Target is getting set to invade Canada, and in a big way.

This story first appeared in the January 14, 2011 issue of WWD. Subscribe Today.

America’s trendy discounter will open 100 to 150 stores across Canada in 2013 and 2014, through a $1.84 billion deal to take over up to 220 Zellers leases.

Target’s entry into Canada marks the chain’s first expansion outside the U.S. The deal may also open the way for other retailers to enter Canada since Target Corp. could gain control over many more leases than it plans to convert to its own stores. In addition, Zellers could decide to give up leases that Target doesn’t take.

Kohl’s, J.C. Penney, Macy’s and Kmart are among the American retailers with no stores in Canada, with Kohl’s the most eager to expand across borders, according to sources. Retailers already operating in Canada, including Wal-Mart and Lowe’s, would be interested in additional locations, though Target would not be interested in facilitating Wal-Mart’s growth.

The deal enables Zellers’ parent, Hudson’s Bay Trading Co., to eliminate its Canadian debt and pour capital into its two department store chains, the 92-unit The Bay in Canada and the 48-unit Lord & Taylor in the U.S. Hudson’s Bay Trading Co. also operates the 160-unit Field’s, another discounter selling a range of products, and the 69-unit Home Outfitters chain.

“This is a spectacular transaction,” Richard Baker, chairman and chief executive officer of Hudson’s Bay Trading Co., said Thursday when the deal was unveiled. “It generates a huge amount of cash that we can now use to pay down our debt and invest in our operating companies going forward.” The debt stems from NRDC Equity Partners’ acquisition of The Hudson’s Bay Co. in 2008, which was then transformed into Hudson Bay Trading Co., a holding company for the four operating divisions. According to reports, NRDC paid $1.1 billion for Hudson’s Bay, and remains acquisition minded. During the interview, Baker did cite the possibility of using some of the cash from the Zellers deal for an acquisition. NRDC also paid about $1 billion for Lord & Taylor in 2006. NRDC’s roots are in real estate, so its recent acquisitions of retailers have raised speculation that real estate owned by the retailers could be sold off.

With many of its sites going to Target and possibly other retailers, Zellers, currently with 279 locations, will become a much-pared-down business, Baker noted. “We are going to run all Zellers stores through 2011, then run many in 2012. By 2013, it will be a small division,” he said. Zellers will sublease certain sites from Target.

Baker said Target hasn’t made final determinations on which Zellers to convert to Targets. “We don’t know exactly where they are,” Baker said. “They haven’t selected the stores they want. They have a right to pick up to 220 stores, any stores they want.”

Asked if Target would compete with Hudson’s Bay Trading Co., specifically The Bay, Baker replied: “Maybe in some really small way,” explaining that Target’s prices are lower and that The Bay sells brands that Target doesn’t stock.

Considering its popularity in the U.S. and its reputation for innovative marketing, Target should go over well with Canadian consumers. There’s also less retail competition in Canada than in the U.S.

However, it won’t be a slam dunk. Target will have to renovate the Zellers stores and adapt its merchandising to the smaller footprints. Zellers average 90,000 to 100,000 square feet, while Target stores average 135,000 square feet. Target expects to spend more than 1 billion Canadian dollars, or $1.03 billion at current exchange, on remodeling the sites.

Asked if there would be much difference between Target in the U.S. versus Canada, a Target spokesman said: “We expect to offer a similar breadth and depth of merchandise.” As far as Target adapting to the smaller sites, merchandising alterations would be determined on a site-by-site basis. Target is developing a smaller prototype in the Seattle area that will open before any stores open in Canada. It could contain features applicable to Canadian sites.

Target is also considering other countries for expansion, such as Mexico.

According to the Minneapolis-based retailer, the financial returns on the Canadian stores are expected to be in line with returns on new Target stores in the U.S. There will be some dilution to earnings prior to store openings, followed by accretion to earnings in the first full year of operation.

Target said its Canadian expansion will generate thousands of jobs there through construction projects and store operations. Typically, Target has 150 to 200 employees per store. Target also said it intends to actively pursue the sale of its credit card receivables portfolio, which totaled $6.7 billion as of Oct. 30. First Annapolis has been hired to advise Target.

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