Will Target Canada Survive 2015?

Target’s Canadian expansion is standing on pretty shaky ground. Here’s why it makes sense for the company to sell its stores to Hudson’s Bay Co. (TSX:HBC) or Loblaw Companies Limited (TSX:L).

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The Motley Fool

If I had one word to describe Target Corporation’s (NYSE: TGT) expansion into Canada, I’d go with lackluster. And I think that’s being generous.

Since the company opened the first of its 133 Canadian stores in Ontario in March, 2013, it has seen nothing but losses from its Canadian division. Although the stores are renovated nicely and have great visual appeal, the stores have been plagued with a host of problems including poor price perception, a lack of foot traffic, and perhaps the most fatal flaw for a retailer, a lack of merchandise.

While the company has been taking steps to improve the situation in Canada — including hiring new brass to run the Canadian division and replacing the company’s CEO — the fact remains that the company’s foray into our nation is starting to get to the point where it’s time to consider pulling the plug. Losses recently surpassed $1.5 billion in total in Canada, and an analyst who recently appeared on BNN suggested the company would have to increase same store sales 21% annually over the next three years just to get to breakeven. Those are daunting numbers, even for a retailer with the clout of Target.

The company has indicated it plans to review its future in Canada early in the new year. Assuming the company exits Canada, how will this affect some of its Canadian competitors? And who’s most likely to purchase the stores?

Wal-Mart

Many analysts assume Wal-Mart Stores, Inc. (NYSE: WMT) is the logical buyer for Target’s Canadian stores.

Wal-Mart views Canada as a market it can eventually dominate. The company already has a strong base here, with operations from coast to coast. It could also get significant synergies from a possible purchase of Target, cutting costs by supplying the new stores from its own warehouses and using its own front office staff. Adding some 140 Target stores isn’t such a big deal for a company with nearly 400 stores of its own.

Hudson’s Bay Company

There’s also the possibility of Hudson’s Bay Co (TSX: HBC) taking over the operations of Target’s Canadian stores.

There are a couple of reasons why this makes sense. First of all, Hudson’s Bay sold Target the majority of its Zellers leases when the American retailer expanded into the country in the first place. Hudson’s Bay management knows these locations well and it seems likely that the two companies could strike some sort of deal that allows Hudson’s Bay to continue running the locations as Target stores.

Additionally, Hudson’s Bay could be flush with cash fairly soon. The company is sitting on as much as $8 billion in untapped real estate, including the Saks Building in New York City (which it acquired along with Saks Inc. in late 2013), which a recent appraisal valued at nearly $4 billion. Management has been hinting about spinning off this excess real estate into a REIT for months now, which would raise the cash needed to take on a significant expansion.

Loblaw Companies

Although Loblaw Companies (TSX: L) is a little stretched after acquiring Shoppers Drug Mart in 2013, there’s always the possibility it acquires Target’s Canadian stores. It’s just too big to ignore.

Loblaw’s management has shown themselves to be terrific operators, and it has the supply chain might to be able to quickly and effortlessly swallow a large number of new stores. And since many of Target’s locations are located within a stone’s throw of Loblaw stores, the company could profit simply by buying the chain at a bargain price and shutting down stores it wants to get rid of.

No matter what happens with Target Canada, it’s obvious the expansion into Canada has been a mistake. If Target does decide to sell, there are likely to be a few interested buyers. If the eventual owner of these stores can execute properly, it could turn out to be a great acquisition.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith owns shares of HUDSONS BAY COMPANY.

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