Target Corp. executives are going back to the drawing board to revamp and improve its fledgling Canadian division amid mounting losses and other snags in its core U.S. market.
“We must improve our Canadian segment performance,” said John Mulligan, interim chief executive officer of the U.S. discounter whose predecessor, Gregg Steinhafel, was ousted on May 5 in the wake of a profit-busting data breach and troubles in Canada.
“Canada is a great market and Target is a great retailer, but so far we have not lived up to our potential or our expectations. Improving operations is key, but we need to think broadly about all aspects of our business and whether other changes are needed.”
He stopped short on Wednesday of suggesting he would close some of the weakest of Target’s 127 stores in this country after the retailer launched them gradually starting in March, 2013. Almost from Day One, they were plagued with problems such as bare shelves and shopper complaints their prices were too high.
Target’s first-quarter results, released on Wednesday, reflect the rocky rollout, although in some aspects they were better than analysts had expected as the company rushed in recent months to drop prices and draw back customers.
The retailer reported first-quarter sales in Canada of $393-million (U.S.), 8 per cent lower than analysts had estimated. But its $211-million Canadian loss before interest and taxes was slightly better than the forecast of a loss of $225-million, said analyst Mark Miller at William Blair & Co. in Chicago. Gross profit margins remained weak at 18.7 per cent of sales compared with 29.5 per cent in its U.S. market, driven by heavy discounting to clear excess inventory.
It expects this year’s Canadian sales to be close to $2-billion, below its earlier forecast of $2.6-billion, and profit margins to fall by 20 per cent instead of by 10 per cent, its previous estimate.
“From a longer-term standpoint, secular challenges related to competition in the United States and the uncertainty related to ultimate profit contribution (and perhaps viability) of the Canada business remain worrisome,” Mr. Miller said in a note.
Company executives outlined some of the work they’re doing in Canada, including beefing up its supply chain and flyers to highlight more discounts in a wider array of products. The company intends to launch an e-commerce site in this country, but it won’t be doing so this year, Mr. Mulligan told a media call.
Still, he struggles with bare shelves in some stores, photos of which are regularly posted on Twitter. “I see the pictures all the time too,” said Mr. Mulligan, who is also chief financial officer. “I’ve been in the stores and I’ve seen them. It is unacceptable.”
And he told analysts: “In Canada we need much more urgency to improve our operations.”
On Tuesday, Target announced that its Canadian president Tony Fisher was leaving and being replaced with Mark Schindele, senior vice-president of its U.S. merchandising operations and a veteran supply chain and product development expert. It also unveiled a new senior management team in Canada, and plans to create a new position of non-executive chairperson with deep knowledge of this market to advise the new president. Some analysts have suggested the top person here should be a seasoned Canadian merchant, just as U.S. discounters Wal-Mart Stores Inc. and Costco Wholesale launched with Canadian leaders in their divisions here.
When asked if Target will possibly close some of its weakest Canadian stores to improve overall performance, spokeswoman Lisa Gibson responded in an e-mail: “Our priority is on accelerating the improvement of Canadian operations. This will be a broad undertaking and will require assessing all aspects of the business while also drilling down to evaluate individual stores to enhance the guest [customer] experience. We recognize we have work to do and our team is committed to moving quickly to address these challenges.”
Over all, the company posted a 16-per-cent drop in its first-quarter profit to $418-million or 66 cents a share, generally in line with lowered forecasts, while reporting improvements in its troubled Canadian operations. Sales grew 2.1 per cent to $17-billion from $16.7-billion.
Mr. Mulligan said the retailer’s first-quarter internal customer survey showed double-digit gains from the previous quarter in favourable responses on questions about inventory levels and pricing. “I don’t want to leave you with the wrong impression,” he added. “We’re not satisfied … But we’re starting to see progress.”