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Some Target prices could be higher in Canada than in U.S.

A Target employee returns carts to the store in Falls Church, Va.

KEVIN LAMARQUE/REUTERS

Target Corp. is primping to bring its U.S. discount model to Canada next year, but not necessarily at American prices.

A Target executive suggested on Wednesday it will charge similar prices to those at other retailers here, but likely higher than its rates in the U.S. on some merchandise. Some imported items, such as footwear, have higher tariffs in Canada than in the U.S., and may be priced higher.

"The pricing definitely will be competitive to the Canadian market … not necessarily the U.S. market," Kathy Tesija, executive vice-president of merchandising at Target, told analysts. "We'll be able to do just fine, in terms of being competitive and yet having our costing be reasonable. It is different than the U.S., but it's not an insurmountable challenge by any means."

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Still, a Target Canada official said late Wednesday the company is still finalizing its pricing and meeting with suppliers. "It is a bit too premature to provide any specifics on our pricing strategy at this point," John Morioka, senior vice-president of merchandising at Target Canada, said in an e-mail.

The potential price disparity underlines an ultra-sensitive issue in Canada.

The cross-border price gap that exists on many consumer goods is about 14 per cent on average, a Bank of Montreal survey found this spring, prompting consumers to head to U.S. stores to shop for better deals – and putting more pressure on domestic retailers.

The issue became a flashpoint last year when the high-profile U.S. fashion retailer J. Crew opened its first store in Canada with prices that were 15-per-cent higher than in the U.S. – and even steeper online, although the retailer quickly backed down and lowered its e-commerce rates. The difficulties for retailers here were exacerbated in June when regulatory changes allowed cross-border shoppers to bring back more without paying duty.

Merchants and their suppliers blame each other for higher prices here, highlighting the complexity of the issue in a country with a tenth of the population of the U.S. and, as a result, fewer efficiencies.

Analyst David Strasser at Janney Montgomery Scott LLC, said he expects higher prices at Target stores in Canada will help the retailer generate higher profit margins. U.S. retailers operating in Canada generally are able to generate higher margins than in their U.S. home base, Mr. Strasser said. "There's more gross margin percentage in Canada than in the U.S."

But other analysts credit the higher margins at retailers' Canadian operations to higher productivity in the Canadian stores, as well as less competition than in the U.S. market, rather than higher prices – which are needed simply to cover the expense of higher tariffs.

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Wayne Hood, a retail analyst at BMO Nesbitt Burns, expects Target will generate 12-per-cent margins on earnings (before interest, taxes, depreciation and amortization) in Canada within five years, compared with today's average of 10-per-cent EBITDA margins in U.S. stores.

The higher margin in Canada would be comparable to Target's best-performing U.S. stores, which ring up more than $300 (U.S.) sales per square foot, compared with the average $280 sales per square foot, he said. He expects the Canadian stores will generate $300-plus sales per square foot.

The retailer still has to compete with discount giant Wal-Mart Canada Corp., which will tend to put a cap on prices, he noted.

Ms. Tesija at Target told analysts that the retailer is analyzing the tariffs by category, which will help it "land in the right retail [price] appropriate for that marketplace."

She said "a lot of the Canadian designs will come from what we're choosing in the U.S. They will be manufactured specifically for Canada, but we will leverage our design team and our sourcing expertise."

Mr. Hood said that Target will probably be able to find cost efficiencies in stocking goods for such a large number of stores. It also can find savings in carrying a lot of private-label goods, for which there are no directly competing products at rivals.

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Diane Brisebois, president of the Retail Council of Canada, has complained about higher tariffs here.

On items such as hockey pants, they are as much as 18 per cent, compared with 2.9 per cent in the U.S. Other tariff differences aren't as stark, and government officials say over all the rates are similar.

Also on Wednesday, Target disclosed that the ramping up of its Canadian operations, which will launch their first stores here in March, shaved 9 cents a share from second-quarter profit and will cut 14 cents a share from third-quarter profit – and 50 cents a share for the fiscal year.

Even so, Target raised its full-year profit projection after reporting better-than-expected second-quarter revenue that showed healthy spending in such areas as food.

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More

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