Target could be a bigger threat than rivals anticipated

U.S. retailer reveals its enlarging Canadian stores

TORONTO Target Corp. could be more of a competitive threat than rivals previously imagined this year in Canada as the mass merchant announced a deal with landlords on Wednesday that will enlarge the square footage at a third of its 124 locations opening in 2013.

Target, which announced slightly more than two years ago that it had acquired the vast bulk of Zellers’ leases from Hudson’s Bay Co. for $1.8 billion, has spent the past year building three distribution centres in Canada, renovating stores, building and deploying an IT platform and hiring thousands of staff for all levels of its operation.

It also began asking landlords to look at how many of their malls had adjacent open sites for further investment, John Mulligan, chief financial officer, told analysts during a conference call announcing fourth-quarter results.

“The sites we obtained in the Zellers deal were extremely well located with very attractive leases, were notably smaller than stores we open in the U.S., and in very poor physical condition,” Mulligan said.

“We have decided to expand 40 sites beyond the space they occupied at Zellers stores, creating more than 600,000 square feet of retail selling space.”

Mulligan did not disclose which locations will be expanded, and a Target Canada spokeswoman could not be reached for comment Wednesday.

The retailer is expected to open outlets in Hazeldean Mall, Place d’Orléans, Billings Bridge Plaza, Les Galleries Gatineau and County Fair Mall in Smiths Falls in the fall of 2013.

Outlets on Merivale Road, St. Laurent Boulevard and Bayshore Shopping Centre will open in 2014 and 2015.

Along with securing more space, the retailer also managed to negotiate its way out of the vast majority of its percentage-of-rent clauses with Canadian landlords, Mulligan revealed.

The clauses can kick in when retailers perform exceptionally well in a retail mall space and are a regular feature of leases within Canada’s top malls.

Such clauses mean that if retail tenants exceed a certain point of gross retail sales in a year, a percentage of those sales would have to be given to the landlord as additional rent.

“They of course never impacted Zellers,” Mulligan said. “Per-cent rent is not a meaningful issue for us going forward.”

The deals are a testament to Target’s power even before it enters the market, said Alex Arifuzzaman, partner in Toronto retail real estate specialist InterStratics Consultants. “The landlords are willing to do that because they see Target as having a superior draw to Zellers that will benefit all of the retailers at their properties.”

Landlords will accordingly be able to ask for higher rents from other retailers at the mall, or perhaps attract new tenants, he said. “For some of these properties, it will mean a total transformation.”

The company will now have capital expenditures of $1.5 billion (all figures US) in Canada in 2013 to complete renovations and expansions, Mulligan said.

The costs will negatively affect earnings per share by 45 cents this year, higher than the company had initially anticipated.

“The dilution is a bit higher even than we expected perhaps a year ago and all of that is attributable to independent capital investment decisions we’ve made,” he said.

Target earned $961 million, or $1.47 per share, for the three months ended Feb. 2, down from $981 million, or $1.45 per share, a year earlier.

Excluding the affect of Canadian launch expenses of $148 million, earnings were $1.65 per share, besting analyst estimates of $1.48 per share, according to Thomson Reuters. Target had forecast adjusted earnings between $1.64 and $1.74 per share.

Revenue rose seven per cent to $22.7 billion from $21.3 billion.

Chief executive Gregg Steinhafel confirmed the company is on track for its store openings in Canada, and will open outlets in five waves before the Christmas season, “April, May, and every couple of months beyond that we are going to open somewhere between 20 and 28 stores a cycle.”

The company will do an unspecified number of so-called “soft openings” of stores in March and hold a grand opening event for all 24 of the Ontario stores opening in the first cycle in early April.

“The stores will open to the public in March and we will continue to fine-tune the guest experience as we approach our grand opening in April,” said Target Canada spokeswoman Lisa Gibson.

Steinhafel said the company is seeking out more real estate to open stores in 2014.