Target announced their intention to amputate the Canadian arm of their business following 22 months of disappointing losses. More than 17,000 jobs are at risk and the liquidation of Target Canada should take place over the next few months.
Target Corporation has been around in some capacity since 1902 and is the second-largest discount retailer in the United States behind Walmart. The big-box store, a term that refers to a physically huge retail store, operates over 1900 locations and has its headquarters in Minneapolis, Minnesota.
Moving up north
Target first moved into Canada in 2011, forming a Canadian subsidiary called Target Canada Co. The management at the company with the trademark bullseye logo saw an opening when Zellers in Canada went out of business. The leases on 189 Zellers locations were promptly acquired for $1.8 billion and Target announced plans to open 125 stores in 2013.
They made good on their word. In March 2013 the first three Targets opened in Guelph, Fergus and Milton – all in Ontario. Just a year and a half later, they had grown to 133 stores across all 10 Canadian provinces, employing 17,600 people – more than 6 times the population of Lake Placid.
It wasn’t meant to last. On January 15, 2015 Target announced it would be closing down all 133 outlets.
The quick decline
From March to November 2013, Target Canada had lost over $600 million across the 91 stores open at the time. The Canadian segment of the business represented just 5% of the total amount of stores but their losses represented about 15% of U.S. profits.
The company struggled right from the start. They experienced inventory problems at the outset – leaving Canadian consumers frustrated. Canadians were also disappointed with the prices on offer, complaining that goods were low-quality and more expensive than Walmart and U.S. stores. Interestingly, according to a Deutsche bank pricing survey Target actually had a cheaper basket of goods than Walmart – 19 cents cheaper – but Walmart had a pricing advantage of 65% on the most popular items in the basket.
The damage had been done. Consumers perceptions were cemented and negative sentiment were just too entrenched to overcome. Shoppers did not have to look far for better choices either and Canadians simply switched to outlets such as Canadian Tire, Sears and Walmart.
Source: Colin Perkel / THE CANADIAN PRESS
CEO, Brian Cornell acknowledged the mistakes in Canada saying “We missed the mark from the beginning by taking on too much too fast”. Wall Street analysts estimate that Canadian operations lost over $2 billion in less than two years and the CEO was on record saying that there didn’t seem to be any way to make Target Canada profitable before 2021. They couldn’t afford to keep losing money for that long and so the decision to cut their losses became clear.
What does this mean for the U.S. operations?
Target Canada was an ambitious project that did not pay off; they grew too big too fast but in the long term the exit is the right move, allowing Target to regroup. The company is fresh off a strong holiday season and the share price has hit record highs.
Target Corporation (NYSE: TGT)
Source: Google Finance
In the short term the company will take a hit. Expectations are that the discount retailer will report a pretax write-down of $5.4 billion in Q4 2014. A write-down is when the value of a company’s assets is greatly reduced, sometimes to zero. You just take the loss. It’s basically the corporation’s equivalent of a shoulder shrug.
The company is also setting aside a $59 million employee trust in order to pay out compensation to the 17,600 people who will be out of a job in the months to come. Another $275 million loss is expected in FY (fiscal year) 2015 as Target discontinues operations in Canada. Target is going to have to spend a lot of money to not lose as much money as they have been.
On the bright side, U.S. operations are profitable and have been growing for ages. Revenues increased from about $63 billion in 2008 to more than $72.5 billion in 2013. Profits understandably took a hit in 2013 as Target Canada acted as a sort of financial lead weight, dropping to under $2 billion – about 30% less than year ago levels.
The company also has a great dividend history, consistently increasing from year to year. Consistently increasing revenues and robust financial health in the U.S. segment of the business means it’s very possible that Target returns to pre-2013 profit levels as it sheds off the unprofitable Canada segment and takes care of the associated costs.
Here’s what the CEO had to say on Target’s future.
“What does the exit from Canada mean for the rest of Target’s business?
We are encouraged by the early momentum we see in our U.S. business but we know the retail landscape is constantly evolving. At Target, this means we have to thoughtfully focus and prioritize the guest like never before. We need to work in new ways, we need to further invest in our top priorities and make strategic decisions related to expense. In other words, we have to transform our business for long-term growth. And there is no question, we will.”
The future looks good for Target. If investors punish the stock for losses incurred as a result of closing up shop in Canada then it might be a good idea to swoop in and buy Target at a discount.