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Target Stock Canada's Failure Threatens American Investors

Companies / Retail Sector Jan 24, 2015 - 01:56 AM GMT

By: Money_Morning

Companies

Target Corp. (NYSE: TGT) had one chance to make a good first impression in Canada… and blew it. And Target stock may soon feel the effects.

I know because I saw it clearly for myself.

While that may sound harsh, it's the reality of what happened.


Just two years into their expansion north of the border, and billions of dollars later, the chain's closing up shop and taking a big hit.

This should never have happened and it is another blow to an increasingly punch-drunk retailer.

Here's the story behind it and what to do…

A Flawed Strategy and Execution Were the Problems

Before Target came to Canada, Canadians went to Target in search of "cheap chic."

Many recognized their products as somewhat better quality and more stylish than their main competitor, Walmart (NYSE: WMT). Often the prices at the two stores are comparable.

With an estimated 75% of Canadians (myself included) living within 100 miles of the U.S. border, same day shopping trips south are popular, especially when the exchange rate favors a strong dollar. So Target management reasoned that expanding north made perfect sense as they eyed a familiar yet relatively untapped market.

And even if generally correct, they failed on two critical success criteria… strategy and execution.

I remember firsthand the media fanfare that accompanied Target's entry into Canada and when the first stores greeted customers.

We'd gone in on a couple of occasions within the first few weeks.  My reaction was the same as others I spoke to soon after: prices were typically higher than in Target's U.S. stores, numerous products available stateside were nowhere to be found, and shortages were common. Barren parking lots in front of Target stores were typical.

I kept wondering what the point was of coming into Canada if they weren't going to give Walmart a run for their money?

Current Chief Executive Officer Brian Cornell admitted as much on Target's blog: "We missed the mark from the beginning by taking on too much too fast." Within the first year, the retailer had opened as many as 100 stores.

But that's not all. Management also misjudged the Canadian consumer.

Especially through online shopping, Canadians were quick to realize they were being gouged when comparing to U.S. prices.

In their defense, Target is not alone in having a tough go up here these days, with even Walmart suffering weakening sales. In recent months, both Sony and Mexx (an Amsterdam-based clothing retailer) announced that they were closing their Canadian retail outlets.

For Target, it's been a costly foray into Canada. Target expects a $5.4 billion Q4 loss thanks to discontinued Canadian operations, and cash costs related to exiting on the order of $500 million to $600 million.

Given that management only expected profitability to be reached by 2021, shuttering operations was probably a wise move.

Target's closures will ultimately see all 133 stores close (it is expected to close all its stores by May) and 17,600 employees looking for new jobs. The company is providing workers with 16 weeks of compensation wages and benefits. Clearly the ethical corporate move for its employees, but a residual cost that will persist once the stores have shuttered.

In hindsight, perhaps the company's biggest misstep was strategic. A few months after the retailer had opened in Canada, I thought to go online and search for an item. Initially, I thought I'd done something wrong. But as it turns out, I didn't; Target did.

The company basically had never set up an online shopping presence in Canada. Instead, its Canadian website consisted of little more than a tool to find the nearest location and show off its latest flyer. I was shocked. What a disappointment given the company's size and the scale of its launch to have overlooked a critical component to supporting a bricks and mortar expansion with an ancillary (and presumably requisite) accompanying online presence.

From start to finish, Target had tripped up both the strategy and execution of its foray into the North. In the United States the company's slogan may be:  "Expect More. Pay Less." But up here "Expect Less. Pay More." seems more fitting.

The Takeaway

TGT stock participated in the 2014 equities ride, ringing in last New Year with a $63.49 close and closing out the year at $75.90 for a tidy 20% pickup. It hovered just below $76.00 yesterday.

Clouds continue to loom over its operations into 2015. "Big Box" retailers, as a sector, struggle with online competition and there's no reason to think that will end in 2015. More specific to Target and its great Canadian failure, the struggles come with a specific price tag. The now insolvent Target Canada owes $12 million to the Canada Revenue Agency and various amounts to a number of provincial and municipal governments. Not a great calling card for international expansion elsewhere. The residual severance packages alluded to above will add another $70 million residual tab to a non-performing asset.

It also owes billions in dollars to a grocery list of companies, from small suppliers to large, including Proctor & Gamble (NYSE: PG), Mattel (Nasdaq: MAT), and Nestle (VTX: NESN). Again, not a great leverage point for favorable inventory terms.

Retail stocks can be the most easily alluring, as they are so ubiquitous in our daily lives. They are also often the most whimsical in performance. In the case of TGT stock, don't be fooled by a 20% run-up. Rather than invest in Target stock in 2015, better to take a look back at some of the recent topics we've discussed here at Money Morning, such as gold and an excellent way to truly track its performance – without setting foot in a store.

Source : http://moneymorning.com/2015/01/23/target-stock-nyse-tgt-is-off-the-mark-in-2015/

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