After failure in Canada, Target will focus on U.S.

As Target flees its multibillion-dollar debacle in Canada, the giant retailer will have no choice but to find its next engine of growth within the United States.

CEO Brian Cornell, who cut off the Canadian experiment just five months into his job, says Target has plenty of other initiatives underway to revive sales. Target is expanding smaller-format concepts such as CityTarget and TargetExpress. It sees lots of potential online.

And the Minneapolis-based company sees opportunities to reclaim its mantle as the king of cheap-chic by doubling down on categories such as home, apparel, baby, health and wellness.

"I'm very bullish about the future prospects of our business in the U.S.," Cornell said. "But we also recognize we have a lot of work in front of us over the next two years or three years."

Just two years ago, Target saw Canada as a big opportunity for growth, a test of how well its model would translate in markets outside the United States. But Cornell pulled the plug on the chain's 133 stores in Canada last week, saying the operation was hemorrhaging too much money and wasn't poised to pull a profit for another six years.

Instead, he said it was time to turn the retailer's focus to rejuvenating its 1,800 U.S. stores, which have been struggling with sluggish sales and traffic in the last couple of years, along with the added challenge of a massive data breach in late 2013.

Analysts say there's still plenty Target can do to strengthen itself in the United States. But with stores already in place in most logical markets, there are limits.

Target has already begun to show some improvement in the United States, and its stock has been trading at near-record highs as a result. The company said last week that it now expects same-store sales in the fourth quarter to rise 3 percent, up from its previous guidance of 2 percent.

But critics say the company, which has 14,000 corporate employees in Minnesota and is the third-largest business in the state, lost ground during the tenure of Cornell's predecessor, Gregg Steinhafel. Once the third-largest U.S. retailer after Wal-Mart and Kroger, Target was bumped last year to the No. 4 spot by Costco.

Robin Lewis, a retail consultant in New York, said the issues under Steinhafel went beyond the Canadian fiasco and the company's handling of the data breach.

"He got rid of the old cheap-chic image. He fell down in the entire apparel area. And the food business was ill-conceived," he said, referring to the addition of expanded grocery departments to 1,300 U.S. stores.

But Target has also been trying new approaches.

Between 2005 and 2009, it added about 85 new stores a year. But the pace has recently dwindled to about 20 or so a year, contributing to about 80 layoffs at headquarters last fall. This fiscal year, the company will close more stores — 19 — than it will open — 16.

As growing numbers of people prefer to live in cities, Target has instead been experimenting with smaller boxes in the urban core. It now has eight CityTarget stores, which range in size between 80,000 and 100,000 square feet, with plans to open at least two more in the next couple of years, in Boston and Brooklyn, N.Y.

Last year, it opened its smallest store yet — a 20,000-square-foot store called TargetExpress by the University of Minnesota. At least five more of these little box stores are slated to open this year.

The jury is still out on how many of these smaller stores Target should — and will — open. Consulting group Kantar Retail expects Target to open 50 smaller stores by 2019.

But Carol Spieckerman, a retail consultant with newmarketbuilders, thinks Target can open a lot more than that. After all, so much of Target's customer base lives in urban areas.

In fact, Wal-Mart executives recently told analysts that they will slow the growth of supercenters as they focus more on the smaller stores. "If these small formats are done right, it's a tremendous opportunity for Target."

Then there is the online potential. Online sales still account for only 2 to 3 percent of Target's $71 billion in sales, but the segment is rapidly growing.

Company executives said last week that they expect online sales to rise 40 percent during the fourth quarter. The bump was fueled in part by Target's aggressive holiday promotion of free shipping on any size order.

But Cornell told analysts that digital sales have continued to accelerate even after that deal ended.

Some retail experts wonder if online sales can lead to new sales, or if they just cannibalize stores. But others argue that Target has an opportunity to gain back market share from online retailers such as Amazon with services such as buy online — pickup in store and by its recent rollout of shipping items from stores to get packages to customers' doorsteps more quickly.

But she said they're focused in the right direction. One hit Target already has under its belt in the digital space is Cartwheel, a digital coupon app that executives said has been driving added sales.

Finally, Target has room to capture market share from struggling competitors like J.C. Penney, Kohls and Sears, said Burt Flickinger, a retail consultant with Strategic Resource Group.

"Target's expansion is going to come from one, being better, and two, from the contraction of many of its key competitors," he said.

One thing seems fairly certain: Target won't go back to Canada anytime soon, and expansion to other countries will likely be shelved for a while as a weak global economy forces the firm to focus on the United States.

But if and when it is ready to make another international move, Target will likely be much more cautious.