Canadian Tire swallows Mark’s Work Wearhouse

"But it's really unfortunate (Canadian Tire's) first major initiative is one that looks off strategy. It's a one-year synergy grab."…selling clothing is not part of Canadian Tire's core competency and the acquisition will have modest impact on the Tire's profitability, Mason noted.

The Toronto Star
December 20, 2001

Canadian Tire swallows Mark’s Work Wearhouse
$116 million takeover deal stuns retail community
Steven Theobald

Canadian Tire Corp. Ltd. wants you to come see its new, softer side.

The hard-goods giant is getting into the clothing business by buying Mark's Work Wearhouse Ltd., a move that left the retail community stunned.

Canadian Tire had said in September it was in acquisition mode, an effort aimed at addressing concerns existing businesses are quickly running out of room to grow sales.

"All of a sudden, we add $500 million to our revenues, and it's profitable," Canadian Tire chief executive Wayne Sales said yesterday after announcing the $116 million, $4.10-a-share friendly offer for Mark's.

At first glance, it may seem odd for Canadian Tire to get into the apparel business, Sales conceded, but both companies cater to the same demographic, he said.

"Our customer base is virtually identical."

Synergies in marketing, buying and real estate will create as much as $7 million in savings next year, he said.

Mark's shoppers, for instance, may eventually get Canadian Tire money to stuff into the pockets of the blue jeans they buy, he said. "With more Canadian Tire money in circulation it drives people back to Canadian Tire."

While Mark's is a stable and profitable company, the investment community says, the problem is that Mark's is also a mature business, with few opportunities to expand its top line.

"At least they are not betting the farm on something that is high-risk," said a retail analyst who asked not to be named. "But it's really unfortunate (Canadian Tire's) first major initiative is one that looks off strategy. It's a one-year synergy grab."

In its own attempt to create a growth vehicle, Mark's announced plans in August, 1998, to launch a chain of work-casual clothing stores under Levi Strauss & Co.'s Dockers banner. At the time, Mark's CEO Garth Mitchell proclaimed he could build as many as 150 stores across Canada.

Yet, just last month, after opening a mere eight locations, he pulled the plug on the Dockers venture. Nevertheless, at yesterday's press conference, Mitchell, who is staying on to run Mark's as an autonomous division of Canadian Tire, insisted there are plenty of other opportunities to grow.

The financial clout of Canadian Tire will accelerate Mark's plans to open a further 100 Mark's stores, taking the total to about 425 within four years, he said.

In the bigger picture, Mitchell said, his newfound deep pockets will allow him to pursue "synergistic acquisitions" of other clothing retailers he previously couldn't afford.

"There are lots of people who sell denim," Mitchell offered when asked about likely candidates.

When reminded that the jeans market in Canada is particularly ferocious — the latest threat coming from Gap Inc.'s Old Navy chain — Sales quickly jumped in. "We do not want to get into fashion-forward soft lines," he said.

For the time being, the rollout of 100 new Mark's stores and the expansion of existing locations will provide ample growth, he added.

Canadian Tire has prided itself on being fairly recession-proof, focusing on everyday needs. Entering the apparel business exposes it to the ups-and-downs of the economy, not to mention weather patterns.

Mark's focus on work and casual clothing makes it less susceptible to economic slumps, said Sean Mason, a retail analyst with Dominion Bond Rating Service. "They are not Eatons or Holt Renfrew."

That being said, selling clothing is not part of Canadian Tire's core competency and the acquisition will have modest impact on the Tire's profitability, Mason noted.

"Will it cause a significant swing in Canadian Tire's earnings? I don't think so."

Canadian Tire recently raised $300 million by selling an interest in its $1.7 billion real estate portfolio, money that will be used to pay for the Mark's deal.

Canadian Tire's widely held class A shares lost 7 per cent, or $1.85, closing at $25.65 yesterday. Mark's stock rose 23 per cent, or 75 cents, to $4.05.

Canadian Tire currently operates 454 locations and plans to add a further 35 in the next few years. It posted a profit of $148 million last year on revenues of $5.2 billion.

Mark's operates 325 corporate-owned and franchised stores. Its profit last year was $8.2 million on gross sales of $488 million.

Canadian Tire MWW

Gross Revenues $5.5 b $.488 b
Net Income $148 m $ 8.2 m
Assets $3.7 b $.157 b
Market capitalization $2.1 b $.1068 b
Employees 38,000 2,420

Yesterday’s Close TSE $25.65 $4.05
SOURCE: Bloomberg, company reports


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