Target Corp.'s bottom line will be pinched more than expected by its $1.5-billion investment in its Canadian launch this year, largely because the U.S. discounter will expand some of its stores beyond its original plans.
Target executives revealed on Wednesday that the company's foray into Canada, starting next month, will squeeze 45 cents a share from its 2013 profit, more than 60 per cent higher than analysts' estimates.
But the cheap-chic U.S. retailer also said it will pour money into expanding 40 of the 124 stores that it will roll out in this country this year, adding 600,000 square feet of retail space to its footprint here – and potentially stealing more business from rivals.
"It will be retail wars," said Alex Arifuzzaman of InterStratics Consultants in Toronto. "I do think other retailers are going to be affected, no question about it. It's going to start in Southern Ontario because that's where the first Target stores are opening up."
The highly anticipated Target rollout will begin with a "soft opening" in the coming weeks as the retailer tests the waters, with its official "grand opening" of its first 24 stores in early April. Other retailers ranging from Wal-Mart Canada Corp. to Sears Canada Inc. and Canadian Tire Corp. Ltd. have been bracing for the invasion as they race to up their game.
But an array of merchants, including Wal-Mart, Sears and Canadian Tire's namesake stores, have posted sales declines at stores open a year or more in their latest reported quarter, underlining the growing pressures.
"No one is doing that strongly in Canada among the public retailers," said Brian Yarbrough, retail analyst at Edward Jones in St. Louis, Mo. "How are they going to do when Target opens? That's been our concern."
On Wednesday, Sears Canada Inc. said its fourth-quarter same-store sales – a key retail measure of outlets open a year or more – fell 3.8 per cent. Those sales at Canadian Tire's namesake outlets slipped 1.1 per cent in the same period.
Even discount titan Wal-Mart Canada felt the heat in its fourth quarter, with its same-store sales down 1.9 per cent and traffic to stores dipping 2 per cent, although its market share picked up in "measured categories in a slower overall market," Doug McMillon, president of the chain's international division, said last week.
At Target, fourth-quarter same-store sales picked up 0.4 per cent, which the company said fell short of its target amid cautious consumers and an uncertain economy.
"The challenges facing us in the year ahead are more short-term in nature, and I'm confident in the clarity of our strategy," Target chief executive officer Gregg Steinhafel told analysts.
Target's first foray outside its U.S. home base follows its acquisition of most Zellers leases. Now it's investing $10- to $11-million in each store to renovate and reopen them under the Target banner.
Mr. Yarbrough said he thinks Target's heavy investment in Canada will pay off, even though it could bruise the retailer's 2013 bottom line more than he had expected. Analysts had anticipated that the Canadian launch would chop 25 cents (U.S.) to 30 cents off this year's profit – rather than the company's outlook of a 45-cent dilution.
"The sites we obtained in the Zellers deal were extremely well located with very attractive leases," said John Mulligan, Target's chief financial officer. But the stores were smaller than the retailer's U.S. outlets and "in very poor physical condition."
Target negotiated with landlords to gain more space at sites adjacent to 40 Zellers locations, he said. The retailer also is opening three owned distribution centres, with plans to pour $1.5 billion into the Canadian operations in 2013.
Target's fourth-quarter profit fell to $961-million from $981-million a year earlier. Profit per share rose 2 cents to $1.47 as the number of shares outstanding dropped. Revenue climbed to $22.73-billion from $21.29-billion.