• Document: Presentation on Canadian Tire Corp. by William A. Ackman, Pershing Square Capital Management, L.P.
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Presentation on Canadian Tire Corp. by William A. Ackman, Pershing Square Capital Management, L.P. Given May 23, 2006 at The Ira W. Sohn Investment Research Conference in New York City. This edited transcript is reprinted with Mr. Ackman’s permission and that of the conference organizers. To see the PowerPoint presentation that accompanied this speech, please click here. Bill Ackman: The company I’ll be discussing today is Canadian Tire. It trades on the Toronto Exchange, with a market cap of $5.4 billion and an enterprise value of $6.3 billion. It closed today a little under $66 per share. [Note: The shares closed on August 16 at $69.55.] It looks conventionally cheap, 6.8x EBITDA and 13.5x next year’s earnings, but that’s really just the beginning of the story. There are four components to the business. The bulk of the business is Canadian Tire retail, probably one of the best-known brands in Canada – an 84-year-old business, a fabulous brand. It’s perceived to be a retail company, but in reality, it’s really a real estate company and a franchise business, and the characteristics of this business are very different than a traditional retailer. They have a financial services subsidiary that’s grown tremendously in the last five years, with a $3.3 billion portfolio and about 5% of the Canadian credit-card market, making it the second-largest credit-card issuer. They have a business they bought for $100 million called Mark’s Work Wearhouse, which did $84 million of EBITDA last year. That’s over a three-year period of time since their acquisition, so they’re pretty good at making acquisitions. That’s a specialty retailer, fabulous same-store sales growth. And then there’s Canadian Tire Petroleum, which is kind of the weakest part of the puzzle, but which has significant asset value. They own about 58% of their locations and they pump about twice as much gas per location as any of the other independents or major oil companies in the market. What’s interesting is because of the company’s business model, earnings significantly understate the company’s free cash flow per share, adjusted for maintenance capital expenditures. The company trades at about a 10% earnings yield at the current stock price. If you look at the stock-price chart – and it doesn’t look like the kind of chart we normally get excited about, in that it seems like we’re late to the party – what’s interesting is that the business value’s grown at a much faster rate than the stock price. We’ve been buying the stock – we bought more today. We’ve been an active buyer over, really, the last 45 days, and I wish the conference were a couple weeks out so we could buy a little bit more. It’s still very, very cheap. I’m going to take you through each of the component parts of the company. The first, the retail business, accounts for about 2/3 of the overall EBITDA. There are 462 general merchandise stores. It’s called Canadian Tire, but the business is about half home-related, kind of everything from small appliances, to towels, to other things you buy for the home. Auto is about 25% percent of the business. It’s the biggest auto retailer in Canada, and they’ve also got hardware and sporting goods and leisure. In the Canadian Tire retail business they also have a business they started a few years ago called PartSource, which is almost an entirely franchised business, modeled very much after AutoZone for the serious do-it-yourself customer. CTC owns 75% of their locations, land and building, and the balance is basically long term leaseholds, so, economically, they own pretty much all of their real estate. What we like about it and what we find interesting and what accounts for the company’s superb sort of cash flow characteristics is that the business model’s really that of a franchise company. Now, you wouldn’t be able to tell this by looking at their income statement. The income statement shows revenues, expenses, operating income, interest, taxes, and net income. That’s all you get from the company, but, in reality, there’s a huge rental stream. They get about 4% of the gross revenues of every store, and then they sell their inventory to the store at a profit. The best kind of model for this business is really Tim Hortons. Instead of selling tires, Tim Hortons gets a percentage of the revenues and they sell donuts to their stores. These guys sell tires and other such things through the stores, but the economics are very, very similar. The dealer is responsible for all the maintenance cap ex for the store, responsible for all the capital to build out the store – the lightning fixtures, the cash registers – all the employees. All that Canadian Tire does, basically, is own the real estate. They help the guy market. They share the marketing expenses and they build a system. The Canadian Tire dealers are kind of legendary in their communities. They’re local millionaires and very few dealers own more than one store. It’s a great business model because the dealer is obviously very focuse

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