Retail's Canadian Expansion

In April, Limited Brands (NYSE:LTD) announced it was making a major push into Canada. It plans to reach $1 billion in sales in just four years. Once its expansion is fully implemented, it will have four brands competing for the hearts of Canadian shoppers: Victoria's Secret, Victoria's Secret Pink, Bath and Body Works and, of course, La Senza, the Canadian lingerie brand it acquired for $710 million in 2006. To make all this happen its establishing a separate Canadian division rather than simply handling things from Columbus. In my opinion, it's a brilliant move. Too many retailers come to Canada with little understanding of the differences that exist between the two countries. Those doing their homework like the Limited are bound to do well. Why? Because Canada has approximately 40% less shopping center space per capita than in the United States, and the retail we do have is mostly bland and boring. There is a real opportunity in Canada for retail expansion. American companies wanting in should take action sooner rather than later. The first-mover advantage is real.

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Department Store Hell
In Canada, we have three basic choices when it comes to department stores. Holt Renfrew for high rollers, The Bay (owned by Richard Baker of Lord & Taylor fame) for average to above-average working stiffs and Sears (Nasdaq:SHLD) for the rest. That's it. Recently, Kohl's (NYSE:KSS) admitted it was scouting Canadian locations although Edward Sonshine, CEO of RioCan Real Estate Investment Trust and one of the biggest shopping center owners in Canada suggests it could be as long as two years before they take the plunge. I sincerely hope not. This market is ripe for the picking. Milwaukee-based retail analyst John Collory asked rhetorically in a recent Globe & Mail article, "Why wouldn't Kohl's want to be up there?" Why not indeed.

Jean Stores
True Religion (Nasdaq:TRLG) announced in its first quarter earnings report that it was opening its first Canadian store in Toronto in 2010. It's about time. The last real American splash in jeans was in the fall of 2006 when Lucky Brand Jeans opened its first store in Canada in Toronto's Eaton Centre. Liz Claiborne (NYSE:LIZ), Lucky's owner, recently opened its first Juicy Couture here as well. It seems to be dabbling in the Canadian market rather than hitting it hard. Toronto is the fourth largest commercial business area in North America. In the words of Ultimate Fighting Championship President Dana White, "To not have a market here is insane." VF (NYSE:VFC) needs to move into this market with its 7 for All Mankind stores as does Joe's Jeans (Nasdaq:JOEZ) and many of the other premium jean makers with their own retail locations. It's too lucrative to pass on.

Genesco Gets It
On June 2, Genesco (NYSE:GCO) announced the opening of three Journey's footwear stores in the Toronto-area. It believes its Journey's brand, which very few Canadians would be familiar with, has a great opportunity in Canada - and so do I. In almost every category of retail besides home improvement, which is already clogged with Home Depot (NYSE:HD) and Lowes (NYSE:LOW) along with Canadian competitor Rona, there is an opportunity for an American retailer to come in and take some market share. Two examples off the top of my head would be Dick's Sporting Goods (NYSE:DKS) taking on Forzani Group in the sporting goods arena and Zumiez (NYSE:ZUMZ) taking on West 49 in the skateboard/snowboard apparel business. As a current West 49 and Forzani Group shareholder, I'm intimately aware of their shortcomings. Perhaps a better solution is for the Americans just to buy the two chains and rebrand them. It would be quicker. (To analyze retail stocks, investors need to be aware of the most common metrics used, as well as the company-specific and macroeconomic factors. To learn more, see Analyzing Retail Stocks.)

Bottom Line
Do you want to know why active wear retailer Lululemon (Nasdaq:LULU) sells twice as much per square foot in Canada as it does in the U.S.? Because our retail environment is so mediocre that anything with a pulse seems attractive, even if it's just overpriced yoga pants. To Mickey Drexler of J. Crew (NYSE:JCG), who sees an eventual 10 to 15 stores in Canada but worries about the pitfalls, I say this - you have nothing to fear but fear itself. Canada is your oyster.

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