UPDATE 4-Canadian Tire profit falls on higher spending

Thu Aug 11, 2011 1:21pm EDT

* Q2 2011 EPS C$1.29 vs C$1.50 in Q2 2010

* Profit missed C$1.45 estimate, according to I/B/E/S

* Revenue up 4 pct to C$2.57 bln

* Spending on promotions, infrastructure holds back profit (Adds analyst comment, additional context on costs, competition, updates market reaction)

By Allison Martell and S. John Tilak

TORONTO, Aug 11 (Reuters) - Canadian Tire Corp (CTC.TO) (CTCa.TO), one of the country's biggest retailers, said on Thursday quarterly profit fell 14 percent as it spent more on promotions and invested in infrastructure.

Profit at the company, whose flagship Canadian Tire chain sells housewares, sporting goods and automotive products, dropped even as higher gasoline prices helped boost retail sales by 5.1 percent.

Earnings fell to C$105.8 million, or C$1.29 a share, in the fiscal second qarter ended July 2, from C$122.8 million, or C$1.50, a year earlier.

Analysts, on average, had expected earnings of C$1.45 a share, according to Thomson Reuters I/B/E/S.

Revenue, which includes financial services, rose 4 percent to C$2.57 billion, compared with the average analyst estimate of C$2.62 billion.

In addition to spending on its stores and merchandising, lower-than-expected sales of some seasonal goods and costs related to the company's Forzani Group acquisition held back profit, said Chief Executive Officer Stephen Wetmore in a release. A new loyalty program raised operating expenses.

Edward Jones analyst Brian Yarbrough said that higher costs will likely taper off in the coming quarters, as short-term investments wrap up. But competition and consumer confidence are more of a challenge.

"It's a tough operating environment," he said.

Canadian Tire's stock took a hit in January when Target Corp (TGT.N) said it would enter Canada. Shares are still well below their January high.

The full impact of Target's entry will not be clear for some time, but Yarbrough said that Canadian Tire only has a 15 percent product overlap with Target.

FORANZI ACQUISITION ON TRACK

Canadian Tire's planned C$771 million purchase of Forzani Group Ltd FGL.TO, the country's top sports retailer, cleared a review by the Competition Bureau in early August. The company said it expects that transaction to close in the current quarter.

The Toronto-based company also owns PartSource autoparts outlets and Mark's Work Wearhouse, a chain of casual and work clothing stores that it acquired about a decade ago.

Since the acquisition, revenue and margins have improved substantially at Mark's, and analysts have pointed to that as an indication of what the retailer could achieve with Forzani.

Canadian Tire's more heavily traded Class A shares rose 0.7 percent to C$55.92 Thursday afternoon on the Toronto Stock Exchange.

($1=$1 Canadian) (Editing by Frank McGurty)