Target Corp. (TGT) has had quite a few problems in the past five years. From a massive data breach to a failed international expansion, Target shareholders have seen the company’s value fall and cash hemorrhage. After billions were spent subsidizing Target Canada, a new CEO was brought in and the Canadian operations were quickly shut down. How has Target fared since then and are their financials back to where they were before the retailer decided to head to Canada?
Target Heads to Canada
Target is the darling of chic and cheap fashion in America. Canadians have been traveling down to the U.S. for decades to shop at Target and finally, in 2011, their voice was heard as Target announced it was opening up shop in Canada nationwide.
A myriad of issues plagued the retailer from the start, whether by oversight or intentionally, Target Canada was not Target USA. Higher prices and empty store shelves were what consumers saw when they visited Target Canada and so they did as any rational person would do, they stopped shopping at Target.
Two years of operations and $2.1 billion later, Target abruptly announced in January 2015 that it was closing its Canadian operations and closed its last store only three months later. In November 2015, Target was in the Canadian news again as it settled with landlords—at a rate of about 30%—on a buy-out price for their obligations from the leases that it had abandoned throughout the country. (For related reading, see: An Overview of Corporate Bankruptcy.)
A Long Road to Recovery
Reading Target’s financial statements as a novice investor must feel euphoric—the company’s 2015Q3 results read as though the company is back on the right path with increased revenue, increased profit, increased EPS, increased everything when compared year over year.
However, it can’t be that easy. While Target’s financial reports let us know that business is improving, it can’t be overstated how terribly the business was doing last year when Target USA was subsidizing Target Canada.
Instead, let’s compare the latest financial figures to those of the 2010 fiscal year, the last year before Target announced that it was purchasing lease agreements from The Hudson’s Bay Company and starting the expensive process of opening stores. (For more, see: Retail’s Canadian Expansion.)
A Peek Back in Time
The past five years have been eventful for Target and its shareholders. Aside from the fiasco that was Target Canada, the company suffered a data breach in late 2013 which affected 40 million debit and credit cards and could cost the company $67 million.
Financially speaking, Target is well ahead of where it was five years ago, but not nearly as far ahead as it would have been without having expanded into Canada.
A look at the company’s books (2015Q3 vs. 2010Q3) shows us that Target's earnings are up $52 million, its cash flow is up almost $1 billion and its same-store sales are up a fraction of a percentage point. On the other hand, margins, both gross and EBIT, are down and the number of stores is only up 0.6% annually over that time period.
Slow growth in Target USA’s store count between 2010 and 2015 is directly attributed to Target Canada. A 0.6% increase in store count is pitiful when compared to the 6 – 7% annual store count growth that was happening in the mid-00s. If we add in the 133 Canadian locations, we see that growth jump up to 2% annually—still smaller than previous years but a 10% overall increase over the five-year period.
Canadian operations ate up a significant chunk of financial and non-financial resources and the net result is a 53 store increase since 2010 and a scant online presence. In 2015Q3, Target reported that only 2.7% of that quarter’s sales came from its website and while Target focused on Canada, Amazon.com Inc. (AMZN) swelled up and dominated the American retail space. (For related reading, see: Will Amazon Overtake Netflix?)
And, as if Target couldn’t take the hint that Canada only liked shopping at Target USA and that the Target website was mediocre at best, a recent Target International website is now open to Canadians looking for fashionable deals. The website, only a month old, is already largely criticized in Canada because of its huge mark-ups, exorbitant shipping and duties costs, as well as the fact that some items for sale on the website are not actually purchasable outside of the United States.
Today, with a dividend more than double what it was before Target opened its Canadian stores, Target has shaken off its growth investors and has turned into a dividend stock. While that’s not a problem in and of itself, it begs a larger question—is Target’s management afraid to make another big move? Will Target get back to its heyday of opening 100 or so stores a year?
The Bottom Line
The past five years have been problematic for Target. Today, with mediocre growth in everything except the stock price, Target has finally shaken off the financial mess that was their ill-executed expansion into Canada.