Target Corp. will walk away from Canada less than two years after opening stores there, putting an end to a mismanaged expansion that racked up billions in losses.
The Canadian division, which employs 17,600 people, is seeking court approval to begin liquidation, the Minneapolis-based retailer said today in a statement. Dismantling operations north of the border will lead to a $5.4 billion writedown this quarter, though it will boost profit by next year, Target said.
Fixing the Canada unit, which had amassed more than $2 billion in operating losses since 2011, has been a top priority for Chief Executive Officer Brian Cornell. After taking the reins in August, he spent a portion of his early days at the company touring operations in the country. The woes plaguing the chain’s 133 stores there ranged from empty shelves to prices being higher than at locations in the U.S.
“We were unable to find a realistic scenario that would get Target Canada to profitability until at least 2021,” Cornell said today. “This was a very difficult decision, but it was the right decision for our company.”
The shares rose 1.8 percent to $75.67 at the close in New York. The stock had already been rebounding under Cornell, helped by signs it was recovering from a data breach that hit during the 2013 holiday season. Target has gained 23 percent in the past 12 months.
While it’s unfortunate for employees, shareholders had been losing money in Canada, said Brian Yarbrough, an analyst at Edward Jones & Co. in St. Louis. Eliminating the unit will boost earnings by as much as 30 percent, so “it’s definitely a positive,” he said.
This is the first major strategic shift made under Cornell, who took over when Gregg Steinhafel was ousted after the hacker attack and a broader sales slump. Steinhafel had seen Canada as a burgeoning market for Target, the second-largest U.S. discount chain, because so many Canadians already knew the brand and would cross the border to shop at American stores.
“Cornell quickly realized that so many problems had been passed along by his predecessor and that he really needs to concentrate on the U.S.,” said Burt Flickinger, managing director at Strategic Resource Group, a retail consulting firm. “As good of an opportunity as Canada is long term, it was too badly broken to fix quickly.”
Target announced its foray into Canada in 2011 with the purchase of 220 locations from Zellers Inc., a subsidiary of Hudson’s Bay Co., for about C$1.8 billion. The deal cemented the chain’s first expansion outside the U.S., where it had about 1,750 stores at the time. The first stores opened in March of 2013.
The Canadian expansion was part of Steinhafel’s bid to revive growth at the discounter. After filling the U.S. with the retailer’s stores, the former CEO saw the country as an enticing market where brand recognition was already high.
The expansion, along with adding more groceries to stores and a discount card, were supposed to help the chain boost sales across the company.
The Canadian division had hoped for a turnaround during the holidays, but it didn’t come, Cornell said today. Target had just opened three additional stores in the country in October.
The local economy may also have played a role, Flickinger said. The plunge in oil prices is expected to slow growth. Additionally, the Canadian dollar, the loonie, fell to a five-year low yesterday.
The U.S., meanwhile, is performing better than expected, the company said today. Same-store sales at its U.S. locations will increase by 3 percent this quarter, topping a forecast of 2 percent, thanks to more online purchases and store visits than predicted.
The company also expects costs from exiting Canada to be as much as $600 million, most of which will occur in the fiscal year that begins in February, or later, according to the statement. As part of the liquidation, Target will set up a $59 million fund to pay almost all employees a minimum of 16 weeks of wages and benefits as the unit winds down.
The chain’s absence north of the border may benefit Wal-Mart Stores Inc. and domestic retailers such as Canadian Tire Corp. and Loblaw Cos. Target generated $1.3 billion in sales in Canada through the first three quarters of this fiscal year and had previously expected to reach $6 billion in annual revenue by 2017.
For Vivian Lo, a fund manager at Aston Hill Financial Inc. in Toronto, Target’s woes were simple. The stores in Canada never lived up to the ones across the border.
“As Canadians, we all go to Buffalo and shop at Target,” said Lo. “When Target came to Canada, we expected the same thing, and it wasn’t the same from the product offering to the pricing.”