2 years ago
After two years of struggle in Canada, cheap chik retailer Target (NYSE:TGT) finally closed down its 133 locations in the country. The retailer was unable to sustain huge losses arising for botched up inventory management and high preopening expenses, and could not see the business going profitable any time soon. With its closure, the question has arisen – who will pick up Target’s stores in Canada? With Target’s sudden exit from the country, Wal-Mart (NYSE:WMT) stands a chance to bolster its Canadian business (currently at 370 stores) by buying the leases for Zellers stores, which Target would gladly sell to pay its creditors. However, the retail giant may not consider buying the leases for all the stores on account of self-cannibalization issues. Moreover, it is expected that Loblaw, the largest Canadian grocery chain, will also look to acquire Target’s assets as a preemptive step against the American retail giant, that can potentially start a bidding war. However, Wal-Mart’s own intentions are not clear at the moment, as it does not really have any direct competition in the market. Considering Wal-Mart’s size, buying leases from Target would not cost much, but the retailer may not get enough of a return on its investment. Zellers stores are almost half in size as compared to Wal-Mart’s successful Supercenter format, and it is expected that Target’s former customers will automatically move to Wal-Mart. Hence, it appears that there is no need for Wal-Mart to acquire Target’s assets. However, Loblaw can be a formidable threat to Wal-Mart if it buys the leases from Target ahead of Wal-Mart. The Canadian grocer holds a higher share in the groceries market as compared to the American retailer and targets the same consumer demographic of low-middle income individuals. If Loblaw gets 40-50 Target locations nearby Wal-Mart’s Supercenters, it can effectively take customers away from the retail giant. It appears that Wal-Mart has a knack for sticking to its own expansion rather than acquiring store assets, as it showed no interest in Family Dollar bidding war. The company might do the same yet again. Our price estimate for Wal-Mart stands at $81, implying a discount of less than 10% to the current market price. See our complete analysis for Wal-Mart What Target Has Left Behind? Target originally bought leases for 189 Zellers stores for C$1.825 billion in 2011, and eventually turned only 133 of them to its iconic format. Meanwhile, it sold leases for remaining stores to other retailers, including 39 to Wal-Mart. With Target’s closure, leases for its 133 locations will be up for sale. The retailer employed 17,600 employees in Canada and hence, potential suitors will have a huge pool of skilled labor to choose from in addition to store assets. Hiring employees associated to a particular store while buying the lease for the same store, will ensure better operational efficiency and can help speed up the initial setting up process. There appears enough incentive for any retailer to acquire what Target left behind, but incentive for Wal-Mart seems limited. Why Wal-Mart May Not Benefit From Target’s Locations? Wal-Mart is doing well in Canada. In the most recently concluded quarter, the retailer’s net sales from the region increased 3.3% with a double digit growth in fresh foods. Wal-Mart’s Supercenter format, which spreads across 179,000 sq. ft. and has a large space for grocery and fresh produce, has been very well received in Canada. It is evident that the company will look to carry forward its expansion in the country with this format only. In fact, Wal-Mart had plans to open 11 Supercenters in Canada in January 2015, according to a recent BNN report.  However, buying leases for Zellers stores from Target will not do much good for Wal-Mart’s strategy of expanding its Supercenter base. Target stores were on an average 112,000 sq. ft. large, which is significantly smaller than what Wal-Mart would want for its new locations. Also, it is expected that most of Target’s customers will automatically drift towards Wal-Mart, making buying leases a redundant move. Moreover, Wal-Mart will have the choice of only a few locations that are not in the vicinity of its existing outlets. Even if it decides to buy the leases, the retailer will go after only a few stores to prevent self-cannibalization and hence, its financial gains will be minimal. What Wal-Mart May Lose If Loblaw Acquires Certain Locations? Wal-Mart has very little to gain from Target’s leftovers, but it can lose more if Loblaw gets its hands on Target’s stores. Loblaw, the largest Canadian grocery chain is a direct competitor to Wal-Mart, as it caters to low-middle income groups across the country. With its “Real Canadian Superstores”, it has successfully positioned itself in the league of retailers such as Wal-Mart and Target. In fact, in the grocery space, Loblaw is the clear leader with 27% (2013) share, compared to Wal-Mart’s 6%.  Although Wal-Mart’s market share might have improved substantially in 2014, it would still have been a long way behind Loblaw. If Loblaw acquires a few Target locations, leaving non-lucrative options for Wal-Mart, it can easily sustain its dominance in the Canadian grocery market, making Wal-Mart’s future growth a little strenuous.