Why Target's International Expansion Might Be Doomed

Target's $4.4 billion expansion into Canada is failing.

Losses from the chain's Canadian business are expected to reach $2 billion this year, after Target promised investors it would be profitable by the end of 2013.

The disappointing execution of the company's first international expansion has been cited as a major factor behind CEO Gregg Steinhafel's recent firing.

Some analysts are now predicting that the retailer will be forced to pull out entirely from Target within the next couple years, barring a miraculous turnaround.

"It is conceivable that they will close Canada," Faye Landes, retail analyst at Cowen and Co. in New York, told The Globe and Mail in a recent interview. "I assume with a new CEO, everything will be on the table."

Here's what went wrong with the expansion.

1. Target store locations in Canada are less than ideal. Target bought more than 120 Zellers stores from Canadian department store chain Hudson's Bay Co. in 2011 and "many were in rundown shopping centers that were hard to access," according to the Wall Street Journal. "The locations were smaller than Target's typical U.S. formats and took more money than expected to expand and convert to its trademark red-and-white layout."

2. Canadian customers have complained that Target's prices are lower in the U.S. "Canadians along the border find it a better overall value proposition visiting Target stores in the U.S. or buying online," writes Brian Sozzi, chief equities strategist at Belus Capital Advisors.

3. Target Canada's store shelves are disorganized and empty and selection is limited. In an interview with the Journal, a former Target employee complained of having to fill half of an entire aisle with Tide detergent when the store had nothing else to fill shelves.

4. Target is having a hard time competing with Wal-Mart, which expanded into Canada two decades ago. "Walmart is the household name to visit given its way earlier entry into the market and willingness to invest in price," Sozzi writes.

5. Target's launch in Canada was overambitious. The retailer opened opening 124 stores over 10 months in its first year.

Sozzi says Target's new CEO will have to maneuver a turnaround in Canada within the next couple years to justify a continued presence in the country.

"If holiday 2015 comes along and the business is still bleeding, this new CEO must enter the February 2016 earnings call prepared to announce a complete exit from a capital-wasting business or consider cutting the store size in half to the best locations, and start fresh," he writes.