U.S. Bargain Retailers Expanding in Canada
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Target (NYSE: TGT) has announced its further expansion into the Canadian retail market after the planned addition of 20 stores that are slated to open in British Columbia, Alberta, Saskatchewan and Ontario by the end of this month.
The company is investing heavily in Canada, as it already opened 48 stores in the country earlier this year. This recent spike in Canadian operation includes the company's first entry into Saskatchewan. By the end of this year, the firm plans to open approximately another 55 locations. Target already has 1,784 locations in the United States. Many stores throughout the U.S. indicate Target likely sees nearly full saturation, but opportunity still exists in Canada.
Target's long-term outlook is bright, but near-term is unclear
Target sees significant growth opportunity in Canada, and this could accelerate profits at the company once these stores have been opened and become fully functioning. However, the PFresh initiative at the company has resulted in declining returns on investment due to less profitability in the food sector. Wal-Mart (NYSE: WMT), however, gained success in its food initiative in the 1990s. Entry into a new market, in addition to the PFresh initiative, tells me this stock is best avoided until sales results from the two major initiatives are reported.
The company has consistently been able to beat earnings forecasts, and those forecasts appear set to decrease slightly in the second quarter to $0.96 from the reported earnings per share of $1.05 last quarter. Next quarter looks more bleak, with $0.88 expected. However, analysts see steady year-over-year increases in the next four years -- $4.32, $5.48, $6.20 and $6.41, respectively.
Wal-Mart has set the path for Target
Wal-Mart's entry into the Canadian market in the 1990s altered the clothing apparel landscape significantly, but at least one analyst says Target's entry won't be as impactful. That comes as a relief to many established Canadian firms. "Given Target's consumer proposition, we do not expect as dramatic an impact as that of Wal-Mart's entry," Desjardins Securities' Keith Howlett stated in a report to clients. However, I see Target taking away significant market share due to the nation's current lack of bargain retailers.
Wal-Mart plans to increase its stake in Canada, and said it will open 37 more supercenters -- which includes a grocery section -- by next January. Nine of the new stores will be new, but the rest will be converted existing stores. That would bring the total Canadian count to 388. The increase, along with Target's entry, is a solid indication that there is a major market for bargain shopping in Canada.
The company does look poised to address market share losses to dollar stores. For example, it is reinforcing everyday-low-price strategies by making significant price cuts. The company was initially going to invest $2 billion in price cuts before 2015, but it has updated its plan to now include $6 billion in price cuts by 2017. Furthermore, much of its capital is shifting to domestic small stores, which have a higher return.
Hudson's Bay Company could lose out
Expansion of bargain stores into Canada will likely make an impact on Canada's longest-established corporation, the Hudson's Bay Company (TSX: HBC). The firm has continually been challenged by competition coming from the U.S., and the addition of Target could bare down on the firm with crippling force. I see the share price falling hard.
However, of three analysts, two say "buy" and one says "hold." Morningstar doesn't agree, as it gives the stock a fair value at $15.21, while the price is now over $16. Look for decreasing sales as the U.S. titans set up shop in Canada.
Canada's retail landscape is changing
Target and Wal-Mart's expansion into Canada will likely upset the nation's domestic retail market. Firms such as Sears and Zellers have been closing down and selling their Canadian stake, and faltering profits at those companies could be largely due to to moves made by the bargain retailers. The Hudson's Bay Company will certainly be challenged, and time will tell if the firm will be able to secure enough of the higher-scale apparel market to realize enough profits to keep downsizing far from necessary.
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Phillip Woolgar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!