Target Exits Canada As U.S. Results Beat Estimates

Despite what it characterized as a better than expected holiday sales period for the company in general, Target Corp. today announced its intention to exit Canada. The company expects to report approximately $5.4 billion of pre-tax losses on discontinued operations in the fourth quarter of 2014, driven primarily by the write-down of its Target Canada investment, along with exit costs and disposal activities as well as quarter-to-date Canadian segment operating losses.

Target also has announced that that it obtained an initial order from the Ontario Superior Court for creditor protection under the Companies’ Creditors Arrangement Act. The initial order authorizes Target Canada to begin a court supervised wind-down of its Canadian businesses and provides a broad stay of proceedings against the company, the retailer declared. It also authorizes Target Corp. to provide a debtor-in-possession credit facility of $175 million to finance Target Canada’s operations during the CCAA proceedings.

Target stated that it expects to report approximately $275 million of pre-tax losses on discontinued operations in fiscal 2015. The company added that it expects to realize cash costs of $500 million to $600 million as it discontinues Canadian operations. Target insisted that it has sufficient resources to fund the expected costs.

Target noted that it expects the Canadian market exit to increase its earnings in fiscal 2015 and beyond, and increase cash flow in fiscal 2016 and beyond.

In the fourth quarter Target will begin reporting adjusted earnings per share as reflecting operating results from its U.S. business only, excluding discontinued Canadian operations, the reduction of the beneficial interest assets recognized in connection with its U.S. 2013 consumer credit card portfolio sale, net expenses related to a 2013 data breach, and the resolution of certain tax matters, the company stated.

Based on November through December performance, Target noted that it expects to report fourth quarter 2014 U.S. comparable sales of approximately 3%, better than prior guidance of approximately 2%. Increased traffic and stronger-than-expected digital sales drove the gain, according to the company, which also expect to report fourth quarter adjusted earnings, reflecting results from continuing operations, of $1.43 to $1.47, about six cents above stated expectations for U.S. operations.

“When I joined Target, I promised our team and shareholders that I would take a hard look at our business and operations in an effort to improve our performance and transform our company,” said Brian Cornell, Target chairman and CEO, in announcing the market exit. “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. Personally, this was a very difficult decision, but it was the right decision for our company. With the full support of Target Corp.’s board of directors, we have determined that it is in the best interest of our business and our shareholders to exit the Canadian market and focus on driving growth and building further momentum in our U.S. business.”

Cornell continued, “The Target Canada team has worked tirelessly to improve the fundamentals, fix operations and build a deeper relationship with our guests. We hoped that these efforts in Canada would lead to a successful holiday season, but we did not see the required step-change in our holiday performance. There is no doubt that the next several weeks will be difficult, but we will make every effort to handle our exit in an appropriate and orderly way.”

Target Canada currently operates 133 stores and employs approximately 17,600 people. The company pointed out that it is seeking court approval of a voluntarily make cash contributions of C$70 million, approximately U.S. $59 million, into an employee trust that would provide nearly all Target Canada-based employees a minimum of 16 weeks of compensation, including wages and benefits coverage for workers who are not required for the business wind-down. Target Canada stores will remain open during the liquidation process, the company asserted.

Target acquired 189 Zellers stores in Canada during 2011. It began operating Target Canada locations in 2013.