Target pulls out of Canada. What went wrong?

If Target was looking for 2014 to be a rebound from a tumultuous 2013, when an expensive security breach torpedoed its holiday shopping season, it didn’t happen. And the retail giant can blame Canada.

Target announced Thursday that it will shutter all 133 of its stores in Canada, not even two years after launching an ambitious expansion into the country. Sales were poor throughout the retailer's northern run, hurt part by the perception that prices were higher in Canadian stores than their US counterparts.

“After a thorough review of our Canadian performance and careful consideration of the implications of all options, we were unable to find a realistic scenario that would get Target Canada to profitability until at least 2021,” Target Corp. Chairman and CEO Brian Cornell said in a statement Thursday. “Personally, this was a very difficult decision, but it was the right decision for our company…we have determined that it is in the best interest of our business and our shareholders to exit the Canadian market and focus on driving growth and building further momentum in our US business.”

As part of the liquidation, Target Canada will apply for creditor protection through the Canada court system. The retailer employs 17,600 workers in the country, and says it is seeking court approval to contribute approximately $70 million to an employee trust that “would provide that nearly all Target Canada-based employees receive a minimum of 16 weeks of compensation, including wages and benefits coverage for employees who are not required for the full wind-down period,” the company said in a statement announcing the closure. “Target Canada stores will remain open during the liquidation process.”

The retail giant has been struggling to turn a profit since it first entered the country back in 2011. As this table from Globe and Mail reporter Luke Kawa shows, the company’s Canada profit losses have topped $200 million for the past five financial quarters. Target had hoped that changes for the holiday shopping season, including lower prices, would turn things around, but “we did not see the required step-change in our holiday performance,” Mr. Cornell said.

Target said it expects to lose around $5.4 billion in the financial fourth quarter of 2014 because of the Canada pullout, and about $275 million more in 2015. Its cash costs for the exit are expected to be between $500 million and $600 million.

Trouble in Canada is hardly unique to Target – economic growth in the country is slow and crowded, and there are more business regulations than in other major growth markets, like China, making it a difficult market for US retailers looking to expand. Best Buy and Big Lots have also shuttered Canadian stores in recent years; Wal-Mart, Sears, and Lowe’s have all seen their sales in the country slide.

Target is likely looking for a bit of good news after a rough, costly year and a half. In late 2014, the retailer fell victim to a data breach that compromised personal and financial data of nearly 110 million shoppers during the height of the holiday shopping season. The episode cost the company approximately $148 million and continued to have an impact on Target’s quarterly earnings reports through much of 2014. Still, the retailer says it expects its fourth quarter earnings to beat expectations. 

Investors, meanwhile, were cheerful about Target’s retreat from Canada Thursday morning: the company’s stock was up over 2 percent in midmorning trading.