UPDATE 2-Canadian Tire profit rises as credit cards recover

Thu Aug 12, 2010 3:07pm EDT

* Q2 EPS C$1.47 vs C$1.27 a year earlier

* Same-store sales up 0.8 percent

* Retail sales C$2.86 billion vs C$2.79 billion

* Shares drop 2.5 pct

(Updates with details, analysts comment, shares)

By Solarina Ho

TORONTO, Aug 12 (Reuters) - Canadian Tire Corp Ltd (CTC.TO), one of the country's biggest retailers, posted a nearly 16 percent rise in quarterly profit on Thursday, helped by a recovery in its financial services division.

But shares dropped more than 2.5 percent after the Toronto-based company posted sales at its flagship retail chain that at least one analyst said were disappointing.

Sales at stores opened a year or longer, a key performance measure for retailers, climbed 0.8 percent. At the Canadian Tire chain, sales of cleaning, gardening and backyard products offset weakness in the automotive category.

"Overall, it was a good quarter. There was obviously certain areas you could poke a hole at: the sales at Canadian Tire retail was a little bit weaker than what was expected," said analyst Robert Cavallo of Mackie Research Capital.

Net earnings rose to C$119.9 million ($114.2 million), or C$1.47 a share, for the second quarter ended July 3. That compares with C$103.7 million, or C$1.27, for the same period a year earlier.

Excluding nonoperating gains and losses, profit rose 14.8 percent to $118.4 million, or C$1.45 a share, from C$103 million, or C$1.26, in the year-before quarter.

Analysts had forecast earnings of C$1.34 a share, according to Thomson Reuters I/B/E/S.

Total retail sales rose 2.5 percent to C$2.86 billion.

Earnings at Mark's Work Wearhouse, Canadian Tire's work clothing chain, dropped 47 percent despite higher operating revenues, partly due to higher inventory shrinkage expenses.

"This is the second time this has occurred in the last two years. That part does kind of bother me," said Brian Yarbrough, an analyst with Edward Jones.

Gross operating revenue from its financial services division rose 2.1 percent as a result of an increase in interest earned from above average balances on consumer credit cards. Canadian Tire said it reduced its provisions for loan write-offs as fewer clients defaulted on credit card payments.

"With these write off rates starting to come down and bankruptcy slowing in Canada, the profitably of that division should start to do much better in the coming quarters," said Yarbrough.

Canadian Tire shares fell C$1.40, or 2.5 percent, to C$54.33 on the Toronto Stock Exchange midafternoon.

($1=$1.05 Canadian)

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