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Workers install an outdoor sign at the new Target store at the Mic Mac Mall in Dartmouth, N.S. on Saturday, July 20, 2013. (Andrew Vaughan/THE CANADIAN PRESS)
Workers install an outdoor sign at the new Target store at the Mic Mac Mall in Dartmouth, N.S. on Saturday, July 20, 2013. (Andrew Vaughan/THE CANADIAN PRESS)

Business Briefing

Blame Canada: Why Sears and Target aren't happy Add to ...

These are stories Report on Business is following Wednesday, May 14, 2014.

Follow Michael Babad and The Globe's Business Briefing on Twitter.

Blame Canada
Both Target Corp. and Sears Holdings Corp. are finding life tough in Canada, though for different reasons.

And for Sears shareholders, the idea of getting out of here is cause for celebration.

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As The Globe and Mail’s Bertrand Marotte and Marina Strauss report, Sears today put its Canadian unit on the block, saying it’s considering a sale of its 51-per-cent stake or the entire company, which has operated here since 1953.

According to the latest results from the U.S. parent, which has already streamlined north of the border, same-store sales in Canada, a key measure in retailing, fell 2.7 per cent in the year ended Feb. 1. That accounted for some $85-million (U.S.) in the parent company’s plunge in revenue.

In the fourth quarter alone, Canadian same-store sales tumbled by 6.4 per cent, which Sears Canada blamed on the weather, representing a $60-million cut to revenue.

And adjusted profit in Canada sank to $3-million for the year, from $69-million a year earlier.

Sears didn’t say much more than that in today’s statement, though in his Feb. 27 letter to shareholders, chief executive officer Edward Lampert said that the retailer hoped to raise more than $1-billion this year through several moves, including “working with the Sears Canada board and management with a goal of increasing and realizing the value of our investment in Sears Canada.”

Sears Canada revenue sank in fiscal 2013 to $3.9-billion (Canadian) from $4.3-billion a year earlier.

Target, in turn, lost a bundle as it rushed to open 124 stores and three distribution centres in Canada. But the outlook, at least according to Moody’s Investors Services, is much brighter.

In a report this week, Moody’s analyst Charles O’Shea said he believes Target will be profitable north of the border by next year, having stumbled in its expansion.

He noted that its rivals here ramped up the competition in advance of its entry, and there were perceptions around pricing that disappointed Canadians.

“Target will have its hands full getting back on track this year. However, we do believe the company will experience significant improvement with its Canadian operations over the next several quarters as the stores season and the company tightens the focus on its marketing from a messaging perspective,” he said.

Mr. O’Shea believes Target has learned from its experience, and is adjusting accordingly.

“Thus far Target’s entrée into Canada has been disappointing, with 2013 operating performance below the company’s expectations, as well as ours,” he said.

“The company has publicly acknowledged early problems with pricing perception and in-stock positions, the combination of which led to disastrous margin performance, and the almost $1-billion EBIT loss,” he added, referring to earnings before interest and taxes.

“However, we continue to believe Target’s move into Canada makes sense, and that this remains a potentially lucrative market for Target over the longer term.”

Target was new to Canada, and had a lot to learn, even though some may have believed otherwise.

This year will continue to be a challenge for the U.S. retailer, which is operating in an ultra-competitive market it helped create by its decision to move north. But Mr. O’Shea believes its fortunes will change.

“Our expectation is that the company will likely generate positive EBIT beginning in early 2015, which is a bit later than our original expectation,” he said.

“To that end, we visited three stores recently and it appears the ‘firesale’ clearances are pretty much over. We also note the company has focused more on consumables in its marketing, which should drive increased store traffic. We believe that Target is in Canada for the long haul, and with a potentially more pragmatic view of the Canadian retail market, will turn the corner in the not so distant future.”

As for Sears, well, when was the last time you shopped there?

Analyst Keith Howlett of Desjardins noted that Sears Canada is sitting on more than $500-million in cash, from its asset sales, or $5 a share, and he expects to see a special dividend paid out this year regardless of what transpires with its parent.

He sees several possible scenarios, but that “the complexity of the situation requires private equity participation in order to realign the assets into separate components that are manageable and of interest to different retail operators.”

He rules out the entry of Macy’s or Kohl’s via a purchase of Sears Canada.

Over all, though, he sees today’s announcement as “positive for shareholders of Sears Canada that Sears Holdings is bringing matters to a head in order to surface as much value as possible, at as early a date as possible.

Alberta shuns conference
The province of Alberta is boycotting a major global energy conference because of Russia’s actions in Ukraine, The Globe and Mail's Carrie Tait reports.

The province said today it is dropping out of the 21st World Petroleum Congress, to take place in Moscow June 15-19. The WPC, which takes place every three years, attracts thousands of delegates and hundreds of chief executives to address energy issues around the globe. Alberta planned to have a booth at the Canadian Pavilion, as well as provide “on-the-ground” support for a delegation of energy companies based in the province.

“Since the beginning of the crisis in Ukraine, Alberta has stood united with the Government of Canada in condemning violence and the violation of Ukraine’s sovereign territory," Premier Dave Hancock said in a statement.

"In the face of ongoing aggression I have made the decision to withdraw all provincial support for the Congress being held in Moscow."

Meet Mr. Zycher
Having sampled the writings of Benjamin Zycher, I now understand why the Ontario Tories chose the American economist to study their economic platform.

On the left-to-right meter, his needle’s in the red zone. (Wrong colour, right direction.)

Mr. Zycher, president of his own research firm, has a long CV that includes his current role as resident scholar at the American Enterprise Institute and earlier stints at everywhere from the Milken Institute and UCLA to RAND Corp. and the U.S. State Department.

And in the wouldn’t-you-know-it category, he was senior staff economist on Ronald Reagan’s President’s Council of Economic Advisers.

What the CV doesn’t tell you – but his writings do – is that he hates government bureaucracy and positively loathes the “environmental Left.” He has thoughts on greenhouse gas, affirmative action, and working people.

As The Globe and Mail’s Adrian Morrow reports, the Ontario Conservatives chose Mr. Zycher to analyze their program in the run-up to the June 12 provincial election.

The program – the Million Jobs Plan – pledges to create that many jobs over eight years by cutting corporate taxes, killing subsidies for alternative energy, joining the trade agreement of the western provinces, slashing red tape and ending the endless traffic jams in Toronto. Oh, and it assumes that about half those jobs would have been created anyway.

“These economic benefits of the proposed reforms are substantial, and the rationales offered in defense of the status quo are dubious,” Mr. Zycher said in his 18-page study.

So, wondering where he stood generally, I scoured his writings. What I came away with was a picture of a guy who, putting it in the context of the Tory plan, would want to end gridlock so you can get to the office faster and do an honest day’s work.

Here’s an edited sampling of his work:

“The heat is on. The environmental Left is on the attack, and the target now is not ExxonMobil, or the Kochs, or the Keystone XL pipeline, or fossil fuels, or the efforts of the world’s desperately poor to escape grinding poverty, or plastics, or indoor plumbing, or those who fail to worship Gaia, or any of the other usual suspects. Instead, it is President Obama, urged last month in an open letter by 16 environmental groups to prevent the exportation of liquefied natural gas (LNG) and to make a commitment to keep ‘most of our nation’s fossil fuel reserves in the ground, in line with the recommendations of most of the world’s leading climate scientists’ … The letter obviously is far more a political than an analytical document, and as a reflection of scientific understanding it is deeply disingenuous. That the authors have defined their policy prescriptions as a ‘good-faith test’ for Mr. Obama is amusing in that the letter is a blatant exercise in disinformation. Thus have the environmental groups chosen to pollute the political process in pursuit of a massive suppression of technological advance and enhanced wealth for ordinary working people, an appalling exercise in bad faith. For them it is also business as usual.” American Enterprise Institute online magazine, April 8, 2014

“Now, let me be blunt: Michelle Obama, the product of lifelong affirmative-action coddling, is an intellectual lightweight who fancies herself a serious thinker. Just read her Princeton senior thesis, an intermittently coherent stream-of-consciousness pile of leftist jargon, campus pseudo-seriousness, and racial-identity babble. Can there be any doubt that the Princeton administrators accepted it only because of her skin colour?” National Review Online, Aug. 17, 2009

“I simply cannot remember an Oval Office quite so devoid of economic thinking. The latest example is the pending regulatory change, announced yesterday, which would raise the salary level above which certain classes of workers would be exempt from receiving overtime pay. Accordingly, the overtime pay requirement would be extended to vastly more workers … Suppose that the market-determined competitive salary for such workers putting in 50-60 hours per week is say, $750 per week, or $39,000 per year … Assume now that such work were to require only 40 hours per week; does President Obama actually believe that there would be no change in the competitive market salary? In other words, it is rather obvious that the market-determined salary reflects the long hours that some workers must devote to their jobs: a requirement for harder work, other factors held constant, reduces the supply of workers willing to provide it, thus raising the market salary … But until we have some ‘objective’ measure of ‘fairness’ - a mirage if ever there was one - only market competition can tell us the value of extra-hard work, in the form of prices determined by millions of individual choices made freely.” AEI blog, March 14, 2014

“Can it possibly be the case that the president does not see the connection between such centralized decision-making and the institutionalization of corrupt practices? If politicians, bureaucrats, and experts have a say in how resources will be developed, who will be allowed to buy and sell them, and how the benefits will be distributed among competing interests, then no amount of anti-corruption vigilance would be sufficient. The president’s call for someone ‘to make sure that [trade] interactions are good for Africa’ is a call for a more powerful government and a weaker market, and the corruption and poverty engendered by that combination. And that is a reality not limited to Africa.” AEI blog, July 1, 2013

“Earth Day means never having to say ‘Don't worry.’ For the environmental Left, the Passover seders may be past, but the plagues are eternal: floods, fires, cyclones, drought, extinctions, pestilence, famines, acid rain, ozone holes, cancer-causing power lines, global cooling, global warming, alar, plastics, mercury, depletions, deforestation, falling sperm counts, population bombs, plagues, water wars, nuclear winter, sex-changing fish, cancer-causing cell phones, pandemics, The Lifetime Channel. (OK, the last one is my personal nightmare.) You get the idea: doom, gloom, and apocalypse ad infinitum. But amid the looming catastrophe, a tiny ray of hope survives: it is Earth Day, when all right-thinking members of the reality-based community proclaim their love of the Planet and their worship of Gaia. When many announce, as a matter of religious principle, their eagerness to allow others to suffer economically and physically so as to pursue the restoration of the Earth to its natural state of Eden, as it existed before mankind consumed the forbidden fruit of the tree of technological knowledge.” AEI, April 22, 2013

“As counterintuitive as it may seem, increased reliance on wind and solar power will hurt the environment, not because of such phony issues as endangered cockroaches, used by the environmental left as a tool with which to obstruct the renewable energy projects that they claim to support. Instead, this damage will be real, in the form of greater air pollution. The conventional generators needed to back up the unreliable wind and solar production will have to be cycled up and down because the system operators will be required to take wind and solar generation when it is available. This means greater operating inefficiency and more emissions.” AEI, April 20, 2011

Home prices rise
Canadian home prices rose 0.5 per cent in April from March, in what researchers say was a weak showing despite the fact it “might appear robust.”

On a year-over-year basis, prices rose almost 5 per cent, according to the Teranet-National Bank house price index.

“Though the gain might appear robust, it must be said that apart from the recession in 2009, the composite index always advanced in April, the average monthly increase having been 0.9 per cent,” today’s report said.

“Last month’s advance is indeed the third-weakest for April outside a recession since 1999.”

Prices rose in nine of the markets measures, hitting records in four.

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