Canadian Tire Corporation, Limited

Michael Medline - President and Chief Executive Officer Dean McCann - Executive Vice President and Chief Financial Officer Allan MacDonald - Chief Operating Officer Chad McKinnon - Chief Operating Officer, FGL Sports Mary Turner - Chief Operating Officer, CTFS Rick White - Chief Operating Officer, Mark’s Work Wearhouse Ltd.

Irene Nattel - RBC David Hartley - Credit Suisse Peter Sklar - BMO Capital Markets Kenric Tyghe - Raymond James Derek Dley - Canaccord Genuity Jim Durran - Barclays Mark Petrie - CIBC Vishal Shreedhar - National Bank Brian Morrison - TD Securities Keith Howlett - Desjardins Securities

Thank you and good afternoon everyone. Earlier today, we released our second quarter results, which included strong comp growth across all of our businesses.

The sales performance across our core banners demonstrates the strength of our retail fundamentals, especially at FGL Sports and at Canadian Tire. Canadian Tire posted its best Q2 comp in 12 years and the momentum we are seeing continues to impress me.

And while we began to pull back on the pace of growth in our Financial Services business, the team has still posted solid results once again this quarter. As you have heard me say, my number one objective is putting the numbers up on the board.

We expected this quarter to be tough given the impacts of the declining Canadian dollar and the steadily weakening economy in Alberta. And as you know, we sold 20% of our very profitable Financial Services business last year, which we knew would be a tough gap to close, but our diluted EPS, was still up 1.3% despite the $14.1 million, or $0.18 per share impact in our results.

Now on its face, this still is not good enough, but the one-time positive adjustments last year, which Dean will talk about more in a minute and the currency, are obscuring solid operational results. Our businesses are much stronger than one year ago in terms of underlying performance.

Over the last two years, we have seen a decline in the Canadian dollar of over $0.20. For perspective, the impact of the year-over-year decline in Q2 alone on foreign sourced products for all of our businesses was about $35 million.

Fortunately, we had a strong hedging program in place, which mitigated roughly half of this effect, leaving our merchants to deal with the remainder of the margin pressure in the quarter. And though I normally don’t like to talk about productivity, as you know, because it should be a focus of everyday business, the significant impact of FX on our business is an opportunity to demonstrate that we are making significant productivity gains across our retail businesses, especially under the leadership of Allan MacDonald and his CTR team, both in COGS and SG&A.

In fact, in Q2 alone, CTR more than offset their total currency headwinds. The proactive work that the Canadian Tire team has been doing to deal with foreign exchange challenges has made the difference in our results this quarter and has continued to sustain momentum, but we are not nearly done.

We finally and convincingly have momentum behind productivity and are generating tangible results. And we are going hard after SG&A.

Our shared services or support functions are all examining the cost structures to reduce costs and improve effectiveness. Even in Q2, we have some severance costs buried in our numbers to take out headcount, which will make our organization stronger.

I am pleased with our operating performance and the traction in productivity initiatives as well as the results we are seeing, which will have long-term benefits for us. Before I walk through my four criteria for assessing the quarter, I wanted to highlight two strategic initiatives, which launched this quarter and are key to moving CTC toward its goal of being the most innovative retailer.

First, we opened our first showcase store at Canadian Tire. This is a standalone 140,000 square foot store located in the South Edmonton Commons shopping center and represents a significant step forward in retail.

The showcase store features unique shopping experiences the customers just won’t find anywhere else. We designed the store with a focus on digital enhancements, e-commerce and creating a seamless shopping experience for our customers and it includes square footage and a pickup lane dedicated to online orders.

Clearly, the team at Canadian Tire has hit a homerun with this store. Right from day one, this became our top performing store in the network and we don’t see any signs that that momentum is slowing down.

In fact, this store has held the top spot in our network on more than 80% of the days since it opened. Our customers are telling us that they love the new merchandising digital tools and deeper assortments, but what I am most excited about is that this store has allowed us to think bigger.

In fact, we will now look at other select and limited opportunities to build a few more of these stores across Canada, assuming that we can find the right real estate and the correct markets. Now, as you may know, I have been critical of our e-commerce efforts in the past.

And while we have a long way to go, I am pleased with the progress being made now. As promised, we launched our new sportchek.ca’s website in the quarter.

We have migrated away from GSI and now run the business ourselves. This site is a big step forward for FGL as it moves along its digital journey.

It has enhanced features that allow for customized content to populate individual landing pages based on a customer’s profile and previous search history. And while there is a lot more that we plan to do with this site, we are pleased to have the site up and running and will continue to rollout new features as we move forward.

CTR Mark’s plans for e-commerce are just as exciting and we are on schedule, thanks in large part to how well they are working with our great technology team, led by Eugene Roman. I am pleased that the team is thinking bigger and we are always on the lookout for innovative opportunities that will give us that competitive advantage.

Now, I will move on to my usual four criteria for assessing the performance of the retail businesses. First, did we properly balance our promo and regular pricing or where we are buying sales?

Well, we saw strong top line growth at our Canadian Tire and FGL businesses and I am pleased to say that we did not buy sales to achieve these results. At Canadian Tire, despite being challenged by a variety of headwinds, our merchants once again used the tools at their disposal and significant productivity gains to mitigate the increased margin pressure.

FGL Sports posted 4.8% comp growth, while Sport Chek came in at 8.6%. Obviously, I am pleased with the results we are seeing come out of Chek that continue put up some great numbers, especially when you consider the comps, they were up against last year that also included World Cup men’s soccer sales, which actually hurt the overall Chek comp number by about 2%.

We have also been seeing really strong progress from two of our smaller FGL businesses that we don’t often talk about, Pro Hockey Life and Atmosphere. Their recent comp performance has been outstanding and deserves some recognition for the work that the teams have been doing to propel these businesses forward.

After inconsistent quarterly results at Sport Chek banner over the prior year, we have brought them under the same marketing leadership as Chek. Going forward, we will be introducing many of the successful marketing techniques used at Sport Chek to the Quebec market and digital marketing testing is already underway this quarter.

Initial results are encouraging. And at Mark’s foreign exchange pressure and obviously the economic headwinds in Alberta led to a slowdown in sales of industrial wear and industrial footwear.

So, we took some necessary steps to manage the business with a greater focus on casual wear and casual footwear. Industrial wear products have some of the highest margins across all of our CTC banners.

So, until we begin to see activity pickup in the oil sands, we do expect lower margins at Mark’s. Rick White and his team are doing a great job of transitioning the product offering away from industrial, while the market is soft.

As we know that will be an uphill battle to makeup for industrial wear over the very near-term. Second question, did we drive sales through creative marketing?

I am extremely pleased with all of our marketing programs other than Sports Experts prior to the changes I just talked about. Third, were Canadians choosing us for seasonal products and especially did our innovative products resonate with our customers.

Once again, we saw our customers turn to our retail banners for the products they needed for the season. Overall, weather didn’t really help or hurt us during the quarter.

Now in Western Canada, seasonal product sales were especially strong, where very warm and dry spring weather arrived early this year. For the rest of Canada, we saw heightened sales in our non-seasonal products as unseasonal weather patterns did not encourage Canadians get out to work and play in their backyards as early as in prior years.

I also really like what CTR has done to focus on the young families and I think we’re seeing the benefits of this in our numbers. And fourth, did we properly watch our expenses while continuing to invest in the future, I am going to let Dean talk about this one in more depth, but I was pleased with how the business managed our expenses in the quarter and how our OpEx ratio is trending.

Now with that, I will turn it over to Dean.

Thank you, Michael and good afternoon everyone. My comments today will be centered around a few key areas.

Diluted EPS of $2.15 was up 1.3% over the prior year and reflects an expected $0.18 per share reduction due to the 20% interest in financial services earnings, now owned by Scotiabank. Excluding the effect on revenue of lower gas prices, consolidated revenue increased 6.3% over the prior year, reflecting strong shipments to dealers at Canadian Tire.

Retail revenue and retail sales both ex-petroleum, were in line, up 6.4% and 6.7%, respectively. Although we didn’t have any normalizing items this quarter, we were seeing the impacts – we are seeing the impact on earnings from a few one-time items in 2014, which we noted in our disclosures last year.

Other income is lower in Q2 2015 by around $8 million, mainly due to a one-time legal settlement in the retail segment in the second quarter of 2014. And last year financial services was positively impacted by a net of two events related to an adjustment to the allowance for minimum payment changes and a one-time settlement of a contract.

This year-over-year effect of these items impacted both OpEx and gross margin. Our consolidated gross margin rate was up 29 basis points in the quarter, largely due to improved margins at our petroleum banner.

Excluding petroleum, the consolidated gross margin was down 98 basis points and down 75 basis points in the retail division. The decline in gross margin rate is a function of a few key impacts that are important to understand to evaluate what was in general a very good margin performance by the retail businesses.

First, as Michael laid out our Mark’s business was meaningfully impacted by lower sales of its higher margin industrial wear products. This accounted for roughly half of the retail segment gross margin change.

And second, our Canadian Tire product margins actually increased in the quarter, but that was masked by the timing of certain balancing transactions with various parties including our dealers and our vendors that we settled up for true-up each year. This quarter, as we indicated last year, the timing of the settlements we did – the timing of the settlements did not all line up exactly with those in the prior year, so we also saw a margin impact from this.

However, we do not expect these impacts to affect the balance of the year. And finally, we continued to see foreign exchange pressure, particularly with our Canadian Tire and our Mark’s businesses.

Michael referenced our productivity initiative, now well underway, which builds on the work to-date that our merchants have done to protect our margins. The importance of these initiatives will increase as we move through the balance of 2015 and into 2016 as our effective cost of hedging – effective cost of exchange, including the hedge effects rises assuming as expected the Canadian dollar remains weak relative to the U.S.

dollar. Now before moving on to operating expenses, I wanted to provide an update on the home services business that we have been testing in select markets across the country.

Although we were certainly not material to the results in the quarter, we did decide to reposition this business to better align with the CTR active family strategy and have it focus on installing products that we sell in our CTR stores. Now our operating expenses were well managed during the quarter.

Planned higher year-over-year depreciation and amortization related to the increased level of capital projects we have underway caused the drag on earnings compared to last year. That said, I was pleased to see that the retail OpEx ratio excluding depreciation and amortization, normalized for the effect of the decline in petroleum revenue, increased by 45 basis points, reflecting lower than planned expense growth and an increased focus on managing our costs and productivity despite the higher level of activity across our businesses.

As I said in Q1, our financial services business has been watching the economy closely. We are still watching the leading indicators.

However, as it appears the economic impacts are currently isolated to Alberta. We expect to ease or foot off the brake in terms of growth.

During the quarter, CT REIT took an important step towards achieving its goal of being a self-funding – being self-funding and successfully raised $350 million of unsecured debentures, $200 million of which was used to repay a portion of the financing provided by CTC to the REIT when it acquired its initial portfolio of properties from CTC in late 2013. This was the first time CTC monetized a series of this intercompany financing and the proceeds from the redemption along with $100 million of cash in hand, were used to fund the maturity of $300 million of corporate medium-term notes that were repaid at the end of June.

Our consolidated corporate inventory position is higher year-over-year, but it continues to be very clean across all categories. A portion of the increase can be attributed to planned efforts to increase inventory positions at Pro Hockey Life as well as for the new store openings at Sport Chek.

Inventory is also increased at Canadian Tire, partially due to a shift to higher priced items and buying to support higher year-over-year sales. Mark’s inventory is also up compared to the prior year, but is clean and we will be able to sell-through any excess currently on hand.

Second quarter retail ROIC was 8.06%, up four basis points over Q2 2014, largely due to higher retail segment income before income taxes. Compared to Q1 2015, the retail ROIC measure was up 12 basis points, primarily due to lower assets, driven by a reduction in inventory levels.

And in last quarter, I committed to giving you an update on our CapEx guidance when we announced that we had purchased the leases of 12 former Target properties. We do not anticipate a change in our previously disclosed CapEx guidance for 2015 and expect to keep our operating CapEx spending within the range of $600 million to $625 million, inclusive of any costs related to work on the former Target stores that we do in 2015.

That said our average CapEx – operating CapEx spending over the 3-year period from 2015 to 2017 is expected to increase from the $575 million we previously disclosed to an average range of $600 million to $625 million. The increase reflects the costs associated with retrofitting the former Target properties to Canadian Tire stores.

And with that, I will turn things back over to the operator for the question-and-answer session.

Thanks and good afternoon everyone. I think the question really on everybody’s mind is what is the outlook for gross margins in the retail business as we move forward?

Is there enough in the operating initiatives or the efficiency initiatives rather to really help offset the FX headwinds and how we should expect the cadence on a go-forward basis?

So Irene, this is always difficult, right when you are trying to balance kind of how much forward-looking information we give. But what I would start with is look, we are very happy with the performance of the businesses in terms of margin.

And I broke down that impact on the retail gross margin, that 75 basis points when you hide out petroleum and so on. And basically half of it was Mark’s, that’s tough and a challenge for Mark’s going forward, but they are about roughly speaking less than 10% of our overall business.

And the guys that – as we have said around are doing a great job, but the fact is we are in a cyclical downturn with respect to industrial, in terms of the oil industry and that’s affecting Mark’s sales of industrial wear. They have done an exceptional job moving to other categories like casual men’s footwear, casual menswear.

But those just, by definition, carry lower margins. So great job there, but that’s a challenge that we will continue to experience.

On a very positive side though, we were exceptionally pleased with how the other businesses, particularly CTR led by Allan, has been doing in terms of managing the challenges associated with margin as we look ahead. And that goes to why we have introduced the discussion around productivity because they are exactly the kinds of initiatives that are going to be necessary for us to be able to protect margins over the long-term.

And Allan and team have embraced these like full on and they made a huge difference because, as Michael mentioned in his note – in his comments, if you look back 2 years ago this time, the exchange has moved, it’s costing us $0.20 more to buy the same thing that in terms of the exchange rate than it did then. So we have done a great job I think, in terms of being able to manage against that.

And I expect us to be able to continue to do that. And as I said, our actual product margin, when you think of CTR, was actually up in the quarter despite, if you will that significant headwind in terms of exchange, some of which we offset by hedging.

But as I have always said, hedging just buys you a glide path and the teams have taken up the challenge in terms of working through how to manage, if you will that exchange pressure over time. So I am – as I said, I will leave it at we are extraordinarily pleased with the work done by all of the businesses in terms of managing margin.

That’s really helpful. Thank you.

And then just another question, if I might and this goes towards those 10 Target leases, you have indicated that CapEx will be up as you retrofit those stores, how should we think about timing when those stores come on-stream because it’s been a long time since you have had that kind of square footage growth?

Yes, Irene its Allan. We think about the stores obviously we want to get them up and running as soon as we can and there is a lot of work to be done to get from here to there.

But with our as you know abbreviated schedule gets up and running, I would expect to see them coming online in the first quarter of next year and then shortly thereafter as we can. Of course, like you said you go to bring 12 new stores online, so it’s just going to take a little bit of time, but we are very diligently trying to get those open as soon as we can.

That’s great. Thank you.

Yes. Thanks.

Just thinking about the second half, you had a great quarter a year ago in Q3 and are you anticipating a much tougher quarter in Q3 this year especially exacerbated by some of the challenges you have on the gross margin side and just was wondering in terms of the leverage you would expect on your SG&A when does that really start to kick in the second half of next year – this year sorry?

Thanks David. It’s Dean, so as you well know it’s always the delicate balance in terms of talking about the future.

But I think what I would start with is reiterating kind of what I just said in terms of answering Irene’s question around margin pressure and so on. Obviously as we talked about FX is a factor I think for any retailers buying offshore these days.

As Michael mentioned in his comments I mean about half of that impact we were able to if you will offset by our hedging program, but that just highlights the fact that hedging only buys you time. And then you flow to the productivity type of initiatives in terms of margin that the guys have embraced around here and we have got great traction on.

So those are the kinds of things that we will look to help us if you will manage against those kinds of headwinds. On the SG&A front, similarly we are getting good traction around the works that we are doing around there.

We saw some what I think are very positive signs in terms of our SG&A this quarter. We are obviously all focused around here on driving towards hitting that ROIC target and those are key aspects of – or key initiatives in terms of being able to achieve that.

So I would kind of give you that and hope that gives you some kind of indication of how we are feeling about the business as we look forward.

Okay. Just on USD sourced product in your stores, can you give us an indication of how much in retail is – of your banners are sourced in USD and or even break it down even ballpark it for the various banners?

I think David that’s actually public information or AIF, but I think it’s somewhere south – it’s around in the 40% across the businesses David. But as I said that’s I think our annual information form I think it’s disclosed in there.

I don’t remember the individual numbers on the top of my head, but I know on overall basis it’s in the kind of mid-40s.

Okay, I will take a look at that. Thanks.

And I am just trying to just follow-up on the Target assets, ex-assets. 12 new stores, is that going to be a net new store add for you or are you looking to maybe pull back other stores and so that the number comes in a little lower net-net?

No, it’s going to be a combination of both, but it will net out at that. But I almost want to say exactly zero for going up the store and then down the store.

So yes, it will have no net impact in terms of numbers. Yes, sort of square footage is – I think it’s a pretty good jump in square footage.

I am going to say like 300,000 or something like that, 300,000 to 400,000. We will get the real number, David.

But Allan is right in terms of what those acquisitions allowed us to do is replace some existing stores with far better stores and obviously much bigger stores. So I think the net increase is better part of 400,000 square feet.

I think that’s what we announced when we said we did the leases.

And is there any chance you look at that space, my last question – any chance you look at that space and think about some of your focus on pro shops and things like that, where you allocate some of that space to something a little more forward-looking or different than the usual Canadian Tire offer to-date?

Yes. I mean, first thing to know about those stores is we – the number was 12 because we are very particular about what we were looking for.

Coincident with the opening of the showcase store in South Edmonton Common that should give a little bit of insight to all of you in terms of some of the new merchandising tactics we are trying. So when we look at the success of that being very particular in the markets we are going into, the store sizes we are looking at.

I think it’s fair to say that, that extra few hundred thousand square feet will be developed to enhance the store experience that you know today. So opportunities like blowing out some categories with much greater merchandising, store within a store type setup like you see in South Edmonton Common and the pro shop type strategies are very fair and expected in those new stores.

Great. Thanks a lot guys.

Thanks. Sorry, not to kind of beat this issue to death, but on the foreign exchange issue, could you talk a little bit about your ability to pass through that cost in your 3-year retail and merchandising strategies?

Yes, it’s Michael, how are you doing. This impacts more than one division, so I will take it.

And we didn’t say it in our script, but we always look to see how much inflation is built into our comps. And if it was immaterial in Q2, if it becomes material, we will certainly tell you that by the way, so I want transparency on that.

I think that at this point, most of it is just smarter practices. As you can see, if we haven’t built and inflation, it’s not that there is some mix.

We are doing everything we can to grow our market share and put our hurt on the competitors. So we are trying to avoid taking prices up.

My personal belief is that across all of retail in Canada because of these risks, there could be a little bit inflation that we may see in consumer pricing, which I hope we do not see. And we are doing everything in our power not to pass on to consumers because in many respects that’s not true productivity in my books.

We have got to do things smarter and make our businesses stronger. Although we are already well underway on productivity, I am finding that it’s creating a little bit of a burning platform for us.

We are getting better and better and finding smarter ways to take costs out especially at CTR and Mark’s and certainly and I will take a personal responsibility for this and SG&A. And so I thought I can say at this point, not much inflation, so we didn’t pass it on.

But we are looking at every aspect of our business to make this up and more. And by the way, if that dollar ever recovers, we are going to hold on to it.

This is a stronger company.

Michael, I didn’t understand your comment on why you wouldn’t want to pass some of this through to your retail pricing if retailers, in general, in Canada start to move prices up to compensate for some of this FX headwind. Why wouldn’t you go along with that?

We haven’t seen a lot of that actually recently. And we like to – we will manage our business and do things prudently.

At the same time, I would like to take some market share when we are in this kind of environment. I don’t know if Allan you had anything to add to that?

No, I mean, this isn’t our first quarter with FX headwinds and not a first quarter with adjusting the margins in a positive way. So, we are going to continue to be competitive, but we are focused on as we have always said playing our own game and looking for every opportunity to increase our profitability by looking at how we are going to market.

So, yes, I mean, it’s really an internally-focused discussion as opposed to trying to just capture it with pricing.

Okay. And I just had a couple of questions on the credit card business I noticed that you have talked about slowing down the growth of the credit card business, which has showed up in the numbers.

And I wasn’t too sure from your comments on the call, are you just trying to slow the business in Alberta or is that something you are doing across Canada nationally?

Hi, it’s Mary, Peter. We are not just focused on Alberta.

We do our strategies really at the customer level. So, it’s not just impacting our growth in Alberta, which is not really a huge market for us, it’s only about 8% of our portfolio.

So, what you are seeing is a very deliberate strategy to be more cautious, particularly on acquiring new customers across Canada who show up as a bit higher risk in our models. And I think you are going to continue to see that I think for a little bit of time.

We are starting to reverse cautiously our tightening on that front, but it’s going to take a few quarters for I think to settle into more normal growth.

Right. And Mary, I noticed in the quarter that your insolvency write-offs and you booked a higher allowance for write-offs, is that just an accounting thing or are you seeing some deterioration in credit quality?

What we saw – well actually, our aging is very strong. So, because of the defensive measures we took, we have actually got very, very favorable aging.

So, I am very pleased about that. But what we did see in the quarter was we did see a runoff in insolvency and that’s always a concern to us, because it’s an indicator of pressure on customers usually caused by unemployment or poor quality of employment.

So, that’s the delicate balance that we are trying to match is try to continue to grow our business, but to not get ahead of what’s going on in the economy.

Okay, thank you.

Great, thanks very much. Just with respect to the sporting goods market in Canada and the specifically, I guess, the comps you are facing in the back half.

Are there categories of what you think there is market share opportunities that are up for grabs, so to speak and/or where there is perhaps margin opportunity in categories that are not paying well, not well serviced by the market at large? And how would that sort of play into your thinking around the comps and the reality you are facing within the sporting goods business?

It’s Chad speaking, Kenric. I think we still have big offerings.

We are looking at – we are in our sixth year now of high single, double-digit growth. The encouraging thing for us is some of our core categories, like athletic continue to be mid-teens in growth.

So, good news is our big core categories continue to do well. Electronics is just still on fire.

We are up – more than doubled our business in the quarter over the previous year over high growth, so that continues to grow for us. The footwear business, that one is a little tougher for us right now as more competition continues to grow and now our business is still solid there.

Our women’s business is continuing to grow. We think we have opportunity there as we continue to work through our stores.

And also seasonally adjusting our space, so last year for the second season, we tested taking our golf space down and we basically reduced our Nevada Bob’s space by 50% and tested multiple categories. So, we even think there is still opportunity in some of our seasonal categories by adjusting our store space and getting after business in high margin stuff like kids outerwear, winter accessories to give us much better margin and better productivity in the winter season, so still seeing opportunities.

And if I could just follow-up on that, Chad, just with respect to the seasonal, I mean, certainly the cycling’s popularity in the tradeoff cycling versus golf, which appears to be sort of the cycling being the go-to at the moment. I mean, is that not something where you see incremental opportunity in your cycling business?

And perhaps that’s where some of that reallocation is going or has gone?

Yes. I think it again depends by market.

So, in the winter, obviously, BC continues to sell that product. We see opportunity in the apparel side.

Our hard goods business or bike business is solid. We are attracting new brands, but we will start to use e-comm for that.

Our store space is tight. We think we can do a real nice job of growing our business online by extending out our cycling apparel business at higher margins.

Thank you. And then just switching gears, just wanted clarification on the productivity initiatives that offset sort of the $18 million or half of that headwind, is that correct that didn’t offset the absolute sort of full dollar value?

Did I understand that correctly?

Kenric, it’s Dean. So, actually, it did.

What the work – the work that the guys did in the quarter in terms of all the strategies around increasing, if you will, margin productivity or COGS productivity did in fact offset it. It was the year-over-year impacts of what I call kind of one-time items, some of the kind of adjustments that we go into in putting the margin together.

And the fact is last year they kind of all went our way. This year, they kind of all went the other way and it’s the old minus 1 plus 1 equals 2, right, in terms of the impact.

None of them in and of themselves are particularly material and they are not a big deal on a go-forward basis, but we do some settling up in things like that in the second quarter. And as I said, it was sort of that minus 1 plus 1 scenario, if you understand what I mean, ended up being 2 and it had a fairly decent impact in the quarter.

Good. Thanks so much.

I will leave it there.

Yes, hi guys. Can you just comment on some of the trends that you were seeing in Alberta throughout the quarter?

I mean, were sales softening as we moved throughout the quarter?

I’ll speak, it’s Michael, I see it across all the businesses. Incredibly, I have got to tell you, we saw increases – I am going to speak for Canadian Tire in this case.

Fort McMurray was up in sales in Q2. Northern Alberta was up, now not as strong as the rest of the nation.

And what happened there, I don’t think there is – the economy is booming there. I think that it’s funny how the weather there and some of the things we are doing in this quarter offset what’s going on economically.

We are very concerned and until this picks up with Northern Alberta. And it’s mostly – has an impact, as you heard, on the Mark’s business, because of the industrial wear and that has a big impact.

For CTR, it has an impact, but it’s like CTFS more de minimis. It’s hard to see, because in Q2, it wasn’t – it wasn’t a disaster at all.

It was – we saw good sales, but we are not fooling ourselves. This is going to be tough sliding there.

What we are seeing is Central Canadian strength. We are seeing that.

Okay, that’s great. And was it – last quarter, you guys kind of spoke to the different banners performance in I believe it was in Northern Alberta.

Can you do that again? I mean, March was looking a bit weak, how about Forzani and CTR?

On the FGL side, Alberta was up 7.6% and the interesting, our flagship store which grand opened and had a huge business last year is up 5.5% year-to-date. So, we are still doing okay there.

It’s not at the banner average. We are still, I think, getting more of our share on the FGL side.

And Mark’s?

Mark’s is little bit tough in the industrial part of the business. But overall, on our casual and the casual footwear part of the business, we are certainly holding our own and actually growing that business.

But when we look at industrial on a nationwide basis, we are actually up in every other province. So, it is strictly an Alberta problem there.

And [indiscernible] has commented on but Q2 I think was a little better and I would expect going forward. But we have taken that into account.

I do think that the strength in Ontario and Quebec we are seeing will help if that continues.

Okay, great. And then just one more switching gears here, can you just give us an update on some of the progress you have made on our digital strategy, at Sport Chek did you guys ran another test period where you shifted all of your ad spend online during the quarter?

On the Sport Chek side, we have run three digital flyers year-to-date. They are all comp, so what we have done is last year we tested against print.

This year now, we are saying if we do a digital flyer against digital flyer how do we do. They have been very successful again.

Two of the three were up double-digit, high single on the other one. With plans this year, we ran five last year, we want to get to 9 or 10.

So our goal is to double the amount of digital flyers, which will mean we will knock some paper out in the second half and do digital versus paper.

That’s great. Thank you very much.

So I would be remiss not going back to retail gross margin. I just wanted to make sure as we now for that collectively had a whole bunch of answers to these questions, that it sounds like on the 75 basis point change, 50% was Mark’s and 50% was the unusual delta minus 1, plus 1 becoming minus 2, right because the FX was offset by productivity initiatives, is that a correct assumption?

Thank you, Jim. That was a good summary.

Thank you for that. Second question, just maybe a bit bigger question, capital allocation, it’s been a while now since I guess there was a lot of conversation about M&A and some conversation about possibly including the U.S.

We are now seeing the Target store acquisition a little bit of an uptick in CapEx spend and at some point in time, we are all going to be asking whether you are going to be renewing a share buyback program or not. So can you just talk to me about where your heads are at right now in terms of all those buckets of use of your financial capacity?

Sure. In fact, I’m going to go – it’s Michael I am going to go off if you ask question about capital allocation because I think about it all the time.

So first of all I want to make it clear that I believe that intelligent capital allocation is one of my primary responsibilities and Dean’s and our Board’s. In fact, I want to make sure you are quite cognizant of – and that we are quite cognizant of our financial flexibility.

That financial flexibility, we gained through strong results and the monetization of certain assets. So one, we are thinking about this all the time.

Second, we know what our financial flexibility is. We have shown that we believe in what we like to call balanced approach to capital allocation.

I am going to unbundle that in a second. We have invested in our business.

We have grown our dividend. We have repurchased our shares and we have made a couple of very successful acquisitions.

But now how you balance can be very different across different parts of the cycle. If we believe our shares are the best use of cash, then buybacks they sure make a lot of sense to me.

And just because you have financial flexibility it doesn’t mean that you have to go buy something. At different points in the cycle, what I would consider a good acquisition can be scarce due to inflated valuations or other reasons.

Now smart and sometimes patient stewardship of your money can be the best strategy. And then we should pounce when the times shift in our favor.

So I guess overall and I will get to a couple your more detailed questions what I want to leave you with is I know that everybody has different opinion on capital allocation. You may not always agree with the one we have or I have and what we are doing with our cash, but I wanted you to know and I hope you will agree that we have taken the responsibility seriously and logically.

We continue to look across all sorts of ways we can do the best by you, our shareholders. And we have said that we will continue to look at share buybacks.

And I assume that you are going to put more and more pressure on getting an answer from us as we move forward in terms of what we are going to do in 2016. We continue to look at acquisitions, which could – can include different points, something in the U.S.

if it made sense. And I have talked about that ad nauseum, I think that we don’t want to get boxed in and not be able to make an acquisition that was great for you, like Mark’s was and FGL was.

I got to tell you, I don’t like the valuations on many things out there. And we remain very picky and we look for things that we can add a lot of value.

I would say that if – and the way we are thinking is evolving. We look hard and if we are going to be an innovative company that is successful for you, over the short, medium and long-term, we have got to be an innovator.

And to look at things in the old-fashioned way is not the way I want to do that and what the team doesn’t want to do. So we pay far more consideration to the new world of retail now than we would have even when we bought FGL Sports and that’s just the fact of life these days.

So, all-in-all, we continue to look at that. I just won’t apologize, I guess for being patient and knowing we are sitting on that financial flexibility that both – we all know it.

But there are times in the cycle to do different things. And I think you have seen the sort of things that we will do and that we contemplate and that our Board contemplates.

So that’s a long-winded answer, but this is – putting up the results and making sure that we look after our shareholders’ capital is major to us. And so I just want to give you sort of the sense of how we think of it and I think of it.

And that we are again cognizant of the responsibility here. And we are thinking through these issues all the time.

And so you all give me feedback and you give all of us feedback when we talk to you and appreciate all that feedback and continue to do that. But we are really thinking through what we should do and what you should do at different times in the cycle.

Is that helpful Jim or do you think you want me to go more through?

That’s helpful. We would always like you to be more specific, but I understand.

That might be a pipe Jim at this point.

If I may just one more question, your depreciation and amortization was up quite materially this quarter, can you give us some indication as to whether this is kind of a new run rate number or was there something extraordinary in the quarter that caused it to jump so much?

Yes. I mean there wasn’t anything terribly unplanned in that, Jim.

We have a number of projects kind of coming on-stream, right. Chad mentioned e-commerce for FGL, as an example.

And our CapEx rate has been elevated, as you know. And Eugene’s team is doing – has been doing an exceptional job getting things kind of, if you will in production, right, over the last year to 2 years.

So we are effectively just kind of stepping up here with respect to depreciation. And unfortunately, depreciation of those if you will, new world assets comes at a much higher rate than if you will, kind of legacy assets or store assets kind of thing.

So I think there is a bit of a step-up here that we should frankly, we should all be well, we are certainly planning for on a go-forward basis.

And when you get to the point where the new DC is close to being operational, is there an extraordinary write-down that has to happen on remaining asset value as you shift from one location to another?

There better not be because nobody has talked to me. So I don’t think there is anything like that.

We will have to Jim there will be some operational impacts, right in terms of – because we won’t shut the lights off in Brampton and turn them on and both done on the same day, but that’s well understood and being managed. There is transition plans underway.

We will have to transition inventory and there will be some – a little bit of noise like that, but no kind of one-time write-down or anything like that. There shouldn’t be any way with respect to anything I am aware of in terms of a transition plan.

Great. Thank you.

Good afternoon. So I just had one follow-up question specifically on the retail gross margin, but looking specifically at Mark’s, if half the decline in the quarter was Mark’s specifically, it was obviously a pretty massive decline for Mark’s.

And I appreciate the comment that the context of Mark’s in the broader company is fairly limited, but certainly later in the year, it can become quite material. So I wonder if you can just sort of talk a bit more specifically about Mark’s and how you think about the next few quarters as it relates to FX pressure and then Michael your favorite topic of the balance of sales and margin and chasing sales?

Why don’t Rick – he knows this business more than anybody. Rick, go ahead first and then I’ll go.

Well, certainly, we benefited when the oil prices were high and there was a lot of infrastructure spending. And now we are taking it the other way.

But when we look at Alberta all-in, our industrial is off and quite frankly, industrial is a large portion of our business in Alberta. However, it is – industrial in the rest of the country is actually up, not up quite enough to offset what’s happening in Alberta, but we have to look at other categories that we started about 18 months ago working on primarily casual footwear men’s and ladies and casual clothing in men’s, particularly denim and outerwear.

And when we look at those categories, our men’s casual footwear business is up over 60% right now. And we are high double-digits in all of the other categories.

So, when you look at the fact that in the quarter, Mark’s ended up at a 2.9% comp despite facing those headwinds. It just shows me that we are actually more than making up on a national basis for the downfall in the industrial business in the province of Alberta.

And that was something that we didn’t know the oil business was going down. We just felt that we were too highly leveraged in one area.

And that business promises to grow, because in more than – we only had that going in about half of our stores last year and we are rolling it out to the balance of the stores, a number of different brands out there and a number of different categories. So, I think that we are going to offset that.

And yes, there will be some margin issues, because the industrial business, especially the footwear, trends at a much higher natural margin rate than does casual footwear some of these other categories, but we are hoping to offset that as much as possible, but I don’t have a crystal ball. So, I can’t tell you if it’s going to be 100% offset or not.

Yes. So, that was a great synopsis by Rick.

I just would like to say though that in terms of that balance that I am always talking about in terms of sales and margin and I – at first glance, you think I could have said today that we bought some sales at Mark’s, because obviously, their margin was off and their comps were actually up, but it’s not that at all. It’s – it was currency, but it was that mix issue from a business that is the industrial business is, I think the highest margin business across all of our CTC categories, CTC.

And so – and then we grew a business which is still good margin, but not industrial wear. And so when you make that trade-off, dollar sales for dollar sales or in this case, dollar two sales for a dollar, you still look on the margin line like you have done something wrong you are buying sales, but it didn’t happen.

Now, if it happens, I will tell you, but I think this was not because of that at all or I would have called it out. So, thanks for asking that.

So the margin pressure really was partly intentional and in terms of trying to grow the casual wear business, which is lower gross margin and partly just macro driven in the sense of the weakness in Northern Alberta?

Yes. I mean, we started dumping it on Mark’s here.

And I would say internally, Rick ran the business pretty well to get where he got to be honest with you.

Yes, okay. I appreciate that.

Thank you.

No problem.

Hi, thanks for taking my question. With respect to the gross margin rate delta, that 75 bps was [Technical Difficulty].

The FX was offset by productivity initiatives, but you mentioned productivity initiatives were in COGS and SG&A. So, when you are saying it offset are you talking at the COGS level or across both?

COGS.

Got it, okay. In terms of the timing issue that you have referenced year-over-year, does that mean that next quarter – I am just having difficulty understanding the cadence of that timing issue.

Does that mean next quarter, we could see some catch up with that timing issue or we already lapped it?

I think we have lapped it, Vishal. It’s more of a Q2 phenomenon, quite frankly.

And as I said, I want to stress, but – and this is a worry when you talk about stuff like this, but I want to stress that individually, it’s not that big a deal. It’s frankly just when it goes one way one year and the other way the other year.

It’s just that sort of compounding effect, but it’s more of a Q2 phenomenon quite frankly. So, I wouldn’t be fussed about it in terms of the rest of the year.

Okay. The showcase store that you opened in Edmonton is that a dealer store or is it corporate?

That’s a dealer store.

Okay.

All of our Canadian Tire stores, our Canadian Tire retail stores are dealer stores.

And that will continue to be the case?

Correct.

Okay.

We are very pleased with that, that method of business at Canadian Tire.

Okay. With respect to financial, I think I heard that one measure once you put on the gas with respect to growth a little bit more than the prior quarter.

Just given that markets are continuing to be soft, bankruptcies trending higher, I was wondering why you made that decision?

I would put it – I will let Mary go, but I would try to describe it little differently. I don’t think we have taken our – what we have done is we have taken our foot slightly off the brake a little bit.

We have let up on the brake. We haven’t put it on the gas.

And I think that’s a better way to characterize it, but that’s good that you are clarifying that, but Mary if there is anything else you want to mention on that?

Sure. So, I think we have been tightening for a good six months or more.

So – and we have seen some very much improvement in the quality of our portfolio. But our growth has slowed quite a bit.

So, I think we want to be cautious, which we will be cautious. But we have the ability to, as Michael said, take the foot off the brake a bit.

But if we see anything we don’t like, we can put it back on very, very quickly. The impact takes longer to be realized.

It can take months for you to start to see the impacts, but we can literally tighten up overnight if we start to see trends that don’t care for. I am trying to balance not providing services to really good customers across Canada.

There is many, many people in Alberta or elsewhere in Canada who are very creditworthy. And we would like to help them with our products, but at the same time, trying not to be too optimistic about what’s going on in the economy, because it’s pretty hard to tell what’s going on.

And it’s hard to see that it’s going to improve very quickly. So, I don’t think you should take from my comments that I am, in anyway, a bullish optimist, but I think we are going to be very, very cautious in whatever we do as we have been for sometime.

Thank you for your comments.

Thank you. I just have a few follow-up questions.

First on the productivity initiatives, back on Investor Day, you talked about the cost reductions and you put them into three buckets, and I am wondering if you are able to maybe quantify maybe just percentage wise in each phase where you think you are with respect to achieving those? And then have you seen the opportunity growing since October as you peel back the onion and you are showing some success as you mentioned the 45 basis point increase?

Yes, Brian, it’s Dean. We haven’t – I am getting some blowback here in terms of feedback.

But if I was to bucket them, the first bucket is well underway in terms of the non-merch planning and we have made some good progress there. And I would say – I am not going to give you a percentage, but I would say we are very, very well with a number of initiatives being executed by Lisa and team.

On the second bucket, Michael referenced overheads and the emphasis, if you will, with respect to that category. And we had some tangible results.

And in fact if there is some severances Michael mentioned buried in our numbers in the quarter. So, I would say that one is well underway as well.

I think the COGS is – in terms of the pace, if you will, of play there, I think we are probably in the earlier stages, but it’s been very, very beneficial as Allan alluded to and as I alluded to in terms of being able to offset the currency headwinds. And it really encourages us as we look forward to the future here.

And as Michael said, this is something that it’s a muscle that we are going to make stronger and stronger in terms of the organization that’s going to serve us extraordinarily well when we – when and if we do come out of kind of the current, if you will, currency environment.

Okay. Turning gears a bit, if I just look at the balance sheet, I appreciate your capital allocation commentary.

But if I look at the retail balance sheet, you have got over $400 million of net cash. Presumably, the second half, you are going to have some decent cash flow from operations.

You are going to call it in line with CapEx. Some of this is going to go to your buyback.

I think when we spoke earlier you mentioned allocating some of this balance towards a maturing obligation. I am just not sure I understand why we wouldn’t access the external markets to fund Financial Services obligations at attractive long-term rates rather than using the cash or retail?

We have talked about this before, Brian. And we look at it in terms of managing our cash position on an overall corporate basis.

And you are right the opportunity to self fund all of our businesses is there. We demonstrated that in terms – took a big step as I said in terms of the REIT testing capital markets.

Financial Services certainly has the ability to raise its own money. But if we have, if you will, the opportunity to go to market as we did with respect to the recent securitization deal that we did and we are a couple of factors in that.

We want to do larger deals, probably less often, because it’s the ability to attract more institutional interest into those deals. So, the recent one, we did was $500 million.

So, we kind of, if you will, accelerated doing that deal to take advantage of that. And as a result, we are going to be sitting on a little bit of money that’s earmarked to repay the $250 million tranche of securitization that comes due in November.

So, we manage on kind of an overall corporate treasury point of view. And sometimes, we will fund CTFS as it leads up to doing a securitization deal.

But you are absolutely right, there is the ability to fund all three of those, if you will, all three of the businesses, three areas, if you will, of the business with their own sources of funding as you are well aware.

Okay. Last question just in terms of surplus real estate that’s appropriate for the REIT, I think you had mentioned $1 billion with the transactions both into the REIT and additional acquisitions you have had.

Would it still be in that range?

Yes, we kind of – we shift more in and we put more on the books. So, it’s kind of hovers right around that, right, give or take, any given time, so yes.

Yes. I would like to go in more around the gross margin if we can.

Just in terms of Mark’s I understand that industrial wear was up in Canada, except Alberta. So, I am just trying to really and that it almost offset the decline in Alberta.

So, I am just trying to understand why the gross margin took such a decline?

When you take a look at it from a sales perspective, it was – industrial was up everywhere else in Canada, but from Alberta – except for Alberta. However, the margin is still down in those – in our biggest province for selling industrial wear.

And the margin hit there, we were not able to offset with increases in lower margin other categories that we used to get us a comp. There is quite a massive difference in actual margin rates between industrial and casual apparel and footwear.

But what he wants to know is if industrial wear was up everywhere else, did it offset the down in Northern Alberta or how big is Northern Alberta deal in other words?

I don’t want to get – I will not get into total percentages, but it was not enough to offset – the increase in the rest of Canada was not enough to offset the downturn in Alberta.

That’s how important the oil patch is to industrial, well, if it’s in Mark’s, it means in Canada so...

Does that answer what you are looking for?

Yes, thanks. And then just maybe on the cash, maybe I can ask in a simple way, just to run the business in an effective way and in a prudent way from the Chief Financial Officer’s point of view, what would be the sort of cash balance that you would run the business with?

Well, that’s a unique way to go at it, Keith. Yes.

I guess we are very pleased with having a lot of financial flexibility as Michael mentioned. And from a growth perspective, I mean, we are investing heavily in the businesses, right, in terms of the capital spending program.

You saw us pump that up a bit. We have also made some incremental investments in inventory, which I think are helping to fuel the top line, particularly at Mark’s and – well, in Mark’s, but particularly in FGL.

And our e-commerce businesses as those ramp up we will be putting, I am sure, additional investment into those businesses to support growth there that we are expecting to achieve with the investments that we are making in those areas. So, I haven’t got a number that I am going to give you, but I think the reality is we all know that we have more financial flexibility and more financial capacity than we need to run the business day-to-day.

That said, we are positioned to, as Michael said, capitalize on opportunities if and when they present themselves and fund, if you will, all the capital allocation priorities that Michael laid out earlier in the call.

Thanks. And then just a question on the sporting goods environment, are you – do any of your stores feel the impact of Cabela’s or Sail or I mean, obviously the numbers are very good that you are posting, but did you notice any of them when we open up in your trade areas?

No, we haven’t yet. It’s Chad speaking.

In fact, the average spread is going very nicely over the last couple of years. So, we are quite excited about our outdoor business.

And we preference, I’d like to put my Atmosphere very close to Cabela’s to take some of that draw. So, we haven’t felt it yet.

The only soft part of our business right now is Quebec. The rest has been solid throughout both in outdoor and in sporting goods.

Thank you. And just finally, on the Edmonton store, is the 140,000 selling square footage or the store boxed?

Yes, that’s the retail square footage. That’s the selling floor plan.

Great, thank you.

Thanks. We had a lot of questions today and that was not unexpected and I hope we are able to answer those questions.

If you have more questions or ones you don’t want to share publicly, we are here and listening. So, thank you very much for your patience and your time today.