Is Target Late To The Canada Party?

| About: Target Corporation (TGT)

On Thursday, February 23, 2012, Target (NYSE:TGT) launched its first "pop-up" store in Toronto, a temporary store opened for part of the day to raise money for charity by selling Target designer clothing, while promoting the brand before it begins regular operations in Canada in 2013. Target plans to open up to 135 stores in Canada in March 2013, according to the Toronto Star.

Days later, the Globe and Mail reported that an internal report from the Retail Council of Canada indicated that retailers see "slow growth" and a "challenging environment" that could continue until 2015. One Canadian retailer cited in the article as experiencing declining sales and profits was Sears Canada (which trades on the Toronto Stock exchange under the symbol SCC), and is 92% owned by Sears Holdings Corporation (NASDAQ:SHLD), according to SHLD's 2010 Annual Report.

Sears Canada is cutting its prices on over 5,000 items, and may be viewed as a competitor of Target when it arrives in Canada. The entry of Target into the Canadian market was cited as a potential cause for further Canadian retailer woes. This raises the question: will Target find itself in a more challenging environment than may have been expected when it decided to enter Canada?

Wal-mart (NYSE:WMT) entered Canada in 1994, and opened its first Canadian Superstores in 2006. The stores carry groceries, in addition to department store goods. In anticipation of Wal-mart Superstore expansion in Canada, Canada's largest food retailer, Loblaw Companies Limited (OTCPK:LBLCF), which trades under the symbol "L" on the Toronto Stock Exchange, began opening its own Superstores in Ontario. Initially, these Ontario stores operated under the name "Real Canadian Superstore," and were based on stores that were successful for Loblaw in Western Canada. Please note, I included the American over-the-counter ticker symbol for Loblaw for informational purposes, but caution investors to learn the risks of trading over-the-counter securities, included but not limited to the thinly traded nature of some of these securities.

Although Loblaw's Superstore strategy appeared to be designed to defend itself from Wal-mart, the Superstores appear to have also been designed with competition with Target in mind. When the stores opened in Ontario, they featured Joe Fresh Style clothing. The line was named after designer Joe Mimran, a founder of Club Monaco. Club Monaco is a casual, youthful clothing retailer currently owned by the Ralph Lauren Corporation (NYSE:RL).

The Joe Fresh clothing line was apparently popular enough that Loblaw now operates 12 free-standing Joe Fresh stores in Canada, and five U.S. locations, including in New York City, with a flagship scheduled to open this year on New York's Fifth Avenue. With Club Monaco having its own Fifth Avenue store, along with stores in many Canadian malls, as Joe Fresh expands, it will be interesting to see how successful Loblaw is at competing with the company "Joe" co-founded. Interestingly, Target currently does not have a store on Fifth Avenue.

For those unfamiliar with Loblaw, it operates company owned stores under multiple banners including Loblaws, Real Canadian Superstore, and T&T Supermarket. The company also franchises stores under various banners, including No Frills. The company is controlled by W. Galen Weston, who directly and indirectly through his controlling interest in George Weston Limited, owns approximately 64% of the company's common shares according to the company's 2011 annual report. Weston also owns privately held Canadian luxury department store chain Holt Renfrew. Over the past many decades, Loblaw has introduced a variety of private label products and services that have resonated with consumers.

Some examples of such successful launches in Loblaw's history include:

  • introducing "no name" brand, economy-priced private label products in 1978
  • introducing private label "President's Choice" products in 1984, marketed as quality and value
  • introducing private label "President's Choice G.R.E.E.N." products in 1989
  • launching "President's Choice Financial," which offers various financial services online and in its stores provided by CIBC (NYSE:CM) in 1998
  • introducing private label "President's Choice Organics" in 2001
  • introducing Green reusable shopping bags in 2007

So Loblaw has had over 30 years to build its no name brand, and over 25 years to build its President's Choice brand. In its 2011 Annual Report, Loblaw, citing AC Neilsen MarketTracker, noted that for the 52 weeks ended December 17, 2011, its President's Choice and no name brands where the number one and number two consumer packaged goods brands by sales in Canada, respectively.

In America, Wal-Mart and Target may dominate the discount big box landscape, but in Canada, Target will have to deal with an experienced major superstore competitor. Loblaw stock has noticably declined as Wal-Mart increased its competition through its own Superstores in Canada. Loblaw's stock price traded in the Canadian $70 Canadian range, 7 years ago on March 1, 2005, compared to less than half of that, closing under $35 Canadian on March 1, 2012. Loblaw is currently profitable, earning $2.73 Canadian per share in 2011, and paying out a dividend of $0.84 that year, according to its annual report. From the company's Joe Fresh expansion into New York, to Superstores selling that brand of clothing, Loblaw seems to be preparing for battle with Target. In fact, according to CTV, when asked about Target's arrival in Canada, Loblaw's president said "Let them come," and "Let them taste it."

With fighting words like these, Target investors hoping for an easy increase in earnings from the company's Canadian expansion, may want to take a closer look at the tough competition Target will face in Canada. Meanwhile, Loblaw investors and potential investors may want to keep an eye on what happens with its Joe Fresh expansion into the United States, as this is an interesting development for a company with the same controlling shareholder as high-end clothing retailer Holt Renfrew.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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