Target Corp. (TGT) has decided to wind up its unprofitable Canadian operations less than 24 months after its foray in the country. After a comprehensive evaluation of the business, it was concluded that attaining profitability in the region was not possible before 2021, which compelled Target to abandon Canada and focus on its domestic business.
Target estimates the cash cost of winding up to be somewhere around $500 to $600 million, to be accounted for in fiscal 2015 and beyond. Further, the company expects to record $5.4 billion in pre-tax losses from the discontinuation of the operations in the fourth quarter of fiscal 2014 and another $275 million in fiscal 2015.
As per sources, Target has spent over $4 billon on its Canadian business. It opened the first three pilot Target stores in Canada in Mar 2013.
Target, which carries a Zacks Rank #2 (Buy), expects the closure of Canadian operations to be accretive to its earnings and cash flow going ahead. The company will be shuttering all 133 stores resulting in 17,600 people losing their jobs. However, the company will provide all the employees a minimum of 16 weeks compensation through a $59 million Employee Trust Fund set up under the Ontario Superior Court of Justice’s scrutiny.
However, there is some good news for the soon-to-be fired employees. As per The Wall Street Journal report, Sears Canada, the subsidiary of Sears Holdings Corporation (SHLD), is asking Target employees to apply for jobs at its stores and is also offering an employee discount for 16 weeks.
Analysts observe that Target has been trying to improve its Canadian business since its inception but a series of problems, such as supply chain issues and stiff competition from local retailers, dragged its performance down. The company could not improve its supply chain and that left its store shelves poorly stocked, leaving customers agitated.
Moreover, the company was apparently offering goods at a higher price compared with its U.S. stores. This did not go down well with the Canadian customers. An average Canadian shopper is highly ‘value for money’-oriented and even does ‘cross-border’ shopping.
Though the company tried to improve the pricing mechanism, it could not gain a solid ground. This is because of a competitive Canadian retail landscape where local retailers dominate along with some of the American counterparts like Wal-Mart Stores Inc. (WMT). Wal-Mart came to Canada in 1994 and since has long established its operations in the country.
Analysts concluded that Target failed because the company was doing too many things in too little time. A step by step approach along with better understanding of the Canadian customer base would likely have burnished healthier results. Nevertheless, Target’s failure is a lesson to other retailers like Nordstrom Inc. (JWN) and DSW Inc. (DSW) that have recently begun expanding into the Canadian territory.
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