*Investors look to gauge Target's impact on their holdings
*Department stores, apparel chains seen vulnerable
*Convenience stores, sporting goods seen safer bets
*Grocers await clarity on Target food offerings
By S. John Tilak
TORONTO, March 6 The imminent arrival of Target
Corp (TGT.N) and other U.S. chain stores in the Canadian market
may drive smart investors to Canadian retailers that are most
insulated from the cross-border incursion.
Stores that compete most directly with Target, notably
clothiers and department stores, are not in an envious
Apparel brands such as Reitmans (RET.TO), Le Chateau
CTUa.TO, Joe Fresh, a unit of Loblaw (L.TO), and Mark's Work
Wearhouse, owned by Canadian Tire (CTC.TO), are vulnerable,
On the other hand, convenience store operators, sporting
goods chains, and Lululemon Athletica LLL.TO and other
specialty stores will likely sail through unscathed.
"Investors should take a look at the companies they own,
scan the landscape, see who is coming and decide: Is it going
to negatively impact them or not?" Edward Jones analyst Brian
"You have to look at your exposure versus Target," he said,
adding that Target will take market share. "There are no ifs or
buts about it."
Investors already appear wary about that possibility. Since
Target announced its entry on Jan. 13, the S&P/TSE Canadian
consumer discretionary index .GSPTTCD has fallen 4.5 percent.
Some of the index constituents are Canadian Tire, Reitmans,
Rona RON.TO, Dollarama (DOL.TO) and Forzani Group FGL.TO.
That compares with a 5.6 percent rise by the Toronto Stock
Exchange's S&P/TSX composite index .GSPTSE.
Earlier this year, Target said it was taking over Canadian
leases for Zellers stores owned by Hudson's Bay Co. It plans to
operate 100 to 150 stores under its own name in Canada by 2014.
U.S. apparel and household-items chain Marshalls is looking to
open stores in Ontario this month, its website says.
Analysts point out, however, that investors should keep in
mind that not all Canadian retailers will suffer equally.
"You would want to have a good sense of the lines of
business (Target) operates in and where these would overlap
with existing retailers in Canada," said Ryan Crowther, retail
analyst at Bissett Investment Management.
Bissett, a unit of U.S.-based fund manager Franklin
Templeton, has C$13 billion ($13 billion) in assets under
management. It is the sixth biggest shareholder in Canadian
Tire and the fifth biggest shareholder in Alimentation
Couche-Tard (ATDb.TO), the country's largest convenience store
Canadian Tire's more heavily traded class A shares have
declined 5.3 percent since Target revealed its Canada plans.
Crowther agrees that Target will have some impact on
Canadian Tire because of overlapping lines including household
products. Even so, "it's not something that would be
destructive to our investment thesis," he said.
Canadian Tire "has a strong brand, offers an increasing
free cash flow profile and trades at an attractive valuation.
We're not changing our position in Canadian Tire based on
Target's entry into Canada," Crowther said.
The current American invasion is, in fact, a second wave.
The first, launched in 1994, brought Wal-Mart Stores Inc
(WMT.N) and Home Depot Inc (HD.N) to Canada. Both chains, which
now have deep roots north of the border, initially hurt smaller
retailers, especially local grocery and hardware stores.
This time, most in danger are department stores such as
Sears Canada Inc (SCC.TO), majority owned by U.S.-based Sears
Holdings Corp (SHLD.O); Reitmans, Le Chateau and other apparel
chains; and, to a lesser extent, the big Canadian grocers
including Loblaw Cos Ltd (L.TO), Empire Co (EMPa.TO) and Metro
It is not clear how much food Target will sell at its
Canadian stores. The stores are expected to be smaller than
their U.S. counterparts.
The Canadian retail market is growing faster than its U.S.
counterpart. Even so, the growth may not be enough to offset
the market share loss for Canadian retailers.
"Consumer income is going up. The Canadian population is
growing. Those are two things that make the pie a little bit
larger," said Daniel Baer, Canadian leader of consumer products
at Ernst & Young.
"Just because there are new entrants in the market, it
doesn't mean the consumer is necessarily going to spend more
money," Baer said. "They'll probably spend it differently."
(Reporting by S. John Tilak in Toronto and Jessica Wohl in
Chicago; editing by Frank McGurty and Peter Galloway)