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Target Pulls Back Canadian Expectations, Investors Shouldn’t

Target's Canadian expansion takes a wrong turn after just five months

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Target’s (TGT) Canadian adventure is not going as smoothly as planned.

The company announced lackluster second-quarter earnings August 21, forcing it to revise its profit forecast for the country. In March, I advised readers to buy Target’s stock while the verdict on its expansion was still out. Its latest earnings report suggests investor skepticism remains high.

Target has throttled back its profit expectations for Canada … should investors do the same? I don’t think so, and here’s why.

Originally the company felt it could make a profit by the end of 2013. Now it doesn’t see that happening until at least 2015. The culprit: Canadian consumers assumed prices would be the same as in the U.S. and product selection would be similar to its southern neighbors. Neither happened, and customers to a certain extent have stayed away.

Target was very candid with the media about its pricing prior to opening stores in Canada. It specifically told the press it would be competitive with other large Canadian retailers including Wal-Mart (WMT), its biggest rival. Obviously Canadians chose not to listen. This particular issue is out of its control. All Target can do is remind its Canadian consumers that its prices are the best available in the country. Beyond that — there’s no persuading irrational thought.

So what can it control?

The two areas where it can immediately make inroads with a skeptical consumer are the products it offers and customer service. Both have been completely mishandled since opening its first stores in March. Given the scale of its expansion into Canada (200 stores over 10 years) you had to know this was going to happen. These things never go off without a hitch.

What’s important now is that Canadian president Tony Fisher must execute what might closely resemble a turnaround: his team reassessing every piece of its business to ensure it doesn’t continue disappointing consumers. BMO Capital issued a statement this morning to its clients reiterating its “Outperform” rating for Target, suggesting the company can overcome these difficulties over the next 12 months.

I totally agree.

First, let’s look at product. Many consider Target’s current offerings to be similar to the Zellers stores it replaced and nothing like what’s available in the U.S. If you’re going to offer prices similar to Wal-Mart Canada, at least have the common sense to provide a better product. We might be gullible north of the 49th parallel, but we still can smell a rat. Improve the product and you’re halfway home.

In conjunction with quality products at good prices, you’ve got to make sure the shelves are full. No one wants to shop in a place that looks like it’s going out of business. If you figure out your inventory management and logistics, people will learn to trust your business. That’s retail 101.

Article printed from InvestorPlace Media,

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