Struggling Target Canada faces big test this holiday season

Target Corp. botched its first impression in Canada so badly that some shoppers inverted its motto to "Expect less, pay more."

But with a turnaround plan underway, the Minneapolis-based retailer is hoping for redemption this holiday season.

"It's going to be a pretty important moment for Target Canada," said David Soberman, a marketing professor at the University of Toronto. "They need to get people into the stores and they need to have a good story for people when they get there."

When Target started to open its Canadian stores a year and a half ago in its first international foray, executives initially expected them to start turning a profit by the end of the first year. Instead, they've racked up nearly $1.4 billion in losses to date.

Some analysts say this holiday season is a make-it-or-break-it moment for Target in Canada. If the operation doesn't meet expectations, Target will consider closing stores, said Leon Nicholas, a senior vice president of Kantar Retail.

Asked if that's a possibility, Target officials circle around the question. Executives say they're working hard to fix the Canadian operations and that the holiday season will be an important time to assess how much headway has been made.

"We're making progress, but we still have work to do," said Mark Schindele, a Minnesota native who was tapped to be president of Target Canada in May after his predecessor was fired. "The main focus we have right now is getting our basics and foundation right."

"With the benefit of hindsight, I wished we wouldn't have opened up so many stores as we did at once," Schindele said. "We probably should have scaled back from what we did."

The result: Target's back-end systems couldn't keep up, leading to difficulties keeping stores supplied. Customers also complained that its prices were too high, especially compared with Target's U.S. stores.

The new leadership team has attacked both problems. It has been lowering some prices. To get inventory straight, Target beefed up its once-a-year physical count of items in stores with another count this summer. The goal was to make sure the items on the shelves aligned with what systems said were there. And during this holiday season, Canadian stores will benefit from being able to use last year's sales data to better predict which items will sell and to make orders accordingly.

"As we have more history, we're making better decisions," Schindele said. "Ultimately, your inventory levels are as good as your forecasts. And your forecasts are as good as your history."

Target also expanded some product lines, such as e.l.f. and NYX cosmetics, that until recently had a smaller presence in the Canadian stores.

But there are still some empty shelves, Schindele said. For instance, fashion items tend to sell out quickly and take longer to replenish.

But there are also signs things are getting better. A study by Kantar Retail in August found that Target Canada's prices were 3.9 percent lower than those at Wal-Mart Canada.

And in a September survey, Piper Jaffray & Co., the Minneapolis investment bank, found that 52 percent of Canadian women said they had shopped at Target, up from 43 percent in March. And about one-third of those surveyed felt Target's prices were fair, up from 25 percent in March.

Even so, it's still not clear Target should stay in Canada, said Sean Naughton, a Piper Jaffray analyst. It depends on whether the retailer can show some real progress during the holidays and into early next year, he said.

Naughton estimates it would cost about $1.2 billion for Target to close its Canadian division. "It's pretty clear that they could improve the cash flow of the company pretty materially if they did close down these stores," he said. "What's less clear is if they are starting to turn a corner and potentially starting to get this thing going in the right direction."

Perry Caicco, an analyst with Toronto-based CIBC World Markets, said in a recent report that he expects Target to keep its Canadian stores intact through the end of 2015 while monitoring to see if a turnaround takes hold. If it ends up exiting, it could sell its assets to another retailer to help curb its losses, he noted.

If it stays, he expects ­Target Canada to generate sales of just $3.4 billion by 2017, far below its initial goal of $6 billion.

"Target has been a disaster in Canada, producing sales about half of our initial projections, and running deep operating losses," he wrote.

But Soberman, from the University of Toronto, says Target also has big incentives to make the expansion in Canada work.

The retailer doesn't have much more room to grow in the U.S., he noted. And if Target retreats from its first attempt at international expansion, that would suggest it can't adjust to other countries.