Canadian Tire Corporation Ltd

TSX:CTC.A

Earnings Call Transcript 2020-Q2

[Operator]

Good morning. My name is Melanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Canadian Tire Corporation, Limited second quarter results conference call. [Operator Instructions]This morning, Canadian Tire Corporation, Limited released their financial results for the second quarter of 2020. A copy of the earnings disclosure is available on their website, and includes cautionary language about forward-looking statements, risks and uncertainties, which also apply to the discussion during today's conference call.I will now turn the call over to Greg Hicks, President and CEO. Greg?

[Gregory Huber Hicks, CEO, President & Executive Director]

Thank you, operator. Welcome, everyone, and thank you for joining today's call. With me this morning is our CFO, Gregory Craig. And yes, we are sitting at least 2 meters apart. Something we've gotten quite used to by now.When I first took over as CEO, I committed to being transparent and open. With our employees, our customers, our dealers and our investors and analysts. So again, this quarter, I'm going to take more time to go deeper in our disclosures and try to provide you with an understanding of how our business is performing given this volatile and unique period.Q2 certainly presented some considerable challenges. It was, after all, our first full quarter operating in the eye of the pandemic. On our Q1 call, I indicated that the impact of COVID-19 on our earnings would be more significant in Q2, and this is, in fact, the case. I will take you through the insights behind the quarter, and Gregory will provide you with more detail later on in the call. There is no doubt that the headwinds affected our earnings. However, there is still a lot to like about this quarter. I will start by saying we believe, due to the pervasive temporary store closures across all banners, that comparable sales is not a meaningful metric in this quarter. Retail sales, however, is a very meaningful metric. Despite having 80% of our store network closed for the majority of the quarter, we delivered exceptional retail sales growth at 9.3%, excluding Petroleum. This success can be attributed to our brand's purpose: providing the products, services and support our customers need for life in Canada, regardless of what life may look like. It is also because of our people, especially our frontline store, DC and contact center employees, and our dealers, who stepped up to support our company and our communities during what were uncertain and extremely challenging times.Now before I elaborate on the specific banner results, I can't possibly talk about Q2 without first commenting on the remarkable growth of e-commerce across all of our businesses. With the stores closed and consumers sheltering at home, they naturally turn to e-commerce, enthusiastically shopping to meet their everyday wants and needs. E-commerce demand exploded in April and May, and in June we saw new heightened levels relative to pre-COVID-19 activity. In the quarter, our consolidated e-commerce business reached over $600 million in sales, up $500 million or 400%, with CTR, SportChek and Mark's up 500%, 300% and 350%, respectively. To help meet this new heightened demand, we swiftly implemented curbside pickup across all of our banners, ensuring Canadians could continue to shop with us regardless of store closures. As customers turned to our digital platforms, we experienced incremental visits to our banner websites, including a remarkable increase at CTR of over 100%. Our loyalty customers opted to shop online with us more, with a significant engagement in online shopping through their mobile devices. And we capitalized on this consumer shift to digital by growing our unique mobile app users to over 2 million, which was a 37% increase compared to Q1; and continued our progress and growth of our contactable e-mail list during the quarter. Although early in the quarter, we had some struggles with the CTR website, which we've talked about previously, our teams and capabilities pulled through, and I am incredibly pleased with the engagement and continued relevance achieved with our customers throughout the quarter. It's imperative that we continue to provide relevant, personalized content in these channels to keep customers engaged moving forward. This quarter, we proved beyond a shadow of a doubt that we are relevant in an increasingly digital world. We find ourselves having leapt forward about 2 to 3 years in our e-commerce and digital journey. This quarter's results will pay dividends for us when it comes to delivering on the objective of remaining relevant to our customers.Now let's talk about the quarter by banner, starting with Canadian Tire Retail, which generated an outstanding 20% retail sales growth, even with 203 stores in Ontario closed for the first 5 weeks of the quarter. Excluding Ontario, CTR sales were up a remarkable 30%, while Ontario grew at a more modest yet still impressive 9%. It's hard to put this quarter -- CTR's 25th consecutive quarter of growth -- into perspective. When I was President of CTR, I always thought that a great year meant delivering an incremental $300 million in POS. Well, we delivered twice that number in this quarter alone. Just under $600 million of incremental sales. And I can tell you that T.J. Flood says it's all about the leadership. And while I admit that he isn't entirely wrong, the success we had at CTR is a testament to our unique multi-category assortment.Staying home, shuttered stores and social distancing protocols didn't change the essential role that Canadian Tire plays in the lives of Canadians. They amplified it. Throughout the quarter, we saw fundamental shifts in consumer spending habits, activated by COVID-19, including a macro trend indicating that customers are now, more than ever, looking for a one-stop shopping experience. Our performance in the quarter grew progressively stronger as our customers' wants and needs evolved, and the number of relevant categories continued to grow accordingly.In the first few weeks of April, growth was driven by 25% of CTR's categories, primarily health, cleaning and safety products as well as a short list of products such as bicycles, toys and games, from what we are calling our board and busters category. And as Canadians began to settle in and accept staying home as a part of their new reality, we continued to adapt, and our short list of board and buster categories expanded to include a wider assortment, such as gardening tools and products, patio furniture, barbecues and inflatable pools. By the end of June, more than 80% of our categories were growing at a double-digit rate. CTR's growth trajectory went from a decline of 1.8% in April to a growth of 25% in May and peaked at 38% in June. And while our automotive job categories took a back seat in the quarter, automotive joys, such as car washing, cleaning and road trip preparation products were thriving. And the performance of our own brands portfolio was strong in the quarter, plus 26% at CTR, reflecting the home-centered activities that were on customers' minds. MasterChef, Paderno and Vermont Castings delivered leading growth in our kitchen and outdoor cooking categories, and as Canadians look to make the most of their backyards, brands such as [ Canvas ], Yardworks and Premier resonated well. And while CTR traffic was down in April, this decline reversed once Ontario stores reopened in May, and we feel good about how our traffic trended to end the quarter.Our multi-category mix clearly delivered, as the average basket in the quarter increased 34% versus last year and was a key driver of our growth in the quarter. We experienced growth in both units per basket and average price per unit, with slightly more of the growth driven by price per unit. With family fun as the core theme of our growth-driving categories, it's not surprising that disproportionate growth in the quarter was driven by our coveted active family segment, who are very engaged in household jobs and joys. Our active family spend per customer was up significantly, driven by a large shift to e-commerce. And we were very pleased with the engagement of young adults in the quarter. As they engaged with us through their e-commerce adoption, we saw very strong spend per customer increases of over 30% -- 33% in this segment.We truly understand what is happening in our business right now. Triangle Rewards enables us to know exactly how our customers are engaging with us in a time like this. Adapting and growing our relevance with key customer segments such as active families and young adults, will only benefit us going forward. While we saw strong top line sales growth at CTR in Q2, we cannot deny that there was a significant gap between POS and revenue. Retail sales were up 20%, while revenue only increased by 1%. Several factors led to this, most notably being that only 1 week into our second quarter on April 4 our Ontario CTR stores were closed to the public, restricted only to e-commerce through curbside pickup or deliver to home. And given this uncertain outlook for store reopenings, our Ontario dealers reduced their orders substantially. And throughout the 5-week closure period, Ontario shipments declined 26%.The provincial breakdown of our dealer shipments is quite telling. Excluding Ontario, dealer shipments, the closest proxy for revenue, grew 16% in the quarter. At the same time, Ontario declined by 9%. Combine this with the unprecedented and unpredictable demand for products such as bicycles, pools and outdoor furniture, and consumer demand far exceeded both historical demand and available inventory. To put that in perspective, in Q2 we saw categories generate sales that we typically see over an entire year. Our teams are continuing to work through these orders, which means shipments to the stores are still catching up to sales. Our vendors, too, are working around the clock to manufacture product and keep up with this unprecedented demand. We are taking additional actions to adjust and increase our forecasts and future purchases, working to decrease vendor lead times and increase capacity at our distribution centers. Although we could not have predicted this, I am confident we are doing everything we can to close the gap as we progress through the balance of the year.I also want to give credit to our Canadian Tire associate dealers for understanding and quickly reacting to their communities' needs and prioritizing top categories through dynamic merchandising. From offering the right products to meet customers' unique jobs and joys, to providing the necessary community support during times of heightened need, our dealers enable us to keep our customers at the center of our decision-making. They position us to do what all retailers strive to figure out: how to think and act at a local level. As we continue to move forward, I am confident that local and personalization through Triangle Rewards, combined with the power of our dealer model, will continue to be incredibly important. Scale has proven its worth, especially through the crisis, but local trumps scale, and our dealers have always been an integral part of delivering on this.Now moving to our other banners results. At SportChek and Mark's, with stores closed for the majority of Q2, retail sales for the quarter were down 25% and 36%, respectively. Despite the challenging environment, we wanted to be there for, and remain relevant to, our customers. We made a deliberate decision to move through our inventory and improve our cash position, relying heavily and almost exclusively on e-commerce, in order to end the quarter in a better inventory position and to stay as relevant as we could to our customers. This decision had an impact on our gross margins, and Gregory will give you some more color on that in a moment. We were pleasantly surprised with the amount of sales we were able to hold onto, and very pleased with how dynamically our store teams reacted in winding down and winding back up operations. The team showed incredible resilience in the face of continuous change, implementing curbside pickup for the first time in the quarter in order to continue serving our customers safely and conveniently. As SportChek and Mark's stores reopened, sales rebounded. Store traffic increased, and retail sales in June at SportChek and Mark's were 3.2% and 3.4%, respectively. In keeping with CTR, we maintained our relevance to our customers at these banners.For Helly Hansen, most of our wholesale customers were closed across the globe in the quarter, as were our distribution centers and retail stores. As a result, revenue for the quarter was down 21%. Similar to the story at SportChek and Mark's, the business started to pick back up in June and was up 8%, driven by continued strength in e-commerce.Before I move on to customer experience, let me give you a quick update on our banner performance in July. At CTR, the momentum that we saw in June continued through July, and revenue is performing at similar levels. At SportChek and Mark's, performance is also progressing. And with respect to profitability, gross margin rates at SportChek and Mark's have started to stabilize with both the stores and e-commerce channels fully operational.Across all of our banners, one thing is clear: the importance of customer experience. Regardless of how and where our customers choose to shop, a frictionless experience is not simply valuable; it's critical. So while we improve the experience and scale, and now have the capacity to process and sustain the monumental shift in e-commerce demand, we knew we had to accelerate our plans to invest in our digital platform for the future, bringing our banners together in one digital platform. We continue to work diligently on our digital platform upgrades. And we recently invested in software that helps us diagnose customer pain points along the path to purchase, enabling us to better prioritize our future investment in digital technology. This software allows us to understand the customer experience at almost every touchpoint in a customer's journey: On the site, in the parking lot for curbside pickup, during the wait time for store pickup, at the cash register, auto service desk, returns or paint counter. And we can dissect and improve at the national level, the store lever -- level and all the way down to customer. By continuing to grow our data and analytics capabilities, we can clearly see where we stood up and exactly where we stumbled, enabling us to continue moving towards a seamless omnichannel customer experience. Through data, we can act, and act quickly, on what we know about our customers, not on what we think we know. As we move forward, this will continue to reinforce our relevancy as we further our customer-centric focus across every touchpoint. We are hyper-aware of the importance of customer acquisition for the long term, and know that we have work to do to improve our customer experience.With that, I'm very pleased to tell you that Susan O'Brien has been appointed as our new Chief Brand and Customer Officer. In her new role, Susan will oversee all aspects of our brand and align the curation of the entire customer experience, both online and in-store. I don't need to tell you that the pandemic has dramatically changed consumer shopping habits and expectations quickly and permanently, amplifying the vital importance of omnichannel. I'm confident that bricks-and-mortar retail will continue to be important. COVID-19 has only reinforced that people crave human interaction and experiences, but we know that e-commerce and digital channels will continue to play an even bigger role moving forward. Our relevance and path to prosperity are contingent on omnichannel success and ensuring we can continue to serve our customers wherever they need or choose to shop.Considering the obstacles in the quarter, I'm pleased with our inventory position. Inventory at CTR was leaner due to the exceptional consumer demand, and lower at Mark's and SportChek as a result of the team's focus on moving through inventory. We talked on our last call about the need to focus the organization more on cash flow, and I'm happy to say that at the end of the quarter, our retail cash position improved by $300 million versus last year, with inventory being one of the key drivers of this result. Looking ahead, remaining relevant and meeting customer demand is our #1 priority, and our merchandising teams across all banners are laser-focused on planning for consumer demand over the balance of the year. Gregory is going to give you a more detailed overview of our financial services business performance in just a moment, but I first want to reiterate the integral role this business plays in our customer-centric focus. Not only does our financial services business bolster our ability to support our customers during times of financial hardship through programs such as in-store financing, deferred and skip payments, but our credit card is an incredible asset for our entire business. It provides valuable data from which we glean insights into customer buying behaviors, not just at our banners but overall. Financial services is in a strong financial position. The business is well capitalized with access to multiple sources of liquidity. We have an experienced management team and proven credit risk capabilities, and we remain comfortable with the level of risk in the portfolio.And with that, I'll pass it over to Gregory.

[Gregory George Craig, CFO & Executive VP]

Thanks, Greg, and good morning, everyone. Consistent with the approach I took last time, I'll provide some color on the major financial impacts in the quarter and then highlight the key trends in our financial services business.If I start with the additional context on the quarter, our reported diluted EPS in Q2 was a loss of $0.33, and a loss of $0.25 when we normalized for the $6 million in operational efficiency charges we recorded in the quarter. This is compared to a normalized EPS of $2.97 a year ago. As was the case in the first quarter, COVID-19 continued to affect many aspects of our business, putting pressures on our revenues, cost structure and overall profitability, which resulted in several impacts on our consolidated earnings and EPS that I will highlight next.First, let me start with the store closures at our SportChek, Mark's, Helly Hansen, PartSource and Pro Hockey Life banners. Although stores started to reopen in the third week of May, this put a significant pressure on our ability to generate revenue at normal levels. Collectively, the revenues of these banners declined $300 million in the quarter compared to last year, and the corresponding margin loss was the single-largest contributor to our year-over-year decline in earnings this quarter. We also incurred $41 million of incremental operating costs in the quarter directly attributed to the company's COVID-19 activity, including the temporary special support payment at our corporate stores, our call centers and distribution centers as well as costs associated with the enhanced safety protocols in our stores. This translated into a $0.50 EPS impact.Next, before I discuss the impairment-related items, I should highlight that the negative year-over-year variance in other income and expense of $62 million reflects a gain of $17 million and a currency translation gain of $10 million, both recorded in 2019, and in 2020 a Helly Hansen currency loss of $6 million. This year, in light of the challenging macroeconomic environment brought on by the pandemic, we were required to conduct a thorough review of our assets. As a result, we recorded $28 million of impairment costs due to an expected delay in the execution of our growth plans for the Musto brand and a reduction in the projected cash flow from select stores within our SportChek network. These were noncash charges that are -- impacted our EPS by approximately $0.36 in the quarter. And the final major impact was a benefit of $27 million, or $0.29 in EPS, driven by a partial recovery of our share price in the second quarter, after experiencing a significant loss in share value in Q1, which was recorded in operating expenses. This quarter, we benefited from the expense-offsetting function of these equity hedges as our stock continued on its path to recovery.I will now spend some time going over the key performance metrics of our retail business and our liquidity and cash position before I go on to highlight our financial services performance. As it relates to revenue, I have already highlighted the $300 million decline in the banners that were subject to store closures, and Greg covered our CTR retail revenue results in the quarter. So in the interest of time, I will move on to our retail gross margin rate which, excluding Petroleum, declined 311 basis points in Q2 compared to last year. Reduced margin performance -- reduced margin contribution from higher profit banners such as Mark's, SportChek, Helly Hansen were a contributing factor to the deterioration in the margin mix. Within CTR margin, the rate improved slightly due to a favorable shift in the shipment mix, with a higher proportion of seasonal and playing products in the quarter. The other retail banners experienced significant margin pressure in the quarter, driven primarily by higher e-commerce penetration due to store closures. Also, at Chek and Mark's, our focus was to maintain our relevance to customers in this challenging marketplace, and we made a conscious decision to remain competitive and drive top line sales, enabling us to convert inventory on hand into cash. And what we're seeing in July is that with our stores now fully operational and e-commerce no longer the predominant sales fulfillment channel, gross margin rates at Chek and Mark's have started to return to more normal levels.As you know, our consolidated OpEx ratio is a key metric and area of focus for us. It experienced significant pressures this quarter, increasing 108 basis points versus the prior year, driven primarily by the impact of lower revenue contribution from our retail and financial services businesses. Additionally, while relatively flat to the prior year, operating expenses were negatively impacted by the incremental COVID-related expense of $41 million and benefited from the increase in the mark-to-market value of our equity hedges of $27 million as well as savings in our marketing spend and our OE program savings. Adjusting for the COVID-related impact -- items impacting our expenses and revenue, consolidated OpEx ratio would have improved by 170 basis points in the quarter.During the quarter, we continued to prioritize the health of our balance sheet and maintaining our financial flexibility. I would like to remind you that in the second quarter, we secured additional backup credit facilities of $710 million for our retail business. This facility is available through to March 2021 and has not been utilized.At Financial Services, we preemptively drew on our note purchase facility for approximately -- for approximately 2.1 -- for approximately $1.2 billion in April. The preemptive draw was done out of an abundance of caution, as we faced significant uncertainty in the early days of the pandemic. We have already repaid $500 million, and intend to repay the balance by the end of October. And in June, we repaid the $250 million owing on the medium-term note that was issued in 2019 with a view to delevering. We also continue to operate on a reduced capital spend budget for the year, deferring all nonessential projects. And our capital spend, $55 million lower in the quarter, reflects just that. We are still executing on our critical projects relating to strengthening our digital platform, operational efficiency initiatives and a new dealer ordering system.As mentioned in Q1, we paused our share buyback program and have not repurchased shares other than for anti-dilutive purposes. We finished the quarter in a strong cash position with $2.3 billion of cash and marketable securities, which was an increase of $1.4 billion over the prior year, reflecting the preemptive draw at Financial Services, lower loans receivables and lower levels of inventory.Turning to Financial Services. GAAR was down 3.6% for the first time after 16 consecutive quarters of growth. As we indicated on our Q1 call, we knew that ongoing restrictions associated with the pandemic would lead to reduced consumer discretionary spend and lower sales on the card, which led to a reduction in receivables. As a result of these trends, Financial Services revenue in the quarter was down $20 million versus prior year, directly impacting gross margin. While portfolio delinquencies were favorable in the quarter, with our PD2+ rate being 17 basis points better than the prior year and our write-off rates being on par with Q1's performance, again, as we highlighted last quarter, we believe that government subsidy and financial institution relief programs are masking the underlying trend. We recognize it is highly unusual to see an improvement in delinquencies at the same time as we see a higher unemployment rate. We believe this trend is temporary, and expect to see the impact of the economy on our credit risk metrics once government subsidies and financial institution relief programs come to an end later this fall.As you know, under the IFRS 9 accounting standard, we are required to record expected losses upfront on a forward-looking basis. And while the current operational trends continue to be strong, the accounting standard requires us to increase our provision for credit -- for future losses, reflecting our updated assumptions about the economic environment and outlook.So with that in mind, allowances increased since Q1, contributing to a decline in our margin of approximately $27 million year-over-year. In the quarter, the allowance rate, or ECL rate, has increased to 14.98% compared to 13.64% at Q1. I think the simplest way to think about this increase in the rate is to look at our volume of receivables. When we started the quarter, we had a growth in receivables of 3.4% compared to last year, and we ended Q2 with receivables being down 5.6%. The substantial decrease in our receivables in the quarter has resulted in the allowance rate rising to 14.9%. However, had receivables grown at the same rate as they did in Q1 2020, our allowance rate would have been 13.7%, essentially flat to Q1. Finally, also reflected in gross margin is an increased funding cost of approximately $4 million, the result of the preemptive draw on our note purchase facility that I mentioned earlier. As a result of these factors in the quarter, the business delivered earnings before taxes of $51 million, down $45 million versus the prior year.Looking ahead into the balance of 2020, we will continue to assess this on a quarter-by-quarter basis, as we follow closely potential developments associated with government subsidies and the financial institutions' relief programs. As you know, we take great pride in our Financial Services business, its strengths and the role it plays at CTC. It is in a strong financial position, well capitalized with access to multiple sources of liquidity and has an experienced management team with proven risk and collection capabilities who are doing an excellent job leading the business through this environment.With that, I'll hand the call back to Greg for his closing remarks.

[Gregory Huber Hicks, CEO, President & Executive Director]

Thank you, Gregory. Overall, there is no denying the fact that COVID-19 presented us with significant challenges in Q2. But just as we faced these challenges head on, we will capitalize on what we've learned.Last quarter, I spoke to you about how we've entered our next chapter. As we move forward, I remain committed to continuing with transparent communication, prudent management of our cash and investments, and focused on long-term strategy and growth. And we're building a team that will deliver against these priorities. I'm pleased to tell you that Paul Draffin has been promoted to Chief Supply Chain Officer, leading the entire supply chain function in support of our One Company, One Customer strategy. Our supply chain is a pivotal growth function and a key competitive differentiator. It plays an important role as we continue to hone our customer experience. And after several months of playing a critical operational role in navigating COVID-19, Stephen Brinkley has been appointed to the role of President, SportChek.We also remain committed to, and are making good progress, in our operational efficiency program. All existing OE work streams continue to prioritize the execution of initiatives that are expected to generate benefit in 2020 as well as those with high strategic importance, such as e-commerce fulfillment, workforce mobility and our transportation management system implementation, among others. We continue to be on track to achieve our stated target of $200 million plus in run rate savings by 2022.Throughout Q2, we remained agile. We made decisions and implemented new programs quickly. We learned what is working and what must change. We faced obstacles this quarter, some of which became stumbling blocks and are reflected in our results. But given what we achieved in the face of the COVID-19 crisis, our current trajectory and our extreme relevance to Canadians only furthers my confidence in our future: a future where CTC emerges as a clear winner.With that, I'll turn it back over to the operator for questions.

[Operator]

[Operator Instructions] The first question is from Irene Nattel of RBC Capital Markets.

[Irene Ora Nattel]

I'd like to drill down a little bit more, please, into that disconnect between retail sell-through and shipments to dealers in Q2, and how we should expect that to sort of converge as we move through Q3, Q4, Q1 of next year?

[Gregory Huber Hicks, CEO, President & Executive Director]

Sure. Irene, it's Greg. I'll take that one. We figured that, that would be on your mind. We tried to give you some appropriate color on this in our prepared remarks, but realize that most of our commentary is looking back. So let me try and give you a little more in terms of our expectations here.First, when POS spikes in CTR, revenue always lags POS. We told you on our Q1 call that we were down about 2% in POS for April. So suffice it to say, as per my commentary, the sales came back hard throughout May and June. And we were chasing store orders, both in terms of getting them out of our building and in terms of supply, with huge spikes in demand. The other thing to keep in mind is that CTR revenue includes revenue from banners like PartSource and Pro Hockey Life, which were closed for much of the quarter. So there's a drag there of a few hundred basis points in the quarter. I can tell you the associate dealers are ordering aggressively. They may have been a little skittish when this all started, especially in Ontario, which is totally understandable. But they're ordering aggressively now. And as I said, we're very busy in our distribution centers and with our factories, moving product through the supply chain. Our inventory levels, both corporately and at retail, have seen material drawdown, and both will need to be replenished. So when we look forward, to understand revenue, we break it down in terms of seasonality. Our nonseasonal business is very strong. And looking forward, we expect revenue to outpace POS for the balance of the year. There was a pretty sizable gap of about 15 points in Q2, with POS outpacing revenue, but we expect that to completely turn in these non seasonal businesses. And in Q2, this [ best ] business represents about 50% of our total business. But as we move forward, it becomes a more and more important part of the mix. In Q3, it represents about 60%; and in Q4, it's around 70%. So we're planning not only for great POS in the back half in these businesses, but there is drawdown at retail that needs to be replenished.When you look at our spring/summer shipments, they are very strong right now, as supply is -- as resupply is being secured. But as the season winds down, this business becomes less and less relevant in terms of its total importance. This is going to set us up well for strong Q1 and Q2 shipments in 2021, as we replenish stores for the drawdown we will see coming out of this quarter. And when we look to fall/winter shipments, we expect these shipments to closely match our POS, given increased forecasts, and expect it to be very strong based on orders that we're already seeing to date from the dealers. So overall, we are, every day, seeing the gap narrow here through this quarter, and we are very bullish on our ability to satisfy dealer demand going forward as we plan out the balance of the year.

[Irene Ora Nattel]

That's great. That's really helpful. A couple of follow-ups, if I may. First of all, when you look at your Triangle data, what does it show you about CTR share of consumer wallet this year versus last year? Do you think that you're gaining or losing share, or staying the same?

[Gregory Huber Hicks, CEO, President & Executive Director]

Well, we've got 2 data points that we look to. We really wish we'd have a real external source on market share data for the categories in which we compete. We've got one external source that we've been using for the course of the last 2 or 3 years, and [ I think ] the data is getting more and more relevant as we move forward. And it would suggest that we are taking a significant amount of share in the categories in which we compete, both at the total level and then when you break it down between bricks and e-commerce, which the reporting does. And then second, and Gregory and I have both talked about this a few times, is if you want to know what's going on with retail in Canada, you can just ask us because we see spend data across the card and can break that down for any retailer that we have data on. So we have a daily report that we look at with interest every day, that tracks the pre-COVID and during-COVID spend. And let's just say we feel very comfortable and confident that we're taking share right now.

[Irene Ora Nattel]

That's great. And just one final question, if I may. With respect to the gross margin compression of 300-ish basis points in retail, the comment was made that part of that was e-commerce. Would you be able to tell us how much of that was e-commerce?

[Gregory Huber Hicks, CEO, President & Executive Director]

It's roughly about 2/3. It's a significant portion of the denigration.

[Gregory George Craig, CFO & Executive VP]

Yes. I think -- Irene, it's Gregory here. The way that I think about this is, as we talked a little bit about -- as Mark's and Chek have returned to growth in June, we've seen kind of their margin levels return more back to their historical norms. And again, you have to remember that in April and May, it was really only e-com. It was pretty much 100% of their sales. So I mean -- so I think, as I say, as you look forward, we're -- again, it's still at elevated levels. The penetration rates are still greater than they were a year ago. But I think what you're seeing is they're coming closer to what you would -- what we would expect them to be.

[Gregory Huber Hicks, CEO, President & Executive Director]

Yes. And I would just add, Irene. I mean lots of scale came at us all at once. And to Gregory's point, not so sure we're going to see 100% e-commerce penetration again, at least I hope not for the same reason. So we've got work to do on the variable cost structure attaching itself to our e-commerce fulfillment. And we've got a pile of stuff on the go here, including outsourcing -- or sorry, crowdsourcing delivery, reducing mix shipments, we're geofence -- we're testing now some geofencing tests. And we're building a new distribution center for FGL, which is about more automated, a pick-and-pack fulfillment for e-commerce. We're certainly going to benefit from increased penetration going forward as we see kind of package density come along with that, but know that this certainly is a big area of focus in our operational efficiency work efforts.

[Operator]

The following question is from Vishal Shreedhar of National Bank Financial.

[Vishal Shreedhar, Analyst]

Just on the -- as you look at these customer changes, the behavior changes, it happened very quickly. So wondering if you have any perspective on how the customer may behave [ if at ] possible next year. Will work from home have an impact on these backyard and board-and-buster categories? Will that persist? Or was that kind of a onetime windfall? Maybe I'll just start with that.

[Gregory Huber Hicks, CEO, President & Executive Director]

Yes. Maybe I'll take that. That's -- tough question, Vishal. I mean I think we -- when we -- we think a really important metric to look at more deeply in many, many categories is household penetration. And in many of the categories that have seen tremendous upside in terms of demand here, the household penetration is still quite low. And as long as people are at home, I can't kind of forecast what employment and all that's going to look like next year, I -- we really believe that this is a trend that's going to stick around. And our categories, whether it's jobs or whether it's joys, whether it's inside the house or whether it's outside the house, we have an extremely relevant assortment around anything to do with the home. So we continue to be surprised with the demand in some categories. And then you stop and think about it for a moment, and you're like, well that just -- I guess, that just makes sense, associated with people being more at home. So we continue to believe there is runway here, and we're planning accordingly, Vishal.

[Vishal Shreedhar, Analyst]

Okay. Now one question that I'm sure is on investors' minds is the impact of the stimulus and to what degree did that support the results in the quarter. Is there any thoughts or perspectives that you can share on that? I know it's another difficult question, but your perspective is appreciated.

[Gregory George Craig, CFO & Executive VP]

It's Gregory here. Maybe I'll take that one, and Greg can augment as required. It's certainly something, I think, [ that ] has helped in terms of having a bit more cash. Now you have to remember though, it's replacing income for jobs that they've lost. So although it is $2,000 a month, that's -- many of those people were making more than $2,000 a month. So you have to think and look at it on a bit more of a balanced perspective, Vishal, to be honest. And from our perspective, again, Greg talked about our windows into data and our sources of information. So we can take a look at us as a retailer and compare what our spend looks like against other in the industry. And I'll tell you, we feel pretty comfortable that CERB is considered to be somewhat of a tailwind for us that we're continuing to get share, as Greg alluded to. So we're -- I wouldn't -- is it part of the equation? Sure, but I wouldn't suggest it's a major part of the sales growth that we're seeing.

[Vishal Shreedhar, Analyst]

Okay. And maybe if I can squeeze in another one here. Obviously, there are a lot of moving parts in this quarter, and that impacted margins. But as management looks out, call it, 1 to 2 years, and maybe we can neutralize the macro a little bit. And understanding that e-commerce is going to grow, and that's going to place -- perhaps place some pressure on margin. But as you look at your other drivers and your other levers, the operational efficiency program, does management still anticipate -- or is it possible to hold or grow margins over time? Or is this more of a case of gaining market share and growing sales?

[Gregory Huber Hicks, CEO, President & Executive Director]

I think overall, Vishal, we've seen a fairly material denigration in our historical margin profile of the SportChek business. It's -- obviously, it's more commoditized than some of our other businesses. And you've heard us talk about our active management with respect to trying to drive our own brand penetration. So we think the most important work effort that we have in front of us to stabilize gross margins across the business is e-commerce fulfillment, which I just talked about. We continue to believe we have a pile of penetration runway in every banner for own brands. And that, we believe -- and it will be up to us to execute well on this initiative -- gives us more than a fighting chance to hold our margins. And I think competitively, we're going to be able -- we're going to come out of this stronger than when we went into it, which may help as well. So my crystal ball would suggest that the worst of margin pressure, I'm not going to say is behind us, but I would say it's less of a worry than it was for me about kind of 18 months ago, if that makes sense.

[Operator]

The following question is from Mark Petrie of CIBC.

[Mark Robert Petrie]

I just wanted -- sort of a high-level question, but I'm just wondering how the pandemic affects, how you think about the CTR stores? And I guess specifically assortment, both breadth and depth? But also layout and experience more broadly? And what's realistic in terms of when we're going to sort of see some of the changes that you might have in mind actually taking place in the store?

[Gregory Huber Hicks, CEO, President & Executive Director]

Yes. Thanks for the question, Mark. We see tremendous opportunities to improve the store experience. I think the crisis has just accelerated the delivery of many of the more digitized or automated customer experience initiatives we had on our agenda. Curbside is obviously the main net new digital shopping experience difference, and we rolled out the experience to Chek and Mark's this quarter. And you can't stand still, like, you have to continuously improve the experiences. So we've rolled out text to curbside in about 60 stores, which really seems to be performing well from an experience standpoint, not only for the customer but for efficiencies in the store. And it allows for an SMS notification when you arrive at a parking spot, quick recognition of the customer being there, an automated notification to our store and really easy delivery to the customer's parking stall. So expect us to roll that functionality out. We're rolling out a bunch more lockers in our CTR stores as we speak. I think this is -- these types of things are absolutely going to be critical as we head towards the fourth quarter, where we expect to continue to be managing physical distancing protocols and capacity in our stores. And I don't know about you, but I'll be less inclined to stand outside in a line for 20 minutes when it's below 0. So I think these types of experiences in the store are critical. We implemented digital texting and mobile companion in our automotive service business. And since launch in the quarter, we've actually had over 120,000 messages between our customers and auto service departments, which is really cutting down contact and improving the experience, where we just launched a digital shared cart functionality, which is going to be great for service. It allows us to build a digital shopping cart, send it to the customer for the service job, and they can pay from home. And then they just come in to pick up their key. So we think that's going to be fantastic for our tire business as we head towards the winter season, and on an ongoing basis. We're working on online auto service appointments as well. So all of this in the name of improving digital experience in the store.And I guess, to answer the last part of your question, I think I picked it up in my commentary. You can expect, and are seeing, some of these in-store experience improvements roll out now. So there won't be a big wait time, and we'll just continue to roll them out.

[Mark Robert Petrie]

And you sort of touched on it in your comments with regards to owned brands, but I'm also curious just how the experience over the last number of months, if we want to sort of play in each of those categories with regards to number of SKUs and that sort of thing?

[Gregory Huber Hicks, CEO, President & Executive Director]

Yes. I mean we're still working through some of that. To be honest, we're -- our heads are down, and we're -- the teams are chasing inventory. I mean I think you can expect us from a risk standpoint, being taking more risk in some of the categories that we may have been shy about before because of their kind of higher-ticket and/or [ cube ] nature. So like Vishal's question, I mean, I -- we don't see kind of the trend for improving the job or joy in your yard, your home, your garage, your cottage, et cetera, changing anytime soon. So we feel much better. And I think the dealers feel better about taking risk in some of these higher-ticket categories. So I think from an assortment planning standpoint, that's where a good chunk of the focus is right now. We're working on the Party City business in terms of its integration in CTR. We believe there's great tailwinds for that business as there are more kind of smaller celebrations at home, less vacations, et cetera. So I think it's on the seams right now, in terms of where our work efforts are. And it's more about kind of how deep we go from a depth standpoint in some of the key categories that Canadians are seeking and we expect them to seek next year. And maybe a conversation when we get a little bit more time under our belt, if we're seeing any kind of material -- any material changes to the portfolio.

[Operator]

[Operator Instructions] The following question is from Peter Sklar of BMO Capital Markets.

[Peter Sklar, Analyst]

First, on the credit card. Traditionally, your growth -- you've -- a big -- you've made a big effort growing GAAR by signing up people for the cards in the store. With the Canadian Tire stores in Ontario and across the country open, like, are you still continuing? Or have you backed off on your efforts to grow the card as aggressively as you have in the past?

[Gregory George Craig, CFO & Executive VP]

Hey, Peter. It's Gregory here. As you would have imagined, even prior to Ontario being shut, just given what was going on around the risk environment, we're being very careful. So we were being more careful in selecting acquisition as a general comment. We saw some growth in the digital channel as an example. But as you can imagine, our primary channel is kind of face-to-face selling through the store, and that's more difficult to do in this time. So the team are looking at that again and to expand that as we move on. But I still believe, to be honest, there's so much opportunity within kind of the CTR and the online environment as well. We're not nearly as integrated as we are in a virtual world as we've been in the physical world. So I think the physical world will come back to us, to be honest. But I think we also see a huge opportunity kind of in online and how to kind of present the card more effectively as part of the overall retail experience, if you will. Again, we've got lots of footprints in the store. We have lots of digital traffic. So I think we're -- we just want to be cautious about going back in from an acquisition perspective at this point in time, given where we are in the cycle. But we're feeling really optimistic about the growth of the card looking forward, for sure.

[Peter Sklar, Analyst]

Okay. And then on the PD2, which you have a good result in the PD2, which you talked about. But the thing about -- the PD2, if I'm correct, doesn't reselect where you've given credit card holders relief through skip payment or other means to provide relief. So can you talk about the magnitude of the relief you've had to provide in the portfolio? Because that's also, I would think, arguably a credit metric that you would look at.

[Gregory Huber Hicks, CEO, President & Executive Director]

Yes, it's certainly something we look at closely. And as I think you know in the allowance, when you make kind of those arrangements with customers, it actually requires you to go to a different stage as you think about it from an allowance perspective, Peter. So it's already covered in the allowance. When you make those collection type of arrangements, it actually moves stages. So first of all, I'll just remind you that it's covered from an allowance perspective. What I will say, we have worked with customers since the beginning of time at Financial Services being part of our retail organization. Everyone comes up with hard times from time to time. We've worked with customers for the last 20 years, and we continue to do that during the pandemic. Was there an acceleration of offers? Yes, there was an acceleration. But interestingly, what we found is, as we made a lot of those offers, they've kind of resolved themselves in the quarter. That's the learning we found in this cycle is. I've given the data before around an installment offer. As you give the customer a chance to make a payment over 12 months and then 6 months in, they pay off the whole balance. But they had 6 months more free -- of interest-free loans. So as we -- so we've extended those offers a little bit, but we've found customers are actually removing themselves from that as they move along as well. So it's a part of that. But Peter, I would just say the bigger PD2+ rate that we're keeping an eye on really relates to kind of the CERB payments and the debt relief programs. And just we think that is kind of keeping customers being able to pay more, and again is we need to keep a close eye on that for when that program ends.

[Peter Sklar, Analyst]

Okay. And then just lastly, I wanted to ask a question about the Canadian Tire e-commerce program. So -- but looking at it from the perspective of a Canadian Tire dealer, does it -- like we don't know the specifics of the economic sharing between a dealer and Canadian Tire corporate on an e-commerce sale. But like, does the Canadian Tire dealer like these sales, or would they much prefer a bricks-and-mortar sale? Because there's all the fulfillment, the running around with labor, sending someone out to curbside and the financial arrangements as well, as I mentioned, might be different between the dealer and Canadian Tire than it is for a bricks-and-mortar sale. So I'm just wondering if you can talk about how the dealers are viewing this uptick in e-commerce at the Canadian Tire banner.

[Gregory Huber Hicks, CEO, President & Executive Director]

Yes, it's Greg, I'll take that. I can tell you the -- for the Ontario stores, the alternative to doing e-commerce was a hell of a lot worse. So I think there's a newfound appreciation for e-commerce and the role that it can play in staying relevant in local communities and with customers, et cetera. They -- everyone's got a different story. We've got 500 individual operators, obviously. But they've been adapting for decades in terms of how the business has evolved. I mean certainly, when you move from kind of whatever percent of your retail model that is self-serve to 100% of it being concierge with curbside or pickup, there's more touches, there's more handling, there's more coordination, in-store logistics and planning required in the business. And so what we're seeing is a real tremendous kind of operational, standard operating procedure change happening in the four walls of the stores. And I think what they're expecting of us and what we're going to endeavor to do is, we've got to do our best to drive efficiencies out of the base business and make sure that the processes -- and I think I touched on this in Q1, that the processes that we have for especially same-day fulfillment are integrated with their core processes, which are fairly sophisticated and automated. So I think that's just the expectation when you have so much demand come at you at once. We never anticipated this type of scale, and it wasn't efficient. Very similar to the commentary earlier around ship-to-home and e-commerce fulfillment costs. So we've got a lot of stuff on the drawing board. The dealers have unbelievable ideas. The whole text to curbside, the shared cart that I shared with you, all ideas that came from the stores. And we're fully committed to drive efficiencies in stores. So overall, I think that's the way they think about it, is they think about making sure that their operations are efficient. And right now, when you've got tremendous demand, it isn't quite as efficient. The technology is a little bit in the way, and we need to make sure that it just gets more integrated. So hopefully that helps.

[Operator]

The following question is from Brian Morrison of TD Securities.

[Brian Morrison, Research Analyst]

If I can just go back to Peter's question. I just want to see if I understand this properly, Gregory. On Financial Services, you're not really seeing an increase in delinquencies. Your collections remain stable, but provisions are up in anticipation of the removal of government subsidies. That's raising the allowance rate, and that's magnified by this decline in GAAR. Is that correct?

[Gregory George Craig, CFO & Executive VP]

Yes. Maybe Peter -- I'm sorry, Peter. If I could, just I want to emphasize that last point around the decline in receivables. Because I think sometimes when we hear about the rate, that's what people get fixated on and focus on. So what we've been trying to describe in the pre calls and even on the call today was, if our receivable rate was -- basically where we started the quarter, if it started the first day of the quarter and stayed flat for the full quarter, that our allowance rate really would have been closer to where we ended it at Q1. So it is really kind of that allowance. That drop in receivable, that kind of increases the allowance rate is, to me, the critical point to just -- to clarify for everybody.

[Brian Morrison, Research Analyst]

Okay. And then, Greg, one question here on the retail side of things. Last quarter, you provided daily e-comm volumes. Wondering if you might be able to update where you stand there for either June or July? And then from a brick-and-mortars perspective, I've got to assume that CTR stores are back to prior year levels. Can you just update us potentially on the brick-and-mortar side on the key banners of CTR and Sports Chek and Mark's, if you could?

[Gregory Huber Hicks, CEO, President & Executive Director]

Yes. I mean it's settling now, Brian. I mean tough to know, until we ramp back up here in Q4, if we're settling in the new normal or there's a little bit more of a bump. But suffice it to say, we're still seeing probably about 2.5 to 3x the rate that we would have expected in CTR, roughly in that double-digit territory. But I think it will be -- like I said, it will be important for us to get through Q4, because Q4 has a natural bump with gift-giving and obviously, the weather, et cetera. So we would expect it maybe to kick up another couple of percentage points. And then we'll have a better idea in terms of where it's going to settle in.In Chek and Mark's, the majority of the business continues to be shipped to home, as we've talked about before. To be honest, I don't have the perspective right now in terms of what the penetration rate is settling in at. We can certainly follow up with that -- with you on that if that's of interest. But it's elevated, that's for sure. But like CTR, it's settled back to elevated to pre-COVID rates, but has settled back a fair amount relative to -- certainly relative to April and May when the stores were closed.

[Brian Morrison, Research Analyst]

Yes. Sorry, I understand the e-commerce rates remain elevated, but I'm just asking on top of that, if brick-and-mortar from a in-store perspective, are we seeing volumes start to return to pre-COVID levels as well, or prior year levels?

[Gregory Huber Hicks, CEO, President & Executive Director]

Oh, yes, yes. Absolutely. We tried to disclose some of that in terms of how June and a little bit of foreshadowing in terms of what's happening this quarter in July. Absolutely. Bricks has come back very strong as all stores have ramped up to full operations.

[Operator]

This will conclude today's call. A webcast of the conference call -- Oh, I'm sorry. I wanted to turn the meeting back over to Mr. Hicks.

[Gregory Huber Hicks, CEO, President & Executive Director]

Okay. Thank you, operator. These are, no doubt, extraordinary times, but we're an extremely resilient company. The strength of our brand is built on our deep-rooted values and core purpose of supporting life in Canada, no matter what life looks like. I'm proud of our performance in the quarter and the thousands of team members I represent. Thank you for participating in today's call and for your interest in Canadian Tire. Be well. Thank you.

[Operator]

Thank you. This will conclude today's call. A webcast of the conference call will be archived on Canadian Tire Corporation Limited Investor Relations website for 12 months. Please contact Investor Relations if there are follow-up questions regarding today's call or the materials provided. You may now disconnect.