Scotiabank and Canadian Tire financial service partnership to focus on newcomers

TORONTO -- There is "unlimited" potential to partnering with Scotiabank, says the head of retail giant Canadian Tire, who called the retailer's new relationship with the big bank an opportunity for both to share and bring in customers, particularly those just arriving in Canada.

Scotiabank (TSX:BNS) announced Thursday that it is buying a 20 per cent stake in Canadian Tire's financial services division for $500 million in cash and has agreed to provide up to $2.25 billion in credit card receivables financing to the business.

Canadian Tire (TSX:CTC.A) CEO Stephen Wetmore said the deal is a marketing dream, and will allow the two companies to "introduce new customers to each other" and share each other's products with a new audience.

"The potential is unlimited when it comes to the range of products we can offer to each other's customers," Wetmore said following the retailer's annual general meeting. "We're both facing unprecedented change in how Canadians shop and bank, how Canadians pay for things."

Particularly, the two companies see a way to combine efforts to attract new immigrants who do not have brand loyalty to either the bank or the iconic retailer.

"Most people in the world aren't familiar with the Canadian Tire type of experience. In many countries, you have to go to five, six, eight stores to find what you would find in a Canadian Tire store," said Wetmore.

"So the best way to experience Canada, if you ever moved here, is to walk around a Canadian Tire store. You are going to see the seasons, you're going to see what Canadians do and that sort of thing. To make that initial connection is very important."

One of the ways the retailer is counting on connecting with Scotiabank's customers is through special offers. Newcomers who sign up for the bank's Start Right program for newcomers to the country will receive gift cards to spend at Canadian Tire or its apparel brand, Mark's. Those who have a Canadian Tire Options MasterCard will also be offered $500 in Canadian Tire money if they switch or take a new mortgage from Scotiabank.

Scotiabank president and chief executive Brian Porter said the deal is part of the bank's ongoing strategy to grow its high-margin credit card business and acquire new customers.

"We're in the business of acquiring new customers every day and that's where the we think the value of this transaction is," Porter said.

Under the deal, Scotiabank will become the exclusive partner for new financial products to Canadian Tire customers.

Canadian Tire's financial services division, which includes credit cards, has $4.4 billion in receivables and 1.8 million active customer accounts.

The agreement includes an option for Canadian Tire to sell up to an additional 29 per cent stake in the financial services business to Scotiabank within the next decade at fair market value. But also permits Scotiabank to back out of the partnership at the end of 10 years if considers it no longer beneficial.

Barclays Capital analyst John Aiken called the deal "intriguing" but noted it would have a modest impact on Scotiabank's bottom line in the short term.

"The deal demonstrates Scotia's willingness to increase its exposure to the Canadian retail landscape as well as its ability to be flexible and creative in attaining these goals," Aiken wrote in a note to clients.

"Combining with a strong brand such as Canadian Tire in terms of marketing and taking a stake in CT's financial services business does provide longer-term upside, but we do not anticipate much movement on near term earnings expectations from the street."

The deal with the bank came as Canadian Tire reported its first-quarter results and increased its dividend.

The retailer said it will now pay a quarterly dividend of 50 cents per share, up from 43.75 cents per share.

Canadian Tire said it earned a profit attributable to shareholders of $70.6 million or 88 cents per share for the quarter ended March 29, compared with $73 million or 90 cents per share a year ago.

The results fell below analysts estimates of 93 cents of adjusted earnings per share, according to data compiled by Thomson Reuters.

Retail sales for the company totalled $2.46 billion, up from $2.43 billion in the first three months of 2013.

Same-store sales were down 0.5 per cent at its Canadian Tire stores, while both its Mark's stores and FGL Sports, which includes Hockey Experts, Sports Experts, National Sports, Intersport, Pro Hockey Life and Atmosphere, saw increases.

FGL Sports same-store sales were up 6.4 per cent, while Mark's gained 2.9 per cent.