Canadian Tire goes international with strategic вЂ” but expensive вЂ” $985M purchase of Helly Hansen
TORONTO вЂ” Canadian Tire Corporation Ltd.вЂ™s $985 million purchase of Helly Hansen gives the retailer access to a lucrative global marketplace without the overhead risk of a large new bricks and mortar store network, executives said Thursday.
The most significant acquisition for Canadian Tire since it bought sporting goods retailer Forzani Group in 2011 and casual apparel chain Marks in 2001, the purchase of the premium sportswear brand comes at a time of investor trepidation about the future of store-based retail amid the rise of online shopping.
вЂњYou donвЂ™t want to go outside your country unless it is a business model that you know you can handle,вЂќ Stephen Wetmore, Canadian TireвЂ™s chief executive, said in an interview after the retailerвЂ™s annual general meeting of shareholders on Thursday. вЂњThis is a wonderful way to go around the world and expand our horizons without having to be capital intensive.вЂќ
The company stock surged 5.3 per cent on the day to close at $268.50 on the Toronto Stock Exchange.
Founded in 1877 and based in Oslo, Norway, Helly Hansen has annual revenue of $500 million and is sold in over 40 countries around the world including the U.S. at stores such as Nordstrom and REI, as well as the U.K., Sweden, Germany, Spain, Russia and Australia. In Canada, the brand sells workwear, outerwear, ski and sailing apparel and footwear at retailers including HudsonвЂ™s Bay and Sporting Life, though Canadian Tire is its biggest customer through Sport Chek and Marks.
Currently owned by the Ontario TeachersвЂ™ Pension Plan, Helly Hansen has a global e-commerce platform and 57 small stores, including nine in Canada, though its primary business is wholesale. The brand had compound annual revenue growth of 12 per cent in last three years and compound annual operating earnings growth of 36 per cent, executives said.
This is not Canadian TireвЂ™s first international business foray. The retailer of housewares and auto parts bought Texas-based automotive chain White Stores in 1982 before selling it at a loss four years later. It later opened an auto parts chain in the early 1990s in Indiana and expanded to surrounding states, but closed it in 1995 after disappointing sales at its ten stores.
Since those bruising experiences, Canadian Tire has been very cautious about making international moves, said Alex Arifuzzaman, partner in Toronto-based retail real estate specialist InterStratics Consultants.
вЂњFrom a strategic point of view, (Helly Hansen) looks like a really good acquisition for them,вЂќ he said. вЂњThis gives Canadian Tire more of a global presence with minimal cost or risk. On the wholesale side, they will be able to increase their margins because the business will be vertically integrated.вЂќ
Canadian Tire has been accelerating the acquisitions of national brands and its development of its own in-house brands since 2016 in order to drive more brand-loyal consumers to its stores and increase profitability. Prior to this acquisition, private-label goods accounted for 30 per cent of revenue at Canadian Tire stores, up from 20 per cent in 2012, and 70 per cent of revenue at Marks.
The retailerвЂ™s executives had said in the past that they were mulling the international potential of some of their house brands, which include Motomaster, Noma, and Paderno, but they did not reveal what sales channels they were considering.
The acquisition could see the retailer introduce new products to Helly Hansen and bring Canadian TireвЂ™s proprietary brands to other parts of the world through Helly HansenвЂ™s existing global distribution network.
вЂњTraditionally if we launched a product in Canada we would have registered a trademark in Canada,вЂќ said Wetmore, who returned to helm the company two years ago after previously serving as CEO from 2009 to 2014.
вЂњA year and a half ago, we started registering (product trademarks) around the world. If we had a fantastic product line that we wanted to sell into Scandinavia, for example, we were not set up for that before.вЂќ
The acquisition allows the Oslo-based Helly Hansen team to market and develop new products and advise Canadian Tire on вЂњa raft of different products that we should be developing, that we can sell.вЂќ
BMO Capital Markets analyst Peter Sklar believes the brand aligns well with Canadian TireвЂ™s three main banners, including Sport Chek and MarkвЂ™s, but deemed the transaction вЂњexpensive,вЂќ given its ratio of 18 to 20 times enterprise value to operating earnings on a trailing basis, compared with Canadian TireвЂ™s own valuation of ten times within the same measure.
вЂњWhile the growth may justify the valuation, we believe that managing a high-end, high-growth, international brand represents a shift in strategy for Canadian Tire, and introduces all the associated uncertainties,вЂќ Sklar wrote in a note to clients on Thursday, noting that it will likely be several years before Canadian Tire begins wholesale international distribution of its existing house brands.
вЂњEvery time I buy a great coat, itвЂ™s a bit expensive,вЂќ remarked Wetmore, who has committed to stay on for three more years in the CEO role. вЂњThe last thing we ever would have done is buy a fixer-upper.вЂќ
Wetmore noted that the companyвЂ™s acquisition of Forzani made good strategic sense at the time and the investment has paid off, but the company was required to winnow down 17 separate store banners and remodel stores under its top banners, a lengthy and capital intensive effort.
Canadian Tire also reported Thursday that net income fell 8 per cent to $99.1 million, or $1.18 per share, as expenses rose 7.8 per cent in the three month period ended March 31. Excluding one-time items, the company earned $1.37 per share, a penny below analystsвЂ™ average estimate, according to Thomson Reuters. Same-store sales were robust, rising 5.2 per cent, and overall revenue climbed 3.4 per cent to $2.81 billion.