Target to exit Canadian market, will shutter 133 stores

Target Corp.'s multibillion dollar bet in Canada is officially a bust.

After its first attempt to expand globally turned into an embarrassing and costly debacle, the Minneapolis-based retailer announced on Thursday that it will shutter its 133 stores north of the border and will instead focus its energies on revitalizing its core 1,800-store U.S. business.

The decision comes less than two years after Target opened its first stores in Canada to much fanfare. The operation quickly became a black eye for the company as it struggled to get the basics right. Its problems keeping shelves stocked were mocked on social media and turned off many consumers, while Canadians also complained that Target's prices were too high.

Target had hoped to begin turning a profit in Canada by the end of 2013. Instead, it has racked up about $2 billion in losses.

Brian Cornell, Target's chief executive, inherited the Canadian troubles when he joined the retailer in August. He told analysts on Thursday that he knew it wouldn't be easy, but that he initially thought the stores could be turned around with the right plan in place.

"However, in my time here at Target, I developed a better understanding of just how deeply our entry disappointed Canadian shoppers," he said.

After seeing the results from the holiday season, he said it became clear that Canadians were not warming up to Target and that the Canadian stores could not be profitable until 2021 at the earliest.

"They obviously dug themselves into a very deep hole if it would take six years from today to be profitable," said Charlie O'Shea, a retail analyst with Moody's Investors Service.

"This was an execution failure from start to finish."

A number of other well-regarded retailers such as Wal-Mart and Lowe's have managed to find some degree of success in Canada, he said. So it is especially surprising that Target, which is a fairly good U.S. operator, got it so wrong in Canada by trying to simultaneously build out a distribution network and open dozens of stores.

Some analysts were surprised the announcement came so soon after the holidays, saying they expected Target to reassess later in the year so changes put in place last summer had more time to gain some traction.

"But the uphill battle was too high for them," said Brian Yarbrough, an analyst with Edward Jones. "We all underestimated how frustrated the consumer was in Canada and how much they had alienated that customer."

The aftershocks of Thursday's decision will be felt at Target's Minneapolis headquarters. About 600 employees in the United States, many of whom are based in the Twin Cities, supported Target Canada as either a full- or part-time responsibility. The company expects some layoffs here as a result, but doesn't yet know how many, said Dustee Jenkins, a company spokeswoman.

In Canada, about 17,600 workers will be losing their jobs, but Target is hoping to soften the blow by creating a $59 million employee trust to give those employees at least 16 weeks of compensation.

Target received preliminary approval Thursday morning for its application for protection under Companies' Creditors Arrangement Act with the Ontario Superior Court of Justice in Toronto.

The company has tapped Alvarez & Marsal Canada to help wind down its operations, including the liquidation and sales of its stores. Jenkins said the liquidation process is expected to take about 20 weeks, and stores will likely close in waves.

Target said it expects to report $5.4 billion of pretax losses in the fourth quarter and $275 million in the next quarter as a result of the Canadian exit.

It also estimated that it will spend between $500 million and $600 million in cash on shuttering its operations.

John Mulligan, the company's chief financial officer, told analysts those costs are comparable to a single year of Target Canada's operating cash needs.

While it didn't bear fruit, Target had been working to improve its Canadian stores in the past year. In May, it fired its president of Target Canada and named Mark Schindele, a Target veteran, as his successor. In August, days after Cornell took the reins, the retailer unveiled a rescue plan to lower some of its prices, physically count items to reset its inventory, and add thousands of new items to the stores.

After putting those changes into place, the holiday season was set up as a do-or-die moment for Target Canada as executives monitored whether they were moving the needle.

A team of Target employees and outside consultants visited each store before Christmas as they weighed such scenarios as closing just underperforming stores or using fewer distribution centers.

In the end, Cornell said he realized that Target would have to spend billions of dollars more in Canada without any realistic prospect of return on those investments.

Matt Nemer, an analyst with Wells Fargo, said the exit from Canada is a big "weight off the shoulders" of Target.

"It is also an indication of Cornell's leadership style, that there are no 'sacred cows' and that he is willing to make tough decisions that support shareholder value," he wrote in a research note.

With Canada no longer a distraction, Target will hone in on its U.S. business, which has been making some headway in recent months after struggling with sluggish sales and declining store traffic following the massive data breach in 2013 and a feeling that it had begun to lose its cachet as a cheap-chic retailer.

On Thursday, Target demonstrated more progress toward that end. The retailer said it now expects same-store sales increases in the fourth quarter to rise to 3 percent, up from its previous guidance of 2 percent, driven in part by higher store traffic and stronger online sales.

But Cornell said Target has plenty of room for improvement.

He pointed to growth opportunities including expanding smaller formats such as CityTarget and Target­Express, accelerating online and digital sales and elevating signature categories such as home and apparel.

"We need to modernize Target," he said.

And, he added, there are also other cost savings to be found within the company.

Cornell will lay out a more detailed road map for Target in a meeting with analysts on March 3.

The better-than-expected holiday sales and news of Target's exit from Canada sent the company's stock up 1.8 percent on Thursday, closing at $75.67 a share.

"We've seen from the past couple of months that Cornell is certainly willing to shake things up and make decisions to rock the boat," said Amy Koo, an analyst with Kantar Retail.

While Target's retreat from Canada raises questions about its ability to expand abroad in the future, she added that it's probably wise for Target to focus at home for now.

"They need to get this market right before they do anything else," said Koo. "I think they're off to a good start."

Kavita Kumar • 612-673-4113e