Canadian Tire 1999 Annual Report THE ROAD AHEAD CANADIAN TIRE CORPORATION, LIMITED Canadian Tire offers a unique mix of products and services through three dis- tinct yet interrelated businesses, as outlined below. Together, these business- es form a very competitive package of location, price, service and assortment that meets the needs of our customers for total value. The 38,000 employees of Canadian Tire and its Associate Dealers share a common vision: To be the best at what our customers value most. CANADIAN TIRE CANADIAN TIRE CANADIAN TIRE RETAIL PETROLEUM FINANCIAL SERVICES (“CTR”) (“PETROLEUM”) (“FINANCIAL SERVICES”) CTR is Canada’s leading Petroleum is one of Canada’s Financial Services is en- hardgoods retailer, offering largest independent gaso- gaged primarily in financing consumers approximately line retailers; it also mar- and managing credit card 104,000 stock-keeping units kets related products such accounts for CTR and Petro- of automotive parts and as oil changes, car washes leum customers. Financial accessories, sports and leisure and propane. Petroleum Services operates an emer- products, and home prod- enhances Canadian Tire’s gency roadside service and ucts, primarily through a competitive offering to cus- markets other financial and network of stores operated tomers with merchandise telecommunication prod- by Associate Dealers. promotions and discounts. ucts to our customers. 2 Financial Highlights 3 Message from the President and Chief Executive Officer 7 Message from the Chairman 8 Growth 22 Performance 24 Management’s Discussion and Analysis of Operations 36 Consolidated Financial Statements 40 Notes to Consolidated Financial Statements 52 Ten-Year Financial Review 54 Directors and Officers 56 Environmental, Health and Safety Stewardship 57 Quarterly Information 58 Shareholder and Corporate Information 59 Canadian Tire in the Community THE ROAD AHEAD At Canadian Tire, the road ahead has a single signpost that points the way to continuing growth. Our commitment to growth is why we’re building a network of Canada’s best and most convenient retail stores. It’s why we’re rolling out new merchandising strate- gies that offer an outstanding shopping experience. It’s why we’re launching innovative ways to enhance our dominance in auto parts and take advantage of the rapid acceptance of e-commerce. Like the road we have travelled successfully for the past seven years, the road ahead will require investment. But the road to growth is the only road that provides long-term value to everyone on the journey. 1999 annual report 1 FINANCIAL HIGHLIGHTS Consolidated Percent (Dollars in thousands except per share amounts) 1999 1998 Change* Gross operating revenue $ 4,728,259 $ 4,347,283 8.8% Earnings before income taxes 227,099 249,712 (9.1) Income taxes 81,170 82,732 (1.9) Net earnings 145,929 166,980 (12.6) Cash generated from operations 326,141 316,170 3.2 Cash generated from operating activities 323,467 369,448 (12.4) Dividends 30,845 31,299 (1.5) Per Share Net earnings $ 1.89 $ 2.09 (9.6%) Cash generated from operations 4.22 3.96 6.6 Cash generated from operating activities 4.19 4.63 (9.5) Dividends 0.40 0.40 – Shareholders’ equity 17.21 16.20 6.3 * Percent change calculated from unrounded amounts Business Units CTR Financial Services Petroleum Consolidated (Dollars in thousands) 1999 1998 1999 1998 1999 1998 1999 1998 Gross operating revenue $3,800,288 $ 3,511,695 $ 305,997 $ 305,391 $ 621,974 $ 530,197 $4,728,259 $4,347,283 Earnings before income taxes 155,912 189,468 55,989 51,860 15,198 8,384 227,099 249,712 2 canadian tire MESSAGE FROM THE PRESIDENT AND CHIEF EXECUTIVE OFFICER During 1999, we continued our trend of strong operating performance. Consolidated gross revenue rose 8.8 percent to a record $4.7 billion. Consolidated net earnings per share, however, declined to $1.89 in 1999 from $2.09 in 1998 due to the expensing of a variety of substantial project costs. The major portion of the expensed costs related to the development of the Corporation’s capabilities in information technology and electronic commerce. At an operating level, all of our divisions made very strong contributions to the 1999 operating earnings before the above noted expenses. Canadian Tire Retail operating earnings before these expenses were up 13.2 percent while Financial Services and Petroleum operating earnings increased 8.0 percent and 81.3 percent respectively. A more detailed discussion of the expensed costs and the Corp- oration’s many accomplishments during 1999 can be found in Management’s Discussion and Analysis of Operations, which begins on page 24. Canadian Tire’s strong operating performance during the past seven years has its roots in the success of our strategies and investments for growth. Those strategies and investments will continue because, as this Report details, our prospects for ongoing growth are excellent. RENEWING THE FOUNDATION In 1993, Canadian Tire had a strong foundation of competitive advantages: an almost universal brand awareness, a unique offering of three specialty stores under one roof, a network of entrepreneurial Associate Dealers and a sound financial posi- tion. It was a solid foundation that could be made even stronger. Our stores needed to be more responsive to new competitive formats. Our organization needed to be energized by the common objective of providing what our customers value most. During the past seven years we have strengthened Canadian Tire’s foun- dation for profitable growth. By opening 188 new-format stores, and refining and expanding our offering under three primary product groups, we have increased sales by 1.2 billion dollars. By eliminating expenses that do not add value for customers, we have significantly improved the Corporation’s cost struc- ture. By keeping our eyes on the road ahead, we have launched an exciting new opportunity to build on our market dominance in auto parts and accessories. Our job is to continue to execute our winning strategy on this revitalized foundation. We made excellent progress on that task in 1999 and honed the strategy that will deliver more gains in the future. DRIVING REVENUES Canadian Tire’s new-format stores have exceeded our expectations since we opened the first one in 1994. In their first year of operation, these stores are deliv- ering average sales gains in excess of 50 percent over the previous store in the same market. What’s more, their comparable sales growth in subsequent years is well above the performance of traditional Canadian Tire stores. On the strength of these sales gains, we decided to expand and accelerate the roll-out of our new-format stores. Our original estimate was 240 stores; we now expect to build 350 by the end of 2003. We opened 51 in 1999 – up from 34 in 1998 – for a total of 188 new-format stores. The Corporation is currently just half way through its building program, which suggests our sales momen- tum will continue its strong upward trend. 1999 annual report 3 4 canadian tire MESSAGE FROM THE CHIEF EXECUTIVE OFFICER We are also enhancing the customer experience inside these new stores in order to drive more sales. The “Next Generation” design of Canadian Tire stores builds on our accumulated learning to provide an even better experience for our customers. These stores feature more closely related groupings of products and departments, expanded assortments in key categories such as kitchen and hard- ware, an improved navigational system and more open sight lines throughout the store. Given the immediate sales uplift we have seen in test stores already outfitted with these improvements, we are excited about the potential of Next Generation. The concept will be incorporated in every new store we build and is easily trans- ferable to all existing new-format stores opened since 1994. Canadian Tire Financial Services and Canadian Tire Petroleum remain important elements of our plans for growth. Financial Services’ Options® MasterCard® loyalty program, like Canadian Tire ‘Money’, is an important driver of incremental sales in our stores, and will be even more so in the years ahead. Similarly, Petroleum’s cross-merchandising programs and competitive pricing are substantial components of the total value proposition that is our unique offering to Canadian consumers. Both of these divisions also contribute meaningfully to the Corporation’s overall growth in profitability. NEW ROADS TO GROWTH For the past three years, we have been testing a concept called PartSource®, a chain of stand-alone specialty auto parts stores. Last year we announced plans for a national roll-out of the chain that will see us open up to 200 of these stores over the next four to five years. Canadian Tire is already the dominant provider of automotive parts and service in Canada. With PartSource, we are going after new customers who do not typically frequent a Canadian Tire store for their automotive needs – the passionate “do-it-yourselfer” and professional installer. These customers repre- sent a sales opportunity of $400 million annually to Canadian Tire. We intend to turn this opportunity into real growth as quickly as possible by leveraging our marketing resources, strong vendor partnerships, supply-chain capabilities and real estate and construction expertise. Like PartSource, electronic commerce is also an exciting opportunity to drive new growth. Our e-FlyerTM, the electronic version of our weekly flyer, is already one of the most-visited Internet web sites in Canada. During the coming year, we will build on that considerable potential by launching a new consumer e-com- merce web site that will provide customers with broader access to merchandise and a range of customer services. We know that customers value the shopping experience that Canadian Tire offers and we intend to be the best at providing it through e-commerce.