A Tough Turnaround Ahead for Target in Canada
(Article by Marina Strauss, The Globe and Mail)
Rarely has a retailer raised consumer expectations so high and dashed them so quickly.
Target Corp. arrived in Canada almost a year ago amid buzz and anticipation that the U.S. discount chain would wow shoppers with chic bargains.
Instead, Target stubbed its toe badly, unable to do the basics of replenishing its store shelves while taking criticism for charging noticeably higher prices than at its U.S. stores.
“It’s a bit of the curse of high expectations,” said Neil Stern, senior partner at retail consultancy McMillan Doolittle in Chicago. “There was so much build-up and drama around Target coming, and it would change the retail landscape. The disappointment was palpable.”
The extent of the damage became clear last week when Target unveiled its grim 2013 results, which included a $941-million (U.S.) operating loss in Canada. It had originally forecast a profit here as early as the fourth quarter of 2013.
Efforts to improve Target’s performance in Canada proved costly because of heavy discounting to clear out unsold merchandise and, to a lesser degree, high labour costs during the launch of the first wave of Canadian stores, among other expenses, CFO John Mulligan said.
Target said it is improving the bottom line by shaving $200-million in costs in 2013 and expects to slash $1-billion in expenses in 2014. And it will cut spending in Canada to between $300-million and $400-million from a peak of $1-billion last year.
In 2014, it anticipates a Canadian loss of $314-million (before interest, taxes, depreciation and amortization). The company says it is fixing its inventory snags, which are leading to empty shelves, and the situation already is improving.
Now comes the hard part: changing consumers’ perception that Target Canada is Target Lite – or worse, that it’s a buffed-up version of Zellers.
“Our goal was to bring the true U.S. Target experience to Canada, which included bringing the brands and products our guests [customers], who have cross-border shopped, know and love – and we have,” Tony Fisher, president of Target Canada, said in an e-mail to the Globe and Mail.
It’s not enough for many shoppers, who say they find lower prices in U.S. stores than Canadian stores on identical items – or can’t find the same products at all. The letdown has prompted some to continue to zip down to Targets south of the border, or just ditch the retailer altogether.
“They just don’t have the variety of products here as in the States,” said Sherri Redshaw of Stouffville, Ontario, who has been shopping at Target for decades. She will head to Target during a business trip to Indianapolis next month to buy Hershey’s cinnamon baking chips and the chain’s “up & up” migraine medicine for her husband, among other products – merchandise she can’t find at Target in Canada. “I never leave Target in the States without $300 of purchases.”
Heather Arlen of Guelph, Ontario, is in Florida right now, stocking up at Target on toys for her grandchildren and more than $50 worth of M&M’s. The retailer south of the border carries seven varieties of the candy, for example, including coconut and peanut butter, while in Canada it has only two, plain and peanut, she said.
“Good grief, I can buy plain M&M’s at the corner store. Why go to Target [in Canada]?”
Fashionistas also see a product gap. Sonia Basu, a graduate student in Kitchener, Ont., said she finds a wider selection of clothing styles at Target across the border, especially now that she’s pregnant and looking for maternity and plus sizes. Target in Canada carries plus sizes, although they are not in a separate section but scattered throughout the apparel racks, and run to XXL rather than XXXL in the U.S., Target spokeswoman Lisa Gibson said.
Mr. Fisher said the perception that Target Canada is missing products is partly because of the troubled but improving supply chain, which has led to noticeable gaps on store shelves. “We remain fully committed to improving in-stocks and delivering a more consistent experience for our guests,” he said.
As well, Target counts on its suppliers to recommend products that Canadian consumers prefer, Ms. Gibson said. “We will adjust our merchandising mix based on feedback we get.”
Food and drug regulations mean that some U.S. products would have to be reformulated for Canada, which has stopped Target – and other retailers here – from carrying some items, she said. For instance, last year it could not bring its Archer Farms Sweet & Spicy Thai-Style Chile Reduced-Fat Kettle Chip here because the seasoning blend contained stevia, which could not be used to sweeten snack foods in Canada at the time. (Ottawa gave the green light to stevia in snack foods in January.)
Still, Target carries more than 90%of the same in-house and designer apparel and home decor lines in its Canadian stores as it stocks in its U.S. outlets, including Nate Berkus homewares and Mossimo fashions, Ms. Gibson said.
But the retailer is at a disadvantage: Its Canadian stores are on average 18% smaller than those in the United States, forcing the retailer here to carry fewer offerings. Target bought the store leases from ailing Zellers in 2011 in a $1.8-billion deal; it hand-picked more than 120 of the best ones for Target, Mr. Fisher has said.
Source: The Globe and Mail
Economic News
Bank of Canada Keeps Neutral View on 1% Rate
The Bank of Canada kept its main interest rate unchanged earlier today and reiterated the next move depends on the progress of economic data after early signs of faster growth and inflation.
Policy makers kept the benchmark rate on overnight loans between commercial banks at 1%, where it’s been since September 2010, as expected by all 20 economists in a Bloomberg News survey.
“The fundamental drivers of growth and inflation in Canada continue to strengthen gradually,” policy makers led by Bank of Canada Governor Stephen Poloz, said in a statement from Ottawa Wednesday. “The Bank judges that the balance of risks remains within the zone for which the current stance of monetary policy is appropriate.”
The decision follows three prior announcements where the bank suggested an easier path for monetary policy, which took the country’s dollar to four-year lows. Canada’s economy still faces challenges from indebted consumers to weak exports and investment that will keep inflation “well below” the 2% target this year, the bank said.
Wednesday’s statement made no reference to the currency. It said that global financial markets have been more volatile, adding that “tensions in the Ukraine have added to geopolitical uncertainty.”
The central bank also dismissed recent warnings from about a possible crash of Canada’s housing market. “Recent data support the bank’s expectations of a soft landing in the housing market” and stabilizing household debt levels, the statement said.
The bank acknowledged that a number of key measures of the economy are starting to look better, including inflation, GDP growth and exports.
The bank said inflation is now running “slightly higher than expected,” although not enough to change its longer-range forecast of gradually rising price pressures. The bank doesn’t expect inflation to reach 2% until late next year or early 2016.
The consumer price index rose at a higher-than-expected 1.5% annual pace in January – the fastest pace in 19 months.
The bank also said economic growth is “stronger than anticipated,” growing at an annual rate of 2.5% in the fourth quarter and faster earlier in the year following revisions by Statistics Canada.
Exports have also picked up a bit. “Exports have been a little stronger than previously thought but continue to underperform, and overall business investment has yet to pick up,” the bank said.
The net result is that the bank’s forecast of 2.5% GDP growth for the Canadian economy this year remains unchanged, although it acknowledged that the first three months are likely to be “softer.”
The central bank is still looking for the United States to spur Canada’s economy in the months ahead – in spite of recent slower U.S. growth, which it blamed on winter storms and frigid temperatures.
“The timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks,” the central bank said today, echoing its January statement. “With inflation expected to be well below target for some time, the downside risks to inflation remain important.”
The bank’s next rate announcement is slated for April 16.
Source: Bloomberg News, The Globe and Mail
Pimco Sees Canadian Housing Market Falling as Much as 30%
The world’s biggest bond fund is taking a decidedly grim view of Canada’s housing market, projecting a marked decline over the next few years and slashing its holdings in the country.
Ed Devlin, who heads up Canadian investing for Pacific Investment Management Co. (Pimco), told the Financial Times he expects a drop in the residential real estate market of up to 30% over the next two to five years.
To be clear, Mr. Devlin is not forecasting a sudden crash, but he joins a chorus of voices, from Deutsche Bank to the Organization for Economic Co-operation and Development, in raising red flags.
Deutsche Bank, for example, believes the Canadian housing market is the most overvalued in the world.
Mr. Devlin’s 30% call goes beyond the much more mild decline projected by some Canadian economists. TD Bank, for one, believes the market is overvalued by about 10%.
“I’ve been talking with clients and writing about how the housing market is overvalued,” Mr. Devlin told the Financial Times.
“The change this year would be that I actually think it starts this year.”
After a run of strong profits, Pimco’s primary Total Return Fund, with assets of almost $250-billion (U.S.), cut its holdings of Canadian debt to 2% in the third quarter of last year, compared to 4% 12 months earlier, according to the newspaper.
About a month ago, on Pimco’s website, Mr. Devlin wrote that there is little chance of an all-out meltdown in Canadian real estate and that he expects a more orderly cooling.
A full crash, he wrote, would only be sparked by developments he doesn’t see in the cards, such a sharp hike in interest rates, a sharp rise in unemployment or a disruption to mortgage credit.
The housing decline, which could be cancelled out or reduced to 10% when accounting for inflation, will cause a pullback in consumer spending, capping economic growth this year in Canada around 2%, Devlin said.
Though that is less than the 2.3% growth forecast by the Bank of Canada, it should still be enough to keep the central bank from cutting interest rates as exports pick up some of the slack, he said.
“It’s not a collapse, it’s a correction. We think the Canadian economy can handle it,” said Devlin. “It’s going to be a headwind to consumption as people don’t have the same kind of wealth effect and are more anxious about their house than they have been in the past. They’ll consume less.”
The Canadian housing market and worries about a real estate bubble have been key concerns for policy-makers for several years. Recent indicators have suggested the market may be headed for a soft landing instead of a bubble bursting, but concerns have persisted.
Source: The Globe and Mail, Bloomberg News
Canadian Economy Grows 2.9% in Last Three Months of 2013
Canada’s economy expanded more than expected in the final three months of last year — despite a weather-related setback in December — to post the best year of growth since 2011.
For all of 2013, GDP grew 2%, three-tenths of a point higher than what the Bank of Canada or Finance Minister Jim Flaherty’s budget introduced earlier this month had predicted.
The fourth quarter had an annualized growth rate of 2.9% — four-tenths of a point better than the general estimate of 2.5% — but Statistics Canada also upgraded growth numbers in both the first and second quarters of 2013.
The only fly in the ointment detracting from a strong GDP report was that December was even poorer than expected, as output fell 0.5% from November, the biggest monthly setback since March 2009 when the economy contracted by 0.7%. Economists had projected GDP would fall 0.3% in December.
But while the December pullback will affect the early part of this year, the report overall will be seen as good news by markets and a sign that the Canadian economy may be on its way to a stronger year.
For the final quarter of 2013, Statistics Canada said most major industrial sectors increased production as goods producing industries advanced 0.7% over the previous month, non-annualized. Mining and oil and gas extraction grew 1.8%, while manufacturing bounced back by 0.8% after two flat quarters.
Another positive was the business investment in machinery and equipment bounced back smartly by 0.8% following three quarters of declines. However, business investment in non-residential structures fell.
Exports — a sector the Bank of Canada believes is essential for the economy — rose 0.4% in the quarter, after a flat third.
The central bank will also welcome the news that the savings rate of Canadian households increased by 5% in the fourth quarter, as disposable income grew at a faster pace than spending.
The bank has been warning about the high levels of household debt for several years and urging Canadians not to get in over their heads, particularly in the housing market.
Taking some of the sheen off the numbers, the agency noted that inventories grew during the quarter.
For December, the agency said the weakness was registered across the economy, with both goods-producing industries and services registering declines as manufacturing, retail and wholesale trade and construction all fell. While some could be attributed to the weather, it is not clear whether the economy was also due for a respite following five straight months of advances.
In revisions that helped the annual growth number, Statistics Canada said the economy had advanced by 2.9% and 2.2% respectively in the first and second quarters of 2013. It had previously recorded those growth rates as 2.3 and 1.6%. The 2.7% rate in the third quarter was left unchanged.
The quarterly revisions were due mainly to higher-than-estimated oil and crop output, the federal agency said.
Looking farther a field, the Bank of Canada is forecasting economic growth of 2.5% for both this year and in 2015.
What the economists had to say:
“With the understanding that part of the broad weakness (in December) can be ascribed to severe weather conditions, payback can be expected, although it is yet unclear the extent to which Canada has been as affected by the weather in January,” economist
Jimmy Jean of Desjardins Capital Markets wrote in a note to clients.
“While [Friday’s] GDP report is a bit of a mixed bag, the bigger picture is that the Canadian economy looks to have had better momentum than widely appreciated through much of 2013,”
Douglas Porter, BMO chief economist said.
“We normally look to December GDP by industry data to get a sense of what to expect for GDP in the coming quarter,” said
Sonya Gulati, senior economist at TD Economics.
“Inclement weather will negatively depress the Q1 performance. What’s more, the large stockpile of inventories will need to be depleted eventually, thereby limiting the rate of expansion,” she said.
“[But] if we step back from this quarterly perspective, the economic themes — both here and abroad — playing out indicate that 2014 is shaping up to be better than 2013.”
There’s no doubt, for Canada, it’s still a matter of waiting for the U.S. engine to gather more momentum. For now, growth there appears to be slowing, with GDP at a pace of 2.4% in the fourth quarter, down from a previous estimate of 3.2%.
“The combination of inclement weather and a likely reduction in inventories sets up for the pace of growth to temporarily slow in the first quarter,” said
Dawn Desjardins, at RBC Economics.
“That said, government spending is likely to recover from Q4′s [partial government] shutdown-related drop, while the solid momentum in consumer spending is likely to be maintained,” she said.
“The weather impact will be most visible in residential and non-residential construction activity which we expect will be weak in the first quarter.”
Source: Statistics Canada, Canadian Press, The Financial Post
Retail Sales in Canada Start 2014 On an Uptrend
(Report by Ed Strapagiel, Consultant)
Last week, Statistics Canada reported that retail sales in Canada declined 1.8% in December 2013 from the previous month. This is on a seasonally adjusted basis however, accompanied by a note that seasonal estimates were under review. As retailers are now pushing holiday sales ever earlier, it could be that historical seasonal patterns have shifted. On a not seasonally adjusted basis, December 2013 Canadian retail sales were in fact up 2.1% from a year ago, which paints a different picture.
Overall, 2013 ended up with a 2.5% increase in total retail sales year-over-year, the same as 2012's growth over 2011. The growth in 2013 is historically modest, but this is in part due to relatively low inflation. The quarterly gains in 2013 however indicate an improving trend, with year-over-year increases of 0.1%, 2.7%, 3.4% and 3.5% respectively. Overall, 2013 started on a downtrend but recovered, so that 2014 is starting on an uptrend.
The underlying 12 month trend shows modestly accelerating growth. The 3 month trend is tracking ahead, indicating there should be further improvement in the next few months. In Q1 2014, year-over-year gains should be up, but in part due to almost no growth the year before.
The Automotive & Related sector is still responsible for most of the growth in Canadian retail sales. Store Merchandise was up just 1.6% in 2013, versus 4.3% for Auto & Related.
Food & Drug Stores
As a group, Food & Drug stores had a relatively poor December, down 0.6% from the year before, and up only 1.5% for 2013 in total. The fortunes of store types in this sector however vary greatly.
Retail sales at supermarkets and other grocery stores were down 3.7% in December versus a year ago, although they manage a meagre 0.2% gain for 2013 overall. Convenience stores continued to lose ground, with sales down 3.8% for the year, and are now one of the weakest sectors in Canadian retail.
Specialty food stores, on the other hand, closed 2013 with sales up 7.3% from the year before, the best result of all store types. Beer, wine and liquor stores had a soft December but were still up 2.2% for the year.
Health and personal care (drug) stores continue to be a bright spot in Canadian retail. Sales were up 4.2% in 2013, and recent results indicate some uptrend is still in place.
Store Merchandise
Store Merchandise retail sales declined 0.4% in December 2013 versus a year ago, but this was not enough to offset the 4.5% gain made in November. For Q4 2013 overall, sales increased 2.5% from a year earlier. The last 3 month gain remains ahead of the last 12 month trend despite the poor December result . In short, the momentum remains positive for Store Merchandise going into 2014.
In general merchandise, conventional department stores' sales were down 0.7% in December after a gain of 6.0% in November, which very much looks like seasonal creep. They ended down 0.9% for the year due to negative results in 10 of the 12 months of 2013. The "other general merchandise stores" group (mostly combination retailers) grew sales 4.3% in December, about the same as their 4.2% gain for the year, and well ahead of conventional department stores.
Clothing and accessories stores showed the same pattern of a modest December gain after a strong November. This group was up 3.6% for the year, significantly ahead of the overall retail average.
Furniture and home furnishings stores' retail sales gains remain behind the retail average. Sales for Q4 2013 were down 1.4% year-over-year, but up a similar 1.4% for the year overall.
Electronics & appliance stores' sales keep setting new lows. They were down 3.3% for Q4 2013 and down 3.8% for the year.
Sales at building material and garden equipment/supplies slid for the third month in a row in December, but still managed a 2.1% gain for Q4 2013. For the year 2013, sales were up a modest 1.4% over 2012. Remarkably, this was their best annual increase since 2008.
Automotive & Related
With a 9.1% year-over-year sales gain, the Automotive & Related sector had their strongest month of the year in December. They ended 2013 with a gain of 4.3%, which was dragged down by low sales growth at gasoline stations for most the year.
Motor vehicle and parts dealers' sales bounced back in December with a 10.0% gain. For 2013 overall, their sales were up 6.1%, over double the retail average.
Gasoline station sales rose 7.8% in December as pump prices increased. Their retail sales were up 1.0% for the year owing to little or no gains for most of 2013.
Source: Ed Strapagiel, Consultant
Latest U.S. Economic News
U.S. Fourth Quarter GDP Revised Down, but Hints of Economic Thaw Emerge
The U.S. government lowered its estimate for fourth-quarter economic growth last Friday in the latest sign of a loss of momentum, but some tentative signs emerged that suggested the worst of the slowdown may be over.
GPD expanded at a 2.4% annual rate in the fourth quarter, the Commerce Department said, down sharply from the 3.2% pace it reported last month and the 4.1% logged in the third quarter.
For all of 2013, the economy grew at a lacklustre 1.9%, after expanding 2.8% in 2012.
The U.S. economy has faced a number of headwinds, including a 16-day shutdown of the government in October and an unusually cold winter that has weighed on activity since late December.
Growth has also been dampened by the expiration of long-term unemployment benefits, cuts to food stamps and businesses placing fewer orders with manufacturers as they work through a pile of unsold goods in their warehouses.
"I don't think the fundamentals have changed appreciably," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "Heading into this year we knew it wasn't going to be smooth sailing."
First-quarter growth is forecast at below a 2% pace but analysts expect growth will rebound in 2014, possibly as high as 3%.
Fed Chair Janet Yellen told lawmakers on Thursday the cold weather had played a role in the weakening data, and that it would take a "significant change" to the economy's prospects for the central bank to suspend plans to wind down its stimulus.
Indeed, a number of Fed officials last Friday made clear they still believed the U.S. economy was on an improving path.
"I'd still project that 2014 would have stronger GDP growth than 2013 did," even if recent signs of weakness turned out not to be weather-related, St. Louis Federal Reserve Bank President James Bullard told CNBC television.
Consumer spending accounted for a large chunk of the revision. It grew at a 2.6% rate, not 3.3% as previously reported.
Still, it was the fastest pace since the first quarter of 2012 and it contributed 1.73 percentage points to GDP growth.
An upward revision to inflation was also a factor.
The contribution from trade was lowered to 0.99 percentage point from 1.33 percentage points, reflecting a wider trade gap than previously estimated. Nevertheless, it was the largest contribution trade has made to GDP growth since late 2010.
Inventories, previously reported to have risen by $127.2 billion in the fourth quarter, were revised down to $117.4 billion. Even so, the rise in the stocks was the largest since early 1998.
"The downward revision to inventories is good news for near-term growth," said Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh.
With fewer stocks on their shelves or in their warehouses, businesses now are more likely to need to place new orders or otherwise ramp up production to meet demand.
Government spending was revised down by more than half a percentage point to show its biggest decline in a year.
Business spending was revised sharply higher. Economists said businesses likely pushed through equipment purchases to take advantage of tax credits expiring at the end of last year.
"That's going to hurt us a little bit this quarter," said Moody's Analytics' Sweet.
Source: Reuters
U.S. Consumer Sentiment Edges Ahead Despite Harsh Weather
U.S. consumer sentiment rose marginally in February even as concerns about the extreme weather persisted, a survey released last Friday showed.
The Thomson Reuters/University of Michigan’s final reading on the overall index on consumer sentiment for February came in at 81.6, slightly above the 81.2 in both the preliminary February number and the final January reading.
It was also slightly above the median forecast of 81.3 among economists polled by Reuters.
“The most significant implication is not whether consumers have correctly assessed the weather’s negative impact on the economy, but the resilience consumers have demonstrated in the face of the polar vortex as well as higher utility bills and minimal employment gains,” survey director Richard Curtin said in a statement.
The survey’s barometer of current economic conditions edged up to 95.4 from the 94.0 preliminary reading, which was also the median forecast. It was 96.8 in January.
The gauge of consumer expectations was 72.7, slightly lower than the initial February reading of 73 but up from January’s 71.2.
The survey’s one-year inflation expectation ticked down to 3.2 per cent from 3.3 per cent in the preliminary release, while the five-to-10-year inflation outlook was unchanged from the preliminary at 2.9 per cent.
Source: Reuters
