Target's Canadian rescue aims at prices and supply

Target Corp. outlined steps Wednesday to turn around its flailing Canadian operations, which lost nearly $1 billion last year after a rapid expansion was met with customer complaints about empty store shelves and higher-than-expected prices.

The changes, some of which have already been rolled out in recent weeks, include lowering some prices and resetting its systems to get a better handle over inventory.

"We know we have a lot of work to do," said Eric Hausman, a Target spokesman. "But we're expecting to see measurable progress this fall."

Fixing Canadian operations already appears to be a top priority for Target's new CEO, Brian Cornell, a former PepsiCo executive who started work at the Minneapolis retailer on Tuesday. He will visit Target's Canadian division later this week and spoke with Mark Schindele, the president of Target Canada, last week before his official start.

Schindele, a Target veteran, was tapped to lead the Canadian stores in May after the previous president was fired amid disappointing results with Target's first major international expansion.

Last week, Target cut its profit outlook for the second quarter, citing in part softer-than-expected sales in Canada. At the same time, it has been marking down items to clear out excess inventory at its Canada stores.

Target opened 124 stores in Canada last year, in batches of up to a few dozen, a flurry of action that led to difficulties keeping them supplied and priced competitively. "Opening as quickly as we did had some unintended consequences," Hausman said.

Yarbrough said the initiatives Target laid out on Wednesday are the right direction, but the big question is whether Canadian customers who were initially turned off will come back. "We'll have to see if they will give Target a second chance," he said.

Schindele brought two outside consultants to assess Target's operations and strategy in Canada, Hausman said. And the company has reviewed more than 500,000 comments from customers relayed through social media, phone calls and surveys.

To fix its stocking problem, Target said it physically counted inventory in the Canada stores and reset systems accordingly, paving the way for more accurate ordering. It is working to better coordinate communication among its three distribution centers in Canada, which had been assigning vendors different codes at each site, leading to delays. And it has smoothed out some kinks in its systems that had predicted items to arrive faster than vendors could deliver.

Also, with a year of experience in Canada, Hausman said, Target executives can better determine the demand for certain items. "Based on its success this year, we will be better at predicting how many barbecues we need" next year, Hausman said as an example.

When it comes to pricing, Target says it tracks about 20,000 items that are also carried by its competitors in order to make sure its prices are competitive. On average those items are priced within 1 percent of its competitors. But it realized that there were 1,000 items missing from that comparative pricing model, so it has added them to the list and will lower prices accordingly.

Finally, Target is tweaking its merchandise assortment in Canada, expanding its maternity selection and introducing a plus-size line early next year. It has also recently added items such as Bose speakers and Fitbit watches. And it announced a long-term designer partnership in home décor with celebrity designer Sarah Richardson that should hit Canadian stores in fall 2015.

David Strasser, an analyst with Janney Capital Markets, recently visited Target's Canadian stores and came away somewhat upbeat about Target's ability to turn them around. While he noticed some problems with inventory — too much in some areas and not enough in others — he said Target's back-to-school assortment looked very strong.

He said he thinks Target's Canadian operations are "fixable" and said the initiatives outlined Wednesday "highlight a path forward."

"We are somewhat optimistic that Canada will get better, perhaps not returning to the profile that had been originally forecast, but one that is acceptable," he wrote in a research note.

Strasser said he's become more concerned about Target's far-larger U.S. operations, where its margins have been undercut by aggressive promotions amid fierce competition from online retailers.

In the meantime, Target is still searching for a nonexecutive chair for Canada, a new position it first announced in May.

And despite its struggles to the north, Target continued to open new stores this year. It now has about 130 stores in Canada, with plans to open another few stores this fall.

Kavita Kumar • 612-673-4113