Target's Failure in Canada a Cautionary Tale for Retailers

By Markets Fool.com

Target is ending its disastrous move into Canada only four years after buying 220 Zellers department store locations from Hudson's Bay for $1.8 billion. Target's foray into Canada already has accounted for billions in losses, including $627 million in losses before interest and taxes so far in fiscal year 2014.

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Thursday's announcement will affect 133 stores and some 17,600 workers, who will be able to receive "fair treatment" compensation from a $59 million Employee Trust. The move is CEO Brian Cornell's first major as the company's leader, and according to Thursday's statement, leaving Canada will allow Target to increase fiscal year 2015 earnings and cash flow in 2016. In the meantime, investors can expect a $5.4 billion loss from discontinued operations in the fourth quarter.

There were too many unstacked shelves for Target Canada to survive. Image owned by The Motley Fool.

So what went wrong in Canada?
Part of the problem in Canada was Target's all-in move into the country. The normally conservative and measured company moved as quickly as it could to open stores, hoping that Canada could be a growth avenue when few exist domestically in the brick and mortar retail business.

But Target's own operations weren't ready for the move. Reports of empty store shelves grew in 2013 and by mid-2014 the reputational damage was done. Target would have to spend years and billions more improving distribution and restoring its brand in Canada. As Cornell put it, they were "unable to find a realistic scenario that would get Target Canada to profitability until at least 2021."

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Leaving Canada takes away a financial burden but also an opportunity lost. If Target had taken a more conservative approach, building out distribution before opening hundreds of stores, it could have been a boon for the company. Instead, it's another cautionary story in retail.

What's next for Target?
The good news for Target is that it'll be able to renew focus on brick and mortar stores in the U.S. as well as online sales. Management said this week that same-store sales were up 3% in the fourth quarter, beating their own 2% expectations. And 3% is fairly impressive in retail these days.

For Target to really move into the 21st century and compete with Amazon.com and Walmart it will have to improve the performance of Target.com to become relevant online. The last year has seen a renewed focus on the online side of the business, and early reports after Thanksgiving showed as much as 40% growth. This is a high potential market for Target but many retailers have struggled online and competitors like Amazon already have a huge head start.

Image owned by The Motley Fool.

If leaving Canada means increasing resources, distribution, and prices in the Target.com side of the business, this could be a good long-term move for the company. But let's remember that execution is key.

A lesson learned in retail international expansion
Unfortunately, the number of retailers who have attempted to grow internationally and failed is incredible, and this is just the latest case. (Walmart has struggled in countries like Mexico, Brazil, and China.)

In Canada, the culture and demographics should have worked in Target's favor, particularly being headquartered in a cold northern state like Minneapolis, Minnesota where the culture is very similar to much of Canada. But Target's execution was so poor that it couldn't succeed even in this instance.

Now the hope is that Target can move its growth focus online. If it can't, I wouldn't want to own a big box retailer with few growth options in an increasingly online world. Investors should watch closely as the pressure is on Cornell to make the right strategic recovery moves.

The article Target's Failure in Canada a Cautionary Tale for Retailers originally appeared on Fool.com.

Travis Hoium does not have a position in any company mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.