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If you doubted the need for Target Corp.'s shakeup of its Canadian operation and management team, the company's latest financial results lay out the problems in cold, hard numbers.

The U.S. retailer, which launched in the Canadian market with great fanfare a little more than a year ago, reported Wednesday that its Canadian segment lost another $211-million (U.S.), before taxes, in its fiscal first quarter ended May 3. The Canadian operations have now lost nearly $1.2-billion in five quarters of operations.

Target always expected it would initially lose money in Canada; it's expensive to start up a new operation in a new country, especially one that goes from zero to 127 stores in just 16 months. But what's disconcerting is just how slowly things seem to be improving – if they're improving at all.

Quarterly sales, at $393-million, were the second-biggest so far, next to the $623-million in the fiscal fourth quarter, which included the huge Christmas shopping season (and therefore isn't a fair comparison). Sales were 18 per cent ahead of the third quarter. But given that total retail space was up 40 per cent since the third quarter, those sales gains look more like a step backward.

Even with Target's considerably scaled-down expectations for the pace of Canadian growth, sales were below the company's first-quarter target range. On Wednesday, Target cut its Canadian full-year sales forecast to about $2-billion – nearly 25 per cent below its projection of a quarter earlier. It signalled that it expects losses, before interest, taxes, depreciation and amortization, of about $400-million this year – double the company's forecast of just three months ago. (Toss in depreciation and amortization, and pretax losses will likely be in the $600-million to $700-million range, only a modest improvement from Year One.)

This is the mess that led to the firing this week of Target's Canadian boss, Tony Fisher, who was replaced by company veteran Mark Schindele. While in retrospect Target's headlong rush into Canada looks like a costly mistake in need of sober second thought, the attraction remains: It's an opportunity for instant growth for a retailer that has run out of room to grow in its U.S. base. Over the past several years, Target has been adding less than 1 per cent a year to its retail floor space. The expansion into Canada has added nearly 15 million square feet in a little over a year – as much as the company has increased its U.S. footprint in the past five years.

But just because Target entered a less crowded market didn't mean instant acceptance, and the chain misjudged its audience badly. Consumers quickly became turned off when Target's prices and product selection didn't live up to the massive pre-launch hype. Now, the company has ramped up marketing spending to help turn them back on again. That's keeping expenses high, even as it moves beyond the launch phase.

Selling, general and administrative (SG&A) expenses, which include start-up costs, were $218-million in the first quarter, consistent with levels seen in previous quarters when the company was launching anywhere from 23 to 44 new stores. In the first quarter, however, it opened just three locations.

There is one number Target's new Canadian boss can point at as a source for optimism: The margins, which have (finally) stopped falling. Gross margins in the first quarter were 18.7 per cent – still a far cry from the 30-per-cent norm in the U.S. operations (and the 30-per-cent-plus margins in Target Canada's first two quarters), but an encouraging bounce-back from the deplorable 4.4-per-cent margin in the fourth quarter. Indeed, it was the first time Target Canada's gross margin showed a quarter-to-quarter increase. It's something to build on.

It's also encouraging that Target is now emphasizing "accelerating performance" in its Canadian operations, rather than growth. The company proved it could create a Canadian department store chain almost overnight. Now it has to prove it can run one.

A Thursday Report on Business article on Target incorrectly stated the amount of retail space added by Target Corp. to its Canadian holdings. The company has added nearly 15 million square feet of retail space in Canada in a little over a year, not 15,000.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 26/03/24 11:59pm EDT.

SymbolName% changeLast
COST-Q
Costco Wholesale
+0.14%733.09
CTC-T
Canadian Tire Corp Ltd
-4.24%248
DOL-T
Dollarama Inc
+0.18%104.84
TGT-N
Target Corp
0%174.67
WMT-N
Walmart Inc
-0.26%60.56

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