Target has been taking "a hard look" at where it needs to improve

Target has been taking "a hard look" at where it needs to improve

Struggling discount retailer Target Canada is tackling its supply chain and merchandising issues as part of broader plans to try to fix its operations in the country - and analysts seem to agree the company is finally heading in the right direction.

The move follows a comprehensive review of the company's Canadian operations - and is one of the key steps outlined today (13 August) by new president Mark Schindele, who stepped into the role in May.

"We've been...taking a hard look at where we need to improve. We've uncovered the root cause of some of our challenges and are focused on three main areas: improving in-stocks, sharpening our pricing strategy and enhancing our merchandise assortment."

As part of its efforts, the retailer is carrying out a physical count of inventory at all 130 stores in Canada, resulting in a reset of systems, and more accurate ordering and shipping data.

A division of US based Target Corporation, its first stores in Canada were opened in 2013 following a $1.83bn deal to take over leases on stores operated by discount chain Zellers, a subsidiary of Hudson's Bay Co.

Now that it has a year of sales data to call on, the company is also hopeful that this will improve forecasting and product allocation based on sales history and promotional plans, so that the right amount of product is in the right place at the right time.

The company is also working to adjust delivery schedules so stores receive merchandise more frequently.

The right direction 
Analysts seem to agree Target Canada is heading in the right direction - and that the plans "highlight a path forward, one that appears to have a strong focus from a new management team," according to Janney Capital Markets analyst David Strasser.

In addition to Schindele, John Butcher, senior vice president of merchandising, and Janna Adair-Potts, senior vice president of stores and distribution, recently joined the leadership team, although Target's search for a non-executive chair is ongoing.

"We continue to believe that Canada is fixable, and full acknowledgment of the key issues is a great starting point," says Strasser.

Most recent results posted by the Canadian segment highlight the challenges, with first quarter sales jumping more than four-fold to $393m from $86m a year earlier, but EBIT loss widening to $211m. The gross margin rate of just 18.7% was half that of the year before due to efforts to clear excess inventory, including long lead-time receipts.

"Our store visits highlight an ordering system that needs plenty of work. Some areas were overstocked, other key products were out of stock, and the net result was heavy promotions combined with lost revenues that hurt both top and bottom line. This is a fixable issue, and one we anticipate improving, starting with back-to-school," Strasser adds.

Pricing problems
Another issue being addressed is pricing, after customers who had shopped in the US complained of higher prices in the Canadian stores.

"This is partly VAT related, partly tariff related, and in other instances, the result of pricing competitively in Canada," Strasser says. "For whatever reason, consumers hold them to a different standard than other US retailers.

"The company has to address this, and if it means near term hits to general merchandise, then so be it, but this pricing issue needs to be fixed for long term success."

In response, Target Canada is embarking on a new price match policy, which will price match for both local competitors and the Canadian websites of select online retailers, including Amazon and Walmart.

It has also added about 1,000 additional items to its roster of 20,000 items that are regularly shopped, to compare prices with its largest competitors. "If we see a like item priced higher at Target, we'll lower it," says Schindele.

30,000 new items
On the merchandise front, Target is bringing in more than 30,000 new items - including autumn apparel - between now and Christmas.

The retailer has also unveiled a long-term partnership with celebrity interior designer Sarah Richardson on a new line of home décor set to launch next autumn; it is partnering with Roots to extend its Beaver Canoe assortment with the addition of new apparel like sleepwear and slippers; and its maternity wear assortment is set to expand by 50% in September. 

In addition, the US women's fashion line Nick & Nora will be available in Target Canada stores next year; the Altuzarra for Target designer collaboration launches in September; and a plus-size line will be introduced early next year.

"Enhancing the merchandise what TGT is good at in general," Strasser says, adding: "The company simply needs to go back on offence in this area. Success there will have positive repercussions in the other two areas as well."