Target Expanding Into Canada With Zellers' Deal

Target Corp. plans to expand into Canada, opening its first foreign outpost as it faces slower growth in the U.S.

The Minneapolis-based discount-store chain also said it hired an adviser to help sell its $6.7 billion credit-card receivables portfolio, an effort it first began to pursue before the credit crisis loomed and the recession hit.

Target, following other retailers looking outside their home markets for growth, plans to buy as many as 220 Zellers store leases from Canadian retailer Hudson’s Bay Co. for $1.81 billion. With 279 stores, discount chain Zellers tried to retool itself as a fashionable alternative to Wal-Mart, whose low prices lured away a big portion of its customer base. Target said in the next eight months it will likely choose 100 to 150 of the former Zellers stores to operate as namesake stores.

“We are excited about the opportunity to enter the Canadian landscape and bring the Target brand to Canada,” Target Chief Executive Gregg Steinhafel said in an interview from Toronto, where the company will build a main office.

NRDC Equity Partners LLC, a small private-equity firm that owns departments-store chain Lord & Taylor, bought Hudson’s Bay two years ago for $1.1 billion. Richard Baker, CEO of NRDC and the holding company that owns Hudson’s Bay, said Zellers was doing fine, but the $1.8 billion Target offered “is a lot of money.”

He added, “We still own our real estate, which is worth $1 billion, plus The Bay, a rapidly improving department store, Home Outfitters, Fields and a significantly smaller Zellers. We’ll pay off a substantial amount of our debt and use the cash to grow the business. Zellers, Home Outfitters, Fields and the Bay are all part of Hudson’s Bay.

Target is a latecomer to Canada. The company’s rivals, including Wal-Mart Stores Inc. and Sears Holdings Corp., have been in Canada for years.

About $1 billion is expected to be spent on the revamping of stores, and in many cases expanding those stores, which on average are smaller than Target’s U.S. stores. The move allows Target, which operates 1,752 stores in the U.S., to gain an immediate presence in a foreign country without having to build from scratch.

The stores are expected to open during 2013 and 2014 and are centered mostly in dense urban areas, including Vancouver, Montreal, Ottawa, Edmonton and Calgary.

Mr. Steinhafel said he thinks the brand will be well received. More than 10% of Canadians have shopped Target stores in the U.S. in the last year and 70% of the population is familiar with the brand, Target said, based on company research.

The anticipated sale of Target’s credit-card receivables portfolio this year or early 2012 comes amid what Mr. Steinhafel calls “the fantastic launch” of a 5% discount program on all debit or credit-card purchases made on Target cards.

The company’s credit-card business has had marked improvement.

The operation’s profit more than doubled in the third quarter, helping Target’s company-wide profit increase more than analysts expected. Payments 60 days past due have dropped to 4.2% in December from 6.3% a year earlier, which could aid appeal to a buyer.

Target will still have control over marketing of its proprietary credit cards.

The retailer’s credit-card program has been contentious in recent years. In 2008, it agreed to sell a stake in its credit-card receivables to J.P. Morgan Chase & Co. following the urging of such a deal by activist investor Bill Ackman, who went on to launch a failed proxy bid in 2009.

Target said it likes the idea of freeing up the receivables, now listed as assets on its balance sheet. The accounting ties up capital that it could use for other investments, such as reducing debt or buying back shares.

“It is a good time to be monetizing their credits cards” given conditions have improved, said Bill Dreher, retail analyst at Deutsche Bank. “Retailers can make more money by having someone run it than by running this part of it themselves.”

The announcements come on the heels of improved holiday sales results from Target, which nonetheless disappointed investors with weaker-than-expected results in December.

Calling the combined November-December sales of 3.5% growth at stores open at least a year “respectable,” Mr. Steinhafel said promotions that pulled sales in November hurt results in December, and there was a softness in electronics.

Article Resource: Wall Street Journal On-Line