Target (TGT +0.82%) is out performing many of its big box rivals so far this year including Wal-Mart (WMT +1.08%). The stock is up more than 9% year to date, compared to a nearly 6% decline for shares of Wal-Mart over the same period. Moreover, shares of Target are now trading around $83 a pop or at the top of the stock's 52-week high range. This is particularly impressive considering the recent pile-up of challenges Target has faced including costs related to the December 2013 data breach and the ultimate failure of its Canadian operations.
Unfortunately, the stock's strong performance may be short lived. Here are two things that could push shares of Target lower in the quarters ahead.
International expansion on hold after billions in losses from Canadian disaster
The discount retailer's failed entry into the Canadian market could have far-reaching effects on its business. Target threw in the proverbial towel earlier this year, announcing that it would close all 133 of its stores in Canada, less than two years after officially opening its doors in the Great White North.
Many factors contributed to the retailer's woes in Canada such as inventory problems that left shelves half stocked at many locations, customer complaints over high prices, and supply chain issues. The U.S.-based company decided to pull the plug on its Canadian operations after concluding that it wouldn't become profitable for another six years.
Source: The Motley Fool.
Not only has this resulted in a $7 billion drain on Target's finances, but it also curbs the retailer's ambitions of expanding outside of the United States again anytime soon. "This difficult decision in Canada allows us to focus all of our energy on strengthening and executing our plans in the U.S.," said Brian Cornell, Target's new chief executive.
The Canadian expansion was Target's first attempt at generating sales on an international scale. Liquidating its business in Canada means shareholders won't see the international growth they were once promised, at least not in the near-term. On top of this, exiting the Canadian market could benefit Target's biggest rival, Wal-Mart, as it no longer needs to compete with the number two discount retailer in the region. Some analysts also believe Wal-Mart will scoop up a handful of Target's now vacant retail space in Canada.
If Target can't survive in Canada where it had a pre-existing fan base and strong brand recognition, investors are left wondering whether the company will ever be able to add international growth to its repertoire of achievements. Moreover, Target no longer has plans to expand outside of its domestic market, at least not in the foreseeable future. This could hamper growth down the road.
No economic moat
The big box chain's lack of a substantial economic moat is another potential risk to the stock. A company's economic moat is its best defense against competitors. Target, for example, offers everyday low prices, however this can't be considered a competitive advantage because retail rivals such as Wal-Mart and Amazon do as well.
Additionally, similar to most retailers today Target doesn't benefit from meaningful cost switching. In other words, Target's customers can start shopping at Wal-Mart anytime without it being too expensive or troublesome to do so. Moreover, Target's economies of scale or the cost advantages it enjoys due to size are hardly advantageous next to Wal-Mart, which currently boasts more than 11,000 stores in 27 countries.
The lack of an economic moat coupled with Target's multi-billion dollar losses in Canada make the stock a particularly risky bet with shares now trading around all-time highs. As a result, interested investors might want to wait for a pullback in Target's stock before scooping up shares.
