Target Canada Is Dead
It is official, folks—Target Canada is dead. The CBC (The Canadian Broadcasting Corporation, for uninformed Americans) is reporting that Target Corp. (NYSE: TGT) is planning to discontinue operations in Canada.
Target is planning to shut down all 133 of its Canadian stores and to lay off all 17,600 of its Canadian employees, a CBC article indicates. Target Canada has also filed for “creditor protection”—Canadian for bankruptcy.
It is easy to see why Target is pulling out of Canada; the CBC is reporting that Target lost money every day that it operated in Canada. The total amount of losses are not known, but Target lost $1 billion in its first year in the country, and it will cost between $500 and $600 million to shut down the Canadians. One reason for this is that Canadian law requires Target to pay each of its employees in the country 16 weeks in severance pay; that alone will cost $70 million.
The Canadian debacle will make a dent in Target’s TTM revenue, CBC reported. CBC estimates that Target’s accounts will have to write $5.4 billion off the upcoming fourth quarter earnings report because of the Canadian crash. If that $5.4 billion is subtracted from the $73.7 billion in TTM revenue Target reported on Oct. 31, 2014, Target’s TTM revenue will fall below $70 billion to $68.3 billion. It also means that any profits Target made from the 2014 holiday season will go straight down the Canadian black hole never to be seen again.
The impact on Target’s operations here in the United States is already being seen. The retailer just rescinded dozens of job offers to new employees, Minneapolis TV station KMPS reported. One has to wonder if closing of Target stores and other operations cutbacks in the USA is next.
This certainly seems to justify the contention that Target is losing market share. Its revenue growth has not been keeping pace with rivals like Walmart Stores Inc. (NYSE: WMT) and Amazon.com (NASDAQ: AMZN) in recent years.
Costco Conquers Canada
This disaster is a major victory for Costco Wholesale (NASDAQ: COST), which has been doing extremely well north of the border. Costco now has 10 million members in Canada, a nation of 35 million people, so around one out of three Canadians has a Costco card in his or her wallet. Costco also reported $13 billion in revenue in Canada in 2013 from 88 stores.
Target’s failure in Canada also casts serious doubt on the future of traditional retail. Its business model of building large discount stores in malls failed completely. One has to wonder how much longer that business model can last in the United States, particularly with aggressive competitors like Costco, Kroger (NYSE: KR), and Amazon stealing its best customers.
Other retailers, like Walmart and Bed Bath & Beyond (NASDAQ: BBBY), are going to have to take a hard look at Target’s Canadian adventure. One potential outcome of this will be a major pullback by Walmart in Canada. Another is that these stores will start limiting their investment in traditional retail.
Perhaps the most disturbing assessment of Target’s operations in Canada comes from Target Canada’s CEO, Brian Cornell. In a press release, Cornell all but admitted that Target Canada might never be profitable.
“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.
2014 Holiday Retail Success Turns into Retail Apocalypse
One has to wonder how many more major retail shutdowns are right around the corner. The Holiday 2014 retail success story is turning into a blood bath, and Sears Holdings (NYSE: SHLD) has not even reported its earnings yet. The retail apocalypse is truly upon us and about to get worse.
Disclosure: The author owns shares of Kroger and conducts retail sales through Amazon.com.