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Will Target Lower Its Long-Term Canadian Guidance?

Target (NYSE: TGT  ) has had a rough ride over the past year with the data breach and its failed entry into the Canadian market.  

Many stocks continue to trade at 52-week highs, which forces investors to go "bargain shopping" and invest in beaten-up stocks that could appreciate over time. Target is not one of those stocks.

Target Canada: No easy fix
As Target Canada celebrates its one-year anniversary, executives are hardly holding celebrations of their own as Canadian consumers still have a less-than-ideal impression of the retailer.

Target's management team presented investors with a long-term goal of achieving $6 billion in annual sales by 2017 and $0.80 in earnings per share. Management reiterated this goal during a financial community meeting back in November 2013.

Many know the reasons for Target's failures: inventory issues and a perception that Target is more expensive than its peers.

No easy fix exists for Target Canada's woes. In late May, the company hired consultants who were familiar with the Canadian environment to conduct a 30-day review of its operations.

With that said, it is possible that the study could conclude that Target can not reach its 2017 objectives.

Is the writing already on the wall?
During Target's first-quarter conference call on May 21, the company's Interim President and Chief Executive Officer John Mulligan warned investors that Target expects a single-digit decline in comparable sales in Canada.

Additionally, Target lowered its full-year revenue guidance for Canada to "closer to $2 billion," but this is an improvement from the $1.3 billion in sales that Target Canada has seen since it opened its first store in Canada in March 2013.

Eventually, Target Canada would need to invest heavily in marketing as part of a second aggressive push to win customers. In order to do so, Target Canada needs to analyze the findings from its consultants and implement radical changes in its supply chain and product assortments. It is well known that it cannot implement large-scale changes quickly.

Target Canada will be able to work with 12 months of customer data which should help the company reduce inventory and markdown risk. However, the data is relatively weak compared to that of retailers like Wal-Mart (NYSE: WMT  )  that have decades of customer data to optimize their supply chain management.

The bottom line is that with less-than-ideal data, the risk remains that Target Canada could order too little or too much inventory. It is hard to imagine that Target is on track for its 2017 objectives given the fact that we are in the second half of 2014 and no signs of improvement exist.

It is even more difficult to imagine that Target's management will reiterate its guidance during its next investor conference presentation.

Is Wal-Mart the king of Canada?
Wal-Mart Canada recently named Dirk Van den Berghe as its next president and CEO. Van den Berghe is fluent in seven languages, including Canada's two official languages of English and French. The executive comes from Belgium-based Delhaize Group, a food retailer that operates across three continents.

Van den Berghe will oversee Wal-Mart's aggressive investments in Canada, which it announced earlier this year. Already, the retailer is seeing results from store renovations and an expansion of the number of stores that offer fresh produce and food items. During Wal-Mart's first-quarter conference call, David Cheesewright, Wal-Mart's President and CEO of Wal-Mart International confirmed this:

Sales were strongest in food and consumables, and according to Nielsen, we increased market share 42 basis points for the 12 weeks ended April 19. Our continued price investment resulted in an increased price gap to competitors. We're pleased with online sales as well, which delivered 134% growth. Operating income grew ahead of sales.

Wal-Mart does not break out its Canadian sales and profit data, but according to the Canada-based Financial Post, the retailer sees roughly $23 billion in annual sales.

Foolish take
With 390 total retail units, Wal-Mart Canada generates an average of $58.97 million in sales per location. By comparison, Target Canada, with its 127 Canadian stores, expects to generate only $15.74 million per location in 2014 (based on management's guidance for $2 billion in sales.)

As Target Canada's losses surpassed $1 billion, it is a possibility that the company may cut its losses and shut down, according to analysts at Tiburon Research who forecast that Target is on track to lose $2 billion from its Canadian operations.

Canadian consumers have clearly favored Wal-Mart over Target. Wal-Mart is spending large sums of money on improving its product offerings, while Target is spending money on fixing its product offerings.

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8/27/2015 4:04 PM
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