U.S. discount retailer Target says its long-awaited arrival in Canada won’t officially happen until early April, though some stores will have a “soft opening” next month.
Target made the announcement Wednesday as it reported profits for the critical fourth quarter last year were down 2 per cent, and executives acknowledged that expansion plans north are having a bigger impact on the bottom line.
Target chief executive officer Gregg Steinhafel told analysts on a conference call that the company will open 124 stores across Canada in five separate waves this year, as planned. “Think April, May and every couple of months beyond that, we’re going to open somewhere between 20 and 28 stores,” he said.
The first will be in Ontario, including 14 in the Greater Toronto Area, though some stores will begin to open on an informal basis next month.
Target spokeswoman Lisa Gibson said the company is using its Guelph store to test systems as well as train employees to determine store readiness and the opening dates.
“We will expect to begin soft opening stores in March and have all 24 open by our grand opening in early April,” she said in an email.
The Minneapolis-based chain, known for offering fashionably chic items at lower prices, also announced that its stores in the United States had their worst holiday sales in four years. Net profit in the quarter that ended Feb. 2 fell to $961 million (U.S.) from $981 (U.S.) a year earlier.
Competition, especially discounting for peak Christmas business, as well as uncertain consumer confidence were to blame. The weak U.S. economy remains a challenge as does an increase to payroll taxes, but Target executives expressed confidence for the year ahead.
Target chief financial officer Jim Mulligan said that when the company announced the deal to buy leases from Zellers in 2011, it expected to spend about $10 million to $11 million (U.S.) to upgrade each store. Target has since negotiated additional adjacent spaces at 40 locations, creating an extra 600,000 square feet of retail space. The Zellers sites were smaller than its traditional U.S. stores.
“For each expansion, we have made a separate underwriting decision in which we measured the added investment against the incremental cash flow we believe a larger building will generate,” Mulligan said.
Target estimates it will spend $1.5 billion (U.S.) in capital expenditures on expanding into Canada. The expansion efforts will cut about 45 cents from earnings per share in 2013 due the cost of opening and operating the Canadian stores, including depreciation — higher than earlier forecast.
Mulligan attributed it to capital investment decisions such as building three distribution centres and the 40 store expansions.
But by the fourth quarter, Mulligan expects the Canadian business to generate several cents of earnings per share.
Target is forecasting an adjusted earnings per share of between $4.85 and $5.05 in 2013.
Competition in Canada is expected to be stiff as retailers jockey for the same consumer dollars. “I don’t think there will be more money to be had for retailers,” said Maureen Atkinson, a senior partner at retail consultancy J C Williams Group, noting Canadians are cautious about their spending.
She doesn’t expect Target to come into Canada and start a price war.
“No retailer really wins on that,” Atkinson said. “They want to win on being exciting, being fun. They don’t necessarily want to win on being the lowest.”
However, she said Target will have to be competitive on specific products, ideally items that will draw customers into stores for frequent visits, such as food, diapers or children’s wear.
“Walmart really has to maintain their price story. They will definitely be taking them on specific products,” she said.
Sears Canada fights drop in same store sales
Sears Canada reported flat fourth-quarter results on Wednesday as the retailer tries to reinvent itself with a three-year plan just as discount chain Target is set to open its doors.
Net profit for the fourth quarter was $39.9 million, or 39 cents per share, versus $41 million or 39 cents in the prior year — with gains from a voluntary buyout program and proceeds from the sale of a joint venture.
Same store sales in the fourth quarter were down 3.8 per cent, but it was an improvement over the three prior quarters. Same store sales were off by 5.6 per cent for the full year.
The decline was blamed on weak sales in home electronics and the Craftsman business, which includes snowblowers and hardware. While mattress and appliance sales are slowing in the industry in general, Sears said it added market share.
“We were very much focused on stopping the erosion, stabilizing and focusing on growth,” said Sears Canada president and CEO Calvin McDonald in an interview. “We have much more work to do, and two more years to our transformation.”
Bright spots include a same store sales increase in the fourth quarter for apparel and accessories for the first time in eight quarters. As well, Sears has announced strategic partnerships with Aldo and Buffalo, with another deal in the works.
“I view the quarter as a good indication of progress,” McDonald said.
Maureen Atkinson, a senior partner with J C Williams Group, a retail consultant firm, said the results are not surprising.
“Sears has been trending this way,” she said. “It’s very difficult to turn around a drop of 5 per cent in same store sales.”
Sears has remained profitable by selling off leases, and it is also trying to cut expenses including last month’s move to cut 700 jobs, she said.
But Sears is probably the retailer most vulnerable to Target’s arrival. “They have their work cut out for them,” Atkinson said.
However, she believes it is faring better with apparel, noting she has personally noticed Sears stores in several markets looking better.
“They haven’t spent a lot of money upgrading the stores,” she said. “But the departments are cleaner