Why Target Corporation (TGT) Is Ditching Canada After Less Than Two Years

Target Corp.’s new boss, Brian Cornell, announced on Thursday the biggest decision in his five months at the helm of the second-largest general merchandise retailer in the U.S.: He’s closing the company’s 133 Canadian stores and laying off more than 17,000 employees.

“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,” Cornell said in a prepared statement. The review, which will be completed by the end of 2015, comes after less than two years in the country. “Personally, this was a very difficult decision, but it was the right decision for our company,” Cornell said.

Target also said Thursday it is raising its 2014 fiscal fourth quarter forecast for total sales growth from 2 percent to 3 percent and increased its quarterly earnings per share guidance from $1.43 to $1.47 on better than expected U.S. holiday sales.

Target’s (NYSE:TGT) stock jumped 2.9 percent to $76.49 Thursday morning as investors welcomed the raised guidance and news that the company’s money-losing Canadian venture would soon be winding down.

Despite its Canada problem, analysts are optimistic about Target’s new leadership and its recent holiday season performance. “We think they’re in the early stages of a retail turnaround,” Wells Fargo retail analyst Matt Nemer said during a recent conference call.

In recent years, Target has struggled to maintain market share in the face of competition from rivals, including Walmart and Costco. At the same time, the retailer encountered a massive late-2013 data breach in which hackers compromised 40 million customer credit and debit card accounts. The incident drove down store traffic during the 2013 holiday shopping season.

Target has lost $1.2 billion in its Canada operations since it first planted its red circle logo in Ontario in March 2013. The push north resulted from the acquisition of closed Zellers stores, the once-dominant Canadian retailer that fell into liquidation in 2011. But Target failed to win Canadian consumers, unlike its larger rival Walmart, which entered the country in 1994 and continues to grow there.

Cornell, 55, is a former Walmart executive who left PepsiCo’s foods division (maker of Quaker oats and Frito-Lay chips) to take over Target operations in August. He became the first Target CEO and chairman who was not internally promoted. He replaced Gregg Steinhafel, a longtime Target employee who stepped down in the data breach’s aftermath.

Cornell was picked for his global experience, but he recently indicated that the future of Target Canada was uncertain and that an announcement would be made before the company’s annual report presentation on Feb. 25.

Now that decision has been made. Target is laying off its 17,600 Canadian employees, providing them with a minimum of 16 weeks of severance pay. The stores will remain open during the wind-down period. Target says it will cost up to $600 million to exit Canada in 2015. The company said the decision will lead ultimately to increased earnings for the fiscal year and more cash flow in 2016.

Target will announce its fiscal fourth quarter and full year report on Feb. 25. A Thomson Reuters poll of analysts sees Target reporting a revenue increase of 3.5 percent to $22.26 billion for its fiscal fourth quarter compared with the same quarter a year earlier. Net income is expected to jump 28 percent to $781.4 million.

The year-over-year jump in fourth quarter 2014 profit is largely due to low sales performance in the fourth quarter of 2013 following the massive breach of customers’ credit card data earlier that year.

Target’s annual revenue is expected to be up 2.5 percent to $74.44 billion while net income is seen dropping 6 percent thanks to charges incurred in the year in the wake of the data breach. Earnings per share for the fiscal year, excluding one-time charges, is expected to be $3.25, the same as the previous year.