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On Tuesday, Minneapolis-based Target lowered its second-quarter outlook, pointing to pinched profit margins – including in Canada – amid heavy discounting to clear excess merchandise and lure cautious consumers. It also expects steeper costs tied to its U.S. data breach in the quarter, whose results it will release on Aug. 20. (Fred Lum/The Globe and Mail)
On Tuesday, Minneapolis-based Target lowered its second-quarter outlook, pointing to pinched profit margins – including in Canada – amid heavy discounting to clear excess merchandise and lure cautious consumers. It also expects steeper costs tied to its U.S. data breach in the quarter, whose results it will release on Aug. 20. (Fred Lum/The Globe and Mail)

Target faces steep competition as back-to-school season starts Add to ...

Discounter Target Corp. faces new challenges in its effort to rescue its flagging Canadian business as the critical back-to-school selling season gets underway.

On Tuesday, Minneapolis-based Target lowered its second-quarter outlook, pointing to pinched profit margins – including in Canada – amid heavy discounting to clear excess merchandise and lure cautious consumers. It also expects steeper costs tied to its U.S. data breach in the quarter, whose results it will release on Aug. 20.

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Now as a new leadership team at Target gears up for the back-to-school period – the second biggest retail season after Christmas – consultancy EY is forecasting that overall Canadian back-to-school sales will be stagnant compared with a 3.7-per-cent gain a year earlier.

“Consumers are very thrift-conscious – they’re looking for bargains,” said Bruce Winder, president of retail specialist Bruce Edward Winder Consultancy in Toronto. “It’s a very important time for Target. … This might be Target’s coming-out-party.”

Target has suffered from a perception of overly-high prices compared with those at its U.S. stores and under-stocked shelves. Under new leadership, the discount chain needs to rejig its strategies and persuade shoppers to give it another try after it stumbled in its launch here last year.

But penny-pinching consumers won’t be rushing to spend on back-to-school items this year, EY data warns. “The stage is set for an overall sluggish back-to-school season,” said Daniel Baer, EY partner and Canadian retail and consumer products sector leader.

He said retailers in Canada are feeling the squeeze of “hungrier” competition partly because last year at this time, Target had about half of the 130 stores it now runs in this country. “That adds an element that you don’t necessarily have in the U.S.,” Mr. Baer said. South of the border, the average family with children in kindergarten to grade 12 will spend 5 per cent more than last year on back-to-school items, predicted a National Retail Federation survey last month.

Mr. Baer said Canadian consumers are expected to spend less on traditional back-to-school products because they’re shelling out more for food, gas and new homes, leaving them with less money for clothing, footwear, electronics and school supplies. Amid the tighter competition, including archrival Wal-Mart Canada Corp. expanding quickly here, Target needs to live up to its marketing slogan Expect more. Pay less – he said.

“They have to reset to meet what the consumer was expecting from them from Day One, which was a tall order given the number of stores they were looking to open,” he said. “I’m in the camp of expecting them to stay in Canada and to work on that expectation gap and fix it.”

He said Target will be helped by its limited-edition fashion collections, including one this fall in which the retailer is teaming with luxury designer Joseph Altuzarra. As well, the chain is lowering some prices and adding “hundreds” of new fashion items to its racks, John Butcher, senior vice-president of merchandising, said in an interview in June. A Target spokesman declined to comment on Tuesday.

But Target is at a disadvantage in not yet having e-commerce in Canada, even as it races to catch up on its digital strategies south of the border, Mr. Baer said.

Wal-Mart, for its part, is doubling the number of back-to-school items it is selling online this year compared with 2013, said Mark Hilton, a vice-president of merchandising at the discounter. “We’ve really changed our strategy and stepped up our online focus,” he said.

And Wal-Mart has cut prices on some back-to-school items by up to half from a year ago, Mr. Hilton said. “The market’s heated up but I can guarantee you our prices have heated up even more.”

For example, Wal-Mart is selling a 24-piece Crayola crayon for 25 cents, compared with $2 on average at competitors, according to the chain’s research, while it’s touting a Hilroy 32-page exercise book for 5 cents, compared with 35 cents at competitors, he said. Wal-Mart is also focusing on back-to-campus goods, such as $15 “fashionable” comforters, he said.

Target’s bleak forecast came less than a week after the retailer named former PepsiCo Inc. and Wal-Mart Stores Inc. executive Brian Cornell as chief executive officer as it tries to regain customer confidence. In Canada, it expects “somewhat softer-than expected sales” and a margin pinch from “continued investments to clear excess inventory.“ Target estimated overall adjusted second-quarter profit will be about 78 cents (U.S.) a share, lower than its prior forecast of 85 cents to $1 a share. Analysts on average expected a profit of 91 cents a share, according to Thomson Reuters I/B/E/S.

Follow on Twitter: @MarinaStrauss

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