Following the announcement, shares of Target were up as much as 8% in pre-market trade on Thursday.
In a statement, Target CEO Brian Cornell said, "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."
The Globe and Mail's Luke Kawa tweeted this table showing Target's losses in Canada over the last several quarters, with cumulative losses coming in at more than $2 billion.
Target said that it would take a $5.4 billion pre-tax charge in the fourth quarter related to the closure of its Canadian operations, and the company said cash costs related to wind down of its Canada unit are expected to total $500-$600 million.
In addition to announcing its exit from Canada, Target said that in the fourth quarter, same-store sales are expected to rise 3% compared to the prior year, better than the 2% increase the company had previously forecasted. Target added that its fourth quarter earnings are expected to beat expectations.
Here is Target's full statement:
MINNEAPOLIS--(BUSINESS WIRE)--Jan. 15, 2015-- Today Target Corporation (NYSE:TGT) (the "Company") announces that it plans to discontinue operating stores in Canada through its indirect wholly-owned subsidiary, Target Canada Co. ("Target Canada"). As a part of that process, this morning Target Canada filed an application for protection under the Companies' Creditors Arrangement Act (the "CCAA") with the Ontario Superior Court of Justice (Commercial List) in Toronto (the "Court").
"When I joined Target, I promised our team and shareholders that I would take a hard look at our business and operations in an effort to improve our performance and transform our company. 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. Personally, this was a very difficult decision, but it was the right decision for our company. With the full support of Target Corporation's Board of Directors, 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 U.S. business," said Brian Cornell, Target Corporation Chairman and CEO.
Target Canada currently has 133 stores across the country and employs approximately 17,600 people. To ensure fair treatment of Target Canada employees, Target Corporation is seeking the Court's approval to voluntarily make cash contributions of C$70 million (approximately US$59 million) into an Employee Trust. Upon approval by the Court, the proposed trust 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. Target Canada stores will remain open during the liquidation process.
As part of its application, Target Canada is seeking the appointment of Alvarez & Marsal Canada as Monitor in the CCAA proceedings to oversee the liquidation and wind-down process for Target Canada and its subsidiaries. Subject to Court approval, Target Corporation has committed to provide a US$175 milliondebtor-in-possession credit facility to finance Target Canada's operations during the CCAA proceedings. Target Canada is also seeking Court approval to engage Lazard to advise Target Canada in connection with the sale of its real estate assets.
"The Target Canada team has worked tirelessly to improve the fundamentals, fix operations and build a deeper relationship with our guests. We hoped that these efforts in Canada would lead to a successful holiday season, but we did not see the required step-change in our holiday performance," said Cornell. "There is no doubt that the next several weeks will be difficult, but we will make every effort to handle our exit in an appropriate and orderly way."
As a result of the CCAA filing, Target Corporation has determined that Target Canada and its subsidiaries will be deconsolidated from Target Corporation's financial statements as of the date of the filing. Target Corporation expects to report approximately $5.4 billion of pre-tax losses on discontinued operations in the fourth quarter of 2014, driven primarily by the write-down of the Corporation's investment in TargetCanada, along with costs associated with exit or disposal activities and quarter-to-date Canadian Segment operating losses prior to today's filing. Target Corporation expects to report approximately $275 million of pre-tax losses on discontinued operations in fiscal 2015.
Target Corporation's cash costs to discontinue Canadian operations are expected to be $500 million to $600 million, most of which will occur in the Company's 2015 fiscal year or later. The Company has sufficient resources to fund these expected costs, including cash on hand and ongoing cash generation by its U.S. business.
Target Corporation expects this decision will increase its earnings in fiscal 2015 and beyond, and increase its cash flow in fiscal 2016 and beyond.
As a result of the decision announced today, Target Corporation will operate as a single segment that includes all U.S. operations. Beginning with the Company's fourth quarter 2014 financial results, Target will report adjusted earnings per share reflecting operating results from its U.S. operations, excluding discontinued Canadian operations, the impact of the reduction of the beneficial interest asset recognized in connection with the 2013 sale of the Company's U.S. consumer credit card portfolio, net expenses related to the 2013 data breach, and the resolution of certain tax matters.
Target Corporation plans to provide additional information on the financial implications of this announcement in a Form 8-K to be filed with the Securities and Exchange Commission later today.
Update on expected fourth quarter U.S. performance
Based on performance through November and December, Target Corporation now expects to report fourth quarter 2014 U.S. comparable sales of approximately 3 percent, better than prior guidance of approximately 2 percent, driven primarily by increased traffic and stronger-than-expected digital sales. The Company expects to report fourth quarter adjusted EPS, reflecting results from continuing operations, of $1.43 to $1.47, about 6 cents ahead of expectations for U.S. Segment performance at the beginning of the quarter.
The Company is not able to provide an estimate of its expected fourth quarter 2014 GAAP EPS. However, GAAP results are expected to include:
- Losses related to liquidation of Target Canada, as described above, net of taxes
- Net expenses related to the 2013 data breach, which are not expected to be material
- Impact of the reduction of the beneficial interest asset recognized in connection with the 2013 sale of the Company's credit card portfolio, which is expected to reduce GAAP EPS by approximately 2 cents