Target Misses the Mark in Canada

Target is on track to lose $2 billion on its Canadian operations within its first two years in the country, according to estimates from Tiburon Research cited in the Wall Street Journal.

The company has already lost $941 million within its first year of operations, a very bad showing considering past predictions that their Canada stores would be profitable by the end of 2013.  Some analysts say that the retailer may have to back out of Canada completely if it doesn’t turn around its struggling operations soon.

In May, the company’s then-CEO Gregg Steinhafel resigned abruptly, presumably due to the retailer’s massive security breach earlier in the year.  But some analysts attributed Steinhafel’s resignation to Target’s disastrous entry into Canada.  Upon Steinhafel’s departure, interim CEO John Mulligan said that the company was committed to staying in the country.

“Our focus on Canada is on fixing the Canadian business and getting it back on track where it needs to be,” Mulligan said in a statement. He also indicated that the company would not change its goal of reaching $6 billion in annual sales in Canada by 2017.  Sales in its first year totaled less than a quarter of that.

Opening 124 stores across Canada within ten months may have been too aggressive, leading to many of the inventory and training issues that the company faced.  Target reportedly trained its Canadian employees at U.S. stores, and when the employees returned home to begin working, they found that the technology and systems within the stores were completely different than those they trained on.  Inventory was apparently a serious problem for many stores.  One location didn’t even have enough products to fill the shelves on opening day, and customers continue to report empty shelves and a lack of product throughout the region.

Presently, Target is being pressured to close its Canadian stores and redirect its focus to the U.S. market.  Credit Suisse has made some projections and found that “We think it may be more prudent for Target to cut its losses and devote 100 percent of its resources on the U.S. — which comprises over 97 percent of the company’s current sales,” analyst Michael Exstein said.

Exstein estimates that if Target leaves Canada in 2015, it will incur US $3.5 billion in charges but generate US $1 billion in cash proceeds.  As a result, Target could see a ten percent dip in shareholder’s equity as well as the largest decline in free cash flow since 2007.

Some analysts disagree with Credit Suisse’s urgings, saying that leaving the Canadian market entirely will not be necessary.  Paul Trussell of Deutsche Bank told the Globe that the solution lies in closing its weakest stores.

“New management would need to come in and provide real measuring points... that will determine whether or not Target is truly positioned well for the long term in Canada,” Trussell said.

But Exstein considers that to be easier said than done.  “The turnaround would require fixing supply chain and stocking issues, investing in price, and perhaps most critical and difficult of all, repairing the company’s reputation in the eyes of the Canadian consumer,” he said. 

Target has yet to comment on their plans for the future.