Target Pulls Back Canadian Expectations, Investors Shouldn’t

by Will Ashworth | August 22, 2013 1:56 pm

Target Pulls Back Canadian Expectations, Investors Shouldn’t

Target’s (TGT[1]) Canadian adventure is not going as smoothly as planned.

The company announced lackluster second-quarter earnings[2] August 21, forcing it to revise its profit forecast[3] for the country. In March, I advised readers to buy Target’s stock[4] 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[5]), 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.

Now let’s talk about customer service. According to a Forum Research survey[6] only 27% of its customers were “very satisfied,” compared to 62% at Costco’s (COST[7]) Canadian locations. In fact, Target was dead last out of the eight large retailers surveyed. That’s truly embarrassing for the company’s first push into Canada.

I’m not really surprised, though. Retail isn’t a serious career in Canada like it is in the States. Given the number of staff needed for these stores, you knew the average location would be filled with people only there to earn a paycheck until a real job came along. It’s a harsh reality. However, it’s not entirely the fault of employees.

Customer service is about more than hiring correctly. It’s about having the right product, enough inventory, good prices, bright stores, and helpful staff. It doesn’t matter if your employees are all champions of retail if the other things that make Costco tick aren’t present. You’re putting your staff on the floor with one hand tied behind their backs; it’s just wrong.

The good news — all of these problems can be fixed. That doesn’t mean will be easy — quite the opposite. Target is going to have to battle for the next 24 months to truly win the hearts and pocketbooks of average Canadians. And if they mess up Quebec, you can kiss Canada goodbye.

Target’s original projection was $6 billion in revenue within 10 years. Regardless of what has happened to date, I still feel the company has underestimated the potential here. American retailers who have come north willing to understand our differences and similarities — accepting us for who we are — have always done well. That’s never going to change. You can bet Nordstrom (JWN[8]) is watching this unfold very carefully.

This is going to take 2-3 years to play out. Forget about the profitability of Target Canada for now and focus on what it’s doing to alleviate the concerns of its Canadian customer base. If its stock drops despite obvious signs it’s making amends north of the border, you should start buying by the boatload because when it gets to 200 stores and figures out the formula for Canadian success, Target will be sitting on a gold mine.

From where I sit, nothing has changed. The potential for Target is still very real despite the early setbacks. In my opinion, its stock remains a buy.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Endnotes:
  1. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  2. lackluster second-quarter earnings: http://finance.yahoo.com/news/target-reports-second-quarter-2013-113000555.html
  3. profit forecast: http://www.theglobeandmail.com/report-on-business/target-warns-full-year-profit-near-low-end-of-forecast/article13891080/
  4. buy Target’s stock: http://www.theglobeandmail.com/report-on-business/target-warns-full-year-profit-near-low-end-of-forecast/article13891080/
  5. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  6. Forum Research survey: http://www.cbc.ca/news/business/story/2013/08/19/business-target-survey.html
  7. COST: http://studio-5.financialcontent.com/investplace/quote?Symbol=COST
  8. JWN: http://studio-5.financialcontent.com/investplace/quote?Symbol=JWN

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