Target exiting Canada could be an opportunity for Walmart

Target is saying “Adios” to Canada as the retailer announced plans to shutter its 133 stores that it opened in that market in the past two years. Insiders see it as an opportunity for Wal-Mart, who remains committed to its northern expansion.

Target's CEO Brian Cornell said Thursday (Jan. 15) when he joined the retailer five months ago he promised to take a hard look at the entire business and all of its operations in an effort to improve financial performance. 

“After a thorough review of our Canadian performance and careful consideration of the implications of all options, we were unable to find a realistic scenario that would get Target Canada to profitability until at least 2021,” Cornell said.

While Cornell notes the difficult decision, he is confident it was the right move for the company. 

“With the full support of Target Corporations Board of Directors, we have determined that it is in the best interest of our business and our shareholders to exit the Canadian market and focus on driving growth and building further momentum in our U.S. business,” Cornell added.

The company expects to report about $5.4 billion of pre-tax losses for Target Canada in the fourth quarter to write down the investment. 

Shares of TGT rose on the news which also came with a revised fourth quarter 2014 outlook. Target said it now expects fourth quarter U.S. comparable sales to rise 3%, ahead of its original guidance of a 2% rise.

The retailer cited increased traffic and online sales for the better-than expected comparable sales. Target sees fourth-quarter adjusted per-share profit of $1.43 to $1.47 a share, about 6 cents ahead of expectations for U.S. Segment performance at the beginning of the quarter.

“There were many missteps along the way for Target, starting with an overly ambitious market entry plan when it launched with 124 new stores in its first year. This led to severe inventory related issues – overstocks in some stores, poor availability in others, from which it wasn't able to recover. Having built a hugely-impressive pre-opening awareness campaign, many shoppers were left disappointed,” IGD analyst Stewart Samuel told The City Wire.

Samuel said Target’s key competitors including Wal-Mart also delivered a solid defensive play, sharpening pricing, improving stores and offering better ranges.

That said, Canada has been a battleground for retailers. Wal-Mart laid off 750 workers in that market in April 2014 as it too struggled behind laggard performance. At that time Wal-Mart said it remained committed to building out its Canadian business which it has operated for two decades.

In fiscal 2014 Wal-Mart said it would invest between $550 million and $750 million annually to build new stores and refurbish older stores in Canada. In 2014, Wal-Mart spent $750 million with 35 new supercenters and several store remodels that allow for more fresh grocery.

“Wal-Mart is likely to be interested in some of the Target Canada stores. At around 115,000 square feet, they could provide the retailer with the opportunity to operate with a smaller footprint in some locations,” Samuel said.

Last year Big Lots closed 78 Canadian stores, which it bought just two years before. The retailer blamed increasing competition amid discounters. Best Buy also hit headwinds in 2013 and opted to close 15 of its 260 stores in Canada and cut about 5% of its workforce in the country as it tried to revamp its strategy.