Target says it plans to discontinue all operations in Canada and has been granted protection from creditors, less than two years after opening to much fanfare.
In a release early Thursday, the U.S. retail chain said it will close all its locations in Canada. There are 133 stores across the country with about 17,600 employees.
The company launched in Canada in March 2013, not quite two years ago.
'I think they overestimated the reception they would get.' - Mandeep Malik, McMaster University retail analyst
But after high expectations, the chain failed to deliver right out of the gate as customers faced higher than expected prices, and empty shelves as the retailer had problems with its distribution chain.
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Target lost almost $1 billion in its first year in Canada, and while the losses have shrunk since then, the chain is still losing money daily.
Executives repeatedly promised they would get it right and reaffirmed their commitment to Canada as recently as July, but ultimately decided to pull the plug.
"After a thorough review of our Canadian performance and careful consideration of the implications of all options, we were unable to find a realistic scenario that would get Target Canada to profitability until at least 2021," the U.S. parent company's CEO Brian Cornell said in a release Thursday, explaining the justification for the shutdown.
Target filed an application in a Toronto courtroom for protection under the Companies’ Creditors Arrangement Act early Thursday morning. That request was granted.
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The federal law allows companies that can't pay their debts the ability to restructure themselves. Without it, the companies and individuals that an insolvent company owes money to can technically start seizing assets. But because Target has applied under CCAA, that won't happen here yet.
Aaron Alt, most recently Target's senior vice-president and treasurer, has been named CEO of Target Canada to execute the process of winding down operations under the court's supervision. A spokesman with the company told CBC News that Target expects the process to take between four and five months under the doors are closed for good.
Target's shareholders welcomed the news, sending shares in the company up almost three per cent on the NYSE on Thursday. Closing up shop in Canada means the company has more money to focus its efforts on shoring up its also-struggling U.S. operations.
And at least one analyst also hinted that it was a good idea to end the failed experiment in Canada.
"Target’s decision to exit Canada after less than two years of store operations is an admission that it has failed in its attempt to enter a new market," Moody's analyst Charlie O'Shea said. "With over $1.5 billion in … losses, it is clear that the early flaws in Target’s strategy to simultaneously open stores while building out or developing its supply chain became insurmountable."
Severance will be paid
Target has hired international consultancy Alvarez & Marsal to oversee the liquidation and wind-down process.
Most of Target's stores are in locations that were taken over from existing Zellers leases, but the company does own some real estate in Canada.
Financial advisory firm Lazard Ltd. will advise the company with regards to possibly selling its real estate assets. On a conference call with analysts, Cornell noted that about $1.2 billion in debt will come off the company's books just from getting out of the leases alone, providing a buyer can be found.
Retail analyst Mandeep Malik, who works at Hamilton's McMaster University, told CBC News in an interview that there's no obvious suitor for Target's old locations. "I don't know who could replace them," he said. "Nobody's going to act in haste I doubt that very much."
A number of Target's locations are owned by Toronto-based RioCan Investment Trust. Units of that REIT shed about one per cent on the TSX on Thursday when the Target news came out.
The company is seeking the court's permission to set up a $70-million fund to ensure all employees affected by the move get up to 16 weeks of severance pay. The stores will remain open while the company completes the liquidation process.
- LISTEN: Target failed in Canada because it expanded to far, too fast, retail analyst David Ian Gray tells CBC
"Your efforts have been extraordinary, and absolutely nothing about our decision to exit diminishes your hard work and dedication," Cornell told employees in a letter on Thursday, a copy of which has been obtained by CBC News.
Target said the decision to close shop in Canada will cost between $500 million and $600 million in cash from the U.S. parent's bottom line, but results in a writedown of about $5.4 billion from an accounting perspective in the upcoming fourth-quarter earnings.
Target is the latest retailer to go under in what's becoming an increasingly tough retail environment in Canada.
Fashion shops Mexx, Smart Set and Jacob have all announced plans to close down in recent months. Montreal-based Le Chateau hasn't officially closed, but the clothing chain has been in a tough spot of late.
The failure of Target and those others is a lesson to anyone else in the retail business in Canada, Malik said.
"I don't think they've underestimated Canada, I think they overestimated the reception they would get," he said. "I'm not sure why they failed, [but it's] a lesson they will be analyzing for years to come and I think other retailers have to look at it as well."