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The 'Lo'-down on Target's exit: A Q&A with retail stocks specialist Vivian Lo of Aston Hill

January 26th, 2015 by

Like it or not, Target's exit will affect us all. We caught up with portfolio manager Vivian Lo to find out how


The Canadian dollar is down, Canadian oil prices are down, and now Canadian Targets are down for the count. If you haven’t heard, Target made the big announcement to exit Canada after suffering operating losses of up to $2 billion USD (that’s $2.47 billion CAD with today's exchange rate) in fewer than two years. Here’s the big question many of us may be (rightfully so) asking: Now what? 

What happens to other Canadian retailers caught up in the bustle? What happens to Canadian consumers caught up in the turmoil? What happens to the Canadian economy caught up (and down) in the volatility of rising and sinking stocks? We talked to Vivian Lo, portfolio manager with Aston Hill Asset Management (and a retail stocks specialist, might we add) to find out how Target’s big bust affects the Canadian economy as a whole - and what kind of domino effect we can expect to see in the coming liquidation.

When a big retailer misses a target, does the economy take the hit? A Q&A with portfolio manager Vivian Lo

  • Q: What will be the effect of Target’s 133 soon-to-be-empty stores (our condolences go out to the 17,600 soon-to-be-ex-employees) on the Canadian commercial real estate market?

Target stores have a great big footprint and so not many retailers can easily occupy their space; commercial vacancy rates are going to rise until new tenants are found. 

Expect that prime locations in urban areas will find new anchor tenants quickly, but “less attractive” or under-performing locations will be more difficult to fill. Another option may be to break up the space, although that can be expensive and may not be a viable solution in some locations.

  • Q: Okay, and what about the associated REIT (real estate investment trust) securities?

In terms of the impact to REITs, the financial impact should be minimal as the real estate is owned by a large number of landlords. Therefore, no one landlord is overly exposed to Target. (As an aside, Target represents only 2% of revenue to RioCan REIT and Morguard REIT).

We saw some weakness in RioCan on the day of the announcement as investors digested the news - but the stock recovered.

  • Q: We’ve heard speculation that Walmart could aim to fill the gap - or maybe Loblaws. How might this over-saturation of only a few brands (and thus a more limited selection) affect Canadian consumers? 

Greater competition means more selection and better, lower pricing for consumers. Target’s exit eases some of the competitive pressures and price wars in the Canadian market, specifically in the grocers and drug stores (after the liquidation is done, of course) - so Canadians may not see the same type of promotions that they have enjoyed in the last couple of years. In terms of product selection, Target Canada didn’t carry the same assortment of products that Target U.S. does, which is what Canadian consumers ultimately wanted; so you can imagine Target’s exit from Canada won’t necessarily “reduce” the selection of products to which Canadians have access.

  • Q: And on the topic of speculation, just how concerned should Target’s investors be about the road ahead?

For investors in Target, decisive action by new management to exit Canada is a positive in my opinion; it shows they’re willing to make difficult decisions (the Band-Aid has been ripped off!).

Canadian operations had been a drag on earnings; the company can now refocus its efforts back on its core U.S. business. Now Target is purely U.S.-driven - and should benefit from the improving U.S. consumer space coupled with benefits from lower gasoline prices, positive-to-free cash flow, and can expect its share buyback program to resume as leverage declines.

A true north resilience

O, Canada! Target may be bidding adieu to its True North neighbours, but parting needn’t be such sweet sorrow. We’ve seen many a sudden change in the economic landscape as of late, but if we as retailers, consumers and investors can keep ourselves focused on the positives of these changes, we may just survive to tell the tale.

Jun 26 2017 12:23am

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