Target ditched Canada. Should shareholders ditch Target?
Target wasn’t willing to wait six years to turn a profit, so it’s packing up.
The U.S. retailer, which entered Canada two years ago, has said it wouldn’t make money north of the border until at least 2021.
Colum McKinley, vice-president of Canadian equities at CIBC Asset Management, is disappointed that Target’s leaving. But he understands why the firm’s new CEO, Brian Cornell, made the decision.
“They put a lot of effort into trying to reinvigorate the brand for Canadian consumers, but they weren’t able to do that,” he says. “Management took an objective look,
Target has 133 stores and about 17,600 employees in Canada, compared to 1,801 stores and about 350,000 employees in the U.S.
McKinley bought Target stock in early 2014, just after the company revealed its Dec. 2013 data breach that affected millions of customers. Investors were also upset about the Canadian losses. “We did our analysis and said, ‘Here is a strong operator that is facing a serious but transitory issue.’ ”
He’s glad he bought. “You’ve seen clear signs that the core U.S. business is improving. Today, they pointed to higher same-store sales and earnings per share than investors had been anticipating. We continue to have a positive view on Target’s U.S. franchise.” The company’s vitals should further improve as the U.S. economy recovers, he adds.
Target’s stock closed at $61.56 on January 15, 2014, and finished today at $75.67, up 1.80% from yesterday.
WHO WINS HERE?
Some have suggested this exit will be a boon for the grocery sector, but McKinley disagrees. “Of Target’s annual sales, only $350 million were grocery sales, and Canada’s total grocery sales is $100 billion,” he says.
Instead, he says, Canadian Tire will benefit.
“Canadian Tire has the bigger category overlaps with existing Target stores, for products such as household essentials and small kitchen appliances.”
Deal-hunting consumers will also gain as Target liquidates its inventory. “That’s a short-term, transitory issue, but it will put a little pressure on the space. I don’t think investors should be too concerned.”
Fellow retailers may also get Target stores–all of which were recently renovated–for a bargain.
Players such as Walmart, Loblaw and other grocers will “look at those stores and try to cherry-pick the best locations for themselves,” he says. “One part of that is to play defence, worrying about who it could go to. And one part to expand their store-location portfolio.”
He adds, “If you’re looking at moving in, and fits with your product suite and the location doesn’t overlap with existing stores, there could be some opportunities.”
Target built one location while in Canada: the Stockyards store in central Toronto, which opened in March 2014.
Despite Target’s decision, Canada’s retail landscape is much more competitive than it was 10 years ago, and McKinley isn’t worried about saturation. “While Target’s retreat reduces some of that competitiveness,” he says, “it’s still a very challenging market for the existing players.”
This article originally appeared on Advisor.ca