POLITICS

Target Corp. checks out of Canada with plans to wind down 133 stores

01/15/2015 08:30 EST | Updated 03/17/2015 05:59 EDT
TORONTO - What began with Target Corp. bursting into Canada with confidence over its prospects has quickly spiralled into billions of dollars in losses and a decision by the discount retailer to scamper back to the United States.

Less than two years after opening its first stores in Canada, the Minneapolis-based company has admitted defeat in the Canadian market, saying Thursday that it could not see turning a profit here for at least another six years — a lifetime in the retail industry.

Target will close 133 stores across the country by early June, with 17,600 employees losing their jobs.

"We have not realized the significant improvement in Canadian consumer sentiment that we believe is necessary," Target chief executive Brian Cornell told analysts during a conference call.

"Put simply, we have not seen the step-change in performance we told you we needed to see."

Target spent more than five years weighing its entry into Canada before making the move to acquire most of the real estate assets operated by Zellers back in 2010.

Winding down those stores will prove to be a costly endeavour, with Target expecting to record about US$5.4 billion in pre-tax losses in its fourth-quarter, mostly related to the Canadian operation. The company said it will also work with an adviser to sell its real estate and expects to spend between US$500 million and US$600 million in cash on the closures.

While the possibility of Target leaving Canada has been talked about for months, some shoppers were surprised that it happened so quickly after the holiday shopping season.

"They really haven't given it a chance yet," said Lisa Kirch outside a Toronto store after she heard about the closures. "I don't know where everybody is supposed to go."

Other Toronto shoppers weren't quite as shocked and suggested that Target didn't connect with their needs.

"I found them to be a little pricey," said Lynn Brough, who visited her local Target once before she decided to spend her money elsewhere.

A representative for Target said the liquidation of its Canadian stores was still in the planning stages.

"The timing for store closures will vary on a store-by-store basis and, until we get into the process, we won't know that level of detail," said spokesman Eric Hausman.

Lacklustre holiday shopping results likely led Target to decide there was no hope of turning around its fumbled plan to become a national retailer that aspired to compete with the likes of Walmart, Canadian Tire (TSX:CTC.A) and Hudson's Bay Co. (TSX:HBC).

Target's departure raises new questions about how the company's absence will reshape the Canadian retail landscape, which has lost several familiar names over the past year.

Sony Corp. was the latest to add its name to the growing list, notifying employees this week that it was closing its remaining 14 locations in Canada. Fashion retailers Mexx, Smart Set and Jacob have also recently liquidated their stores.

Before its launch, Target was viewed as a considerable threat to Canadian retailers of all sizes, partly because its reputation with consumers was unique. Many Canadian shoppers would trek south of the border to wander the aisles of U.S. Target stores in search deals and products they couldn't find at home.

But when Target arrived in Canada the story wasn't the same, and complaints flooded social media about empty shelves, high prices and a selection that fell short of expectations.

"Canadian consumers walked in expecting the American store experience and got this watered down version," said Brynn Winegard, a marketing analyst at Winegard and Company.

Winegard believes Target's U.S. executive team misjudged the market and went in with a preconceived notion that Canadians would greet them with open wallets. She points to the company's first domestic advertising campaign as an example of how confidence overshadowed reality.

The commercial featured a woman riding a motorcycle past some of the country's famous tourist spots and cities before splashing the screen with its logo, saying "Target loves Canada." Winegard said was too soon for the company to be presenting itself as part of the culture.

"We have a lot of great Canadian retail brands, and we didn't need Target to be Canadian," she said. "We needed them to be the company they've been in the U.S."

Target's decision to leave Canada comes as the parent company tries to please investors with better quarterly profits. Just over a year ago, the company suffered a massive security breach that saw credit and debit card information for 110 million North American customers stolen by hackers, which had a rippling effect on its overall business.

"It's clear that our US business has fully healed from those dark days, but that is not enough and we're not yet where we need to be in the U.S.," the company's chief financial officer, John Mulligan, told analysts on Thursday.

"With today's decisions we can focus all of our resources to go beyond healing the U.S. business and continue our work to make it stronger."

The company said it would provide US$175 million of credit to fund Target Canada's operations while it winds down under the Companies' Creditors Arrangement Act, or CCAA, the Canadian equivalent of Chapter 11 bankruptcy protection in the United States.

What remains to be seen is whose hands Target's 133 stores land in over the coming months — but there could be interested bidders aplenty.

"There's going to be a number of retailers who are going to want to get their hands on (some of) these stores," said Antony Karabus, chief executive of HRC Advisory, a firm that consults with retailers.

"But I think some of them are going to sit empty for awhile."

Prior to Target's arrival most of the former Zellers properties were considered rundown and mostly in unattractive locations. When Target acquired the stores, the company tore up the floors and refreshed lighting to reflect its trademark red and white appearance.

Target ultimately spent about $10 million on each location, both the inside and outside, which could prove to be a selling feature when the stores hit the sales block.

Some potential bidders include Walmart, Canadian Tire, and grocers like Loblaw (TSX:L), analysts suggested.

Even Canadian retailers who have recently closed underperforming stores, like Sobeys and Rona (TSX:RON), could also find assets in Quebec and elsewhere to gobble up in the process, said Karabus.

Target says the stores will remain open during a court-supervised liquidation period and it's working to ensure employees are paid at least 16 weeks of severance.

RioCan Real Estate Investment Trust (TSX:REI.UN) owns 26 of the properties where Target stores are located, saying on average they have a remaining lease term of 12.7 years. Canada's largest real estate investment trust said the properties represent just 1.9 per cent of total annualized rental revenue.

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