Target Leaving Canada: What It Means, What It Will Cost

The decision to cut ties followed billions of dollars in losses with no profitability in sight.

Over the holidays, Target Corporation took a final go at stopping the bleeding at its battered Target Canada operation, flooding many stores with thousands of new products.
But as it became clear that no effort would get Target Canada to profitability until at least 2021, the company decided to cut ties with its first international expansion less than two years after its inception. On Thursday, Target announced plans to shutter its 133 stores and lay off 17,600 employees. Job cuts will also likely affect Target employees in the Twin Cities, where about 600 people work on the company’s Canadian operation. A Target spokeswoman told Minnesota Public Radio that though it’s too early to say how many may be laid off or when, “we do expect there will be a reduction in headcount.”
“We hoped that these efforts in Canada would lead to a successful holiday season, but we did not see the required step-change in our holiday performance,” CEO Brian Cornell said in a statement.
Target expects to report about $5.4 billion of pre-tax losses on discontinued operations in the fourth quarter of 2014 and said it will spend between $500 million and $600 million in exiting Canada. Target applied for protection under the Companies’ Creditors Arrangement Act, a Canadian law that that allows companies that can’t pay down debt to restructure. It is also seeking approval from the Ontario Superior Court of Justice to “voluntarily” make cash contributions of roughly $59 million to an employee trust that would provide most Target Canada-based workers at least 16 weeks’ severance pay and benefits.

Target first expanded into Canada under former CEO Gregg Steinhafel in March 2013, and trouble followed almost immediately. Customers complained that its prices were not competitive with similar retailers like Wal-Mart, and a faulty supply-chain led to empty shelves in many locations. “Unfortunately, the negative guest sentiment became too much to overcome,” Cornell said Thursday.
Of opening 124 stores in its first 10 months in Canada, Cornell said Thursday: “We missed the mark from the beginning by taking on too much too fast. “ The locations themselves also drew customers’ ire: the Wall Street Journal reported that customers were disappointed by the stores’ locations, “many of which were hard to access and in rundown shopping centers.”
As losses crept past $1 billion after Target Canada’s first year of operation, Target Corporation ousted its president of Canadian operations, Tony Fisher in May 2014. Later that month, Steinhafel was also forced out, the Canadian experiment on the short list of reasons for his departure. Steinhafel walked away with more than $58 million in pension, retirement benefits and severance awards—this on top of more than $20 million in cash salary and bonus, and $56 million in realized stock gains over the prior five years, according to Bloomberg.
On Thursday, Cornell said that when he took the helm in August 2014, he promised employees and shareholders that he would take a hard look at the business and operations. Of Target Canada, Cornell concluded in a Q&A on the company’s website Thursday: “Simply put, we were losing money every day.”
The decision to leave Canada did not surprise all. Brian Sozzi, an analyst with Belus Capital Advisors, predicted the move earlier this month. Sozzi wrote Thursday that the exit should be welcome news for the company’s investors. Indeed, as of mid-morning Thursday, shares of Target traded up around 2.5 percent. Sozzi said a likely buyer of Target Canada locations would be Wal-Mart, which has been expanding in Canada after two decades up there. Sozzi said Target could now turn attention to two “rather forgotten” strategies later this year: “share repurchases and laying the groundwork for the opening of smaller U.S. stores in urban markets in 2016.”
Also Thursday, Target said same-store sales were expected to rise 3 percent in the fourth quarter, compared with the same period a year ago. This would top a 2 percent increase the company had originally forecast. The company will report its fourth-quarter earnings on Feb. 25.