percent of their total loans, Ms. Wong estimates, so disclosure is more limited for some banks. And yet there’s still a lot of credit card debt: Ms. Wong said Toronto-Dominion Bank has the largest credit card portfolio among Canadian banks at $34 billion.

Both Canadian Tire and the Canadian consumer that drives its success have certainly won over their doubters repeatedly over the past decade. So we could look back on this as just a blip in Canadian Tire’s long-term growth.

Or maybe a retailer still offering their “big red” sales has offered a big red flag.

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