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Globe Investor Target could sell Canadian assets to Wal-Mart or HBC, analyst speculates

Exterior photos of the Target Canada in Guelph, Ont.

Tim Fraser/The Globe and Mail

Will troubled discounter Target Canada stay in Canada or leave?

That's the burning question that retail analyst Perry Caicco at CIBC World Markets asks in a report on Wednesday. It may do either, but probably won't make a decision until the end of 2015, he concludes.

If it leaves, it may sell its assets to savvier rivals, he says. Discount giant Wal-Mart Canada Corp. would be the most likely buyer, Mr. Caicco suggests.

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Other potential suitors are grocery giant Loblaw Cos. Ltd., which this year acquired Shoppers Drug Mart Corp., or even department-store retailer Hudson's Bay Co., he says. (HBC paved the way for Target's entry by selling most of its Zellers leases to the US. chain for $1.8-billion in 2011.)

Maintaining operations in Canada through the end of 2015 will give Target the chance to see if better logistics, lower pricing and sharper merchandise will make a difference to its Canadian operations, Mr. Caicco said.

But so far in his team's store visits, "we have seen few examples of remarkable improvements," he says. "The shelves and displays do not appear to be stocked much better, the pricing and value strategy make little sense to us, and there are few exciting new programs in most parts of the store."

He calculates that Target's cost of leaving Canada would be just as steep as the cost of staying, "and neither is palatable."

U.S. parent Target Corp already has sunk more than $6-billion into setting up shop in this country, he says.

"Target has been a disaster in Canada, producing sales at about half of our initial projections, and running deep operating losses," Mr. Caicco writes.

Target executives have said it moved too quickly to launch 124 stores in Canada in 2013. It has added nine more outlets this year. Last year, it posted an operating profit of almost $1-billion on sales of $1.3-billion.

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In the first half of fiscal 2014, the Canadian division's operating loss grew 11 per cent to $415-million while sales rose 133 per cent to $842-million. In its second quarter, same-store sales at outlets open a year – a key retail measure – fell 11.4 per cent.

Mr. Caicco predicted that Target will lose about $1.2-billion in its first two years of operations in Canada. In 2011, when Target announced its entry here, he had predicted it would generate about $4.1-billion in sales in 2014. Now he thinks it will barely surpass $2-billion.

Target spokesman Eric Hausman said in an e-mail: "Target's focus is on driving improvements to the business, and as we have shared previously, we look forward to continuing to assess   our progress, the work ahead, and the opportunity in the Canadian market. With the fourth quarter just around the corner, our teams are focused on ensuring we offer guests an exceptional shopping experience this holiday season."

If Target decided to exit the country, it may not just pack up and walk away, he says. It could retain some interest in an ongoing entity under the Target brand or another, and "try to squeeze some value from this tough decision," he says.

If Loblaw bought Target assets, it could use the space for its Joe Fresh fashion line or for British cheap-chic chain Primark, which is owned by the Weston family which also controls Loblaw, he suggests.

In all, it would probably cost Target between $420-million and $500-million to leave Canada completely, he says.

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Whatever Target decides, the nature of its decision "could have serious implications for numerous Canadian merchants," he says.

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