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Target Corp can fix its Canadian business – Barclays

Target Corp.'s problems in Canada are largely fixable and a large opportunity remains for the U.S. retailing giant north of the border, Barclays said in a new report

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Target Corp.’s problems in Canada are fixable and a large opportunity remains for the U.S. retailing giant north of the border, Barclays says in a new report.

Following suggestions by others on the Street that Target should cut its losses and exit Canada, the firm’s retail analysts took a closer look at the company’s Canadian operations.

“Initial sales expectations for the country were optimistic and expansion was aggressive given time constrains, but we believe that the challenges are not structural,” they said in a research note.

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Barclays noted that pricing perception has been often cited as a potential reason for Target’s initial underperformance in Canada, yet the current price gap with Wal-Mart is minimal, as is the store overlap.

“We believe that a large opportunity remains in Canada for Target to take market share from existing competitors such as Sears Canada,” the analysts said, noting Target would be best suited to focus on the home and apparel segments.

However, they expect Target will focus more on the consumable/frequency category, an area that is not ideal, but provides time for its supply chain to be fixed while minimizing the risk of markdowns.

“At this stage in the game, changing course in Canada could be premature,” Barclays said, noting the estimated break-even point for a possible exit from Canada would equate to less than US$4.2-billion in sales and a 30% gross margin by 2017.

The analysts cut their 2014 earnings per share estimate for Target to US$3.65 from US$3.75 to reflect ongoing challenges in Canada, but maintained their 2015 estimate of US$4.50 on increased confidence for improvements next year.

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