Target Corp. says it’s making headway in overcoming what’s been a calamitous launch in Canada, but there’s still more to be done as the embattled chain heads into what may well be a make-or-break holiday season.
“We are seeing progress in operations but still have work to do,” Eric Hausman, a spokesman for the U.S. department store said Wednesday.
The affirmation comes a day after a scathing research report painted a dark picture for the fate of Target’s 133 Canadian stores, suggesting there hasn’t been much visible proof of positive change since a new leadership team put in place this summer vowed a turnaround.
“There is minimal empirical evidence of any recent improvement in the store or distribution operations of the company,” CIBC retail analyst Perry Caicco said.
MORE: Target’s biggest headache in Canada? Bare store shelves
Target Canada is faced with “serious decisions,” Caicco concluded, to either double down on the Canadian chain in hopes of getting things right (i.e., achieving profitability eventually), or to seek an exit of some kind.
“The report represents one analyst’s opinion,” Hausman said. “Target’s focus is on driving improvements to the business.”
‘There is minimal empirical evidence of any recent improvement in the store.’
An outright retreat back to the U.S. would cost in excess of $420 million, Caicco estimated, as Minneapolis-based Target would have to break lease agreements, pay severance to approximately 26,000 Canadian employees and burn down inventory through quick fire sales.
Target Canada isn’t likely to make any move until the end of 2015, CIBC said, to see if it can solve its in-store stocking woes and attract shoppers with new pricing and “sharper” merchandise.
But becoming profitable will still take years and represents a daunting challenge in Canada’s competitive retail landscape, CIBC believes. The cost of staying may be higher than paying for an exit.
Sale to rival?
To cushion the blow, Target could sell its leases to a competitor. “The most likely option is a sale of the assets to another resident retailer,” Caicco said.
The analyst said Target could likely weigh a possible sale to rivals like Walmart, Loblaw or Hudson’s Bay – who sold Target leases from its flagging Zellers chain in 2011, paving the way for Target’s entry in March 2013.
Caicco said the probability of a sale of Target’s leases, either with or without a branding or licencing agreement, to Loblaw or Hudson’s Bay was “low-medium” and “low” respectively.
A sale to Walmart meanwhile was given a “medium-high” probability.
“Nobody would have more to gain than Walmart, and they could outbid everybody easily,” Caicco said.
MORE: Walmart Canada turns focus to grinding down grocery prices
Target has opened more than 130 stores across Canada over the past 18 months, initially to huge fanfare and consumer enthusiasm. Stocking issues in stores and backlash over perceived overpricing soon sapped the goodwill generated early on.
Foot traffic has waned. Experts estimate Target has sunk more than $6 billion into its Canadian foray, while achieving only about half the sales that were initially estimated.
Caicco said he expects sales at Target Canada to total roughly $2 billion in 2014, well down from the $4.1 billion the analyst envisioned when Target was first launching stores.
In May, Target replaced its Canadian head with Mark Schindele, a veteran retail merchant at the company, while new chief executive Brian Cornell has since said turning around Target’s fortunes in Canada is a top priority.
MORE: Here’s exactly what Target plans to sell to woo back Canadian shoppers
But the CIBC analyst said recent store checks have disappointed. “So far, on our store visits, we have seen few examples of remarkable improvements,” Caicco said.
Shelves and displays don’t appear to be stocked much better, pricing hasn’t meaningfully changed and there are “few exciting new programs” or promotions in most parts of the store, he said.
“Our focus remains on improving operations and offering our guests a great shopping experience,” Target spokesman Hausman said Wednesday.
In August, Cornell vowed changes were coming soon at Canadian stores, emphasizing the critical importance of correcting problems ahead of the holiday season.
“No one is happy with our current performance,” Cornell said on an Aug. 20 conference call. “We’ve clearly disappointed our Canadians guests.”
“We have to have a sense of urgency here,” he added.
WATCH, Wed., Jul 23: Target Canada is still struggling, losing $1 billion since opening up shop in Canada 18 months ago. Now, the beleaguered company is asking for help. Vassy Kapelos explains.
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