U.S. retailer Target Corp
In its first foray outside its U.S. home market, Target said it would pay Zellers Inc C$1.825 billion ($1.84 billion) for the leases and would run the stores under the Zellers brand for a period of time.
Looking ahead, it planned to open up to 150 Target stores in Canada by 2014 and expects financial returns on these stores to be in line with returns on new U.S. Target stores. It forecast a dilution in earnings ahead of the store openings, followed by accretion in the first year of operations.
This is a logical fit with Zellers. It is a natural overlap for the company, said Robert Cavallo, an analyst with Mackie Research Capital. It adds a level of competitiveness in the market.
Target also said it was looking to sell its credit card receivables portfolio, which totaled $6.7 billion as of October 30. First Annapolis is advising Target on the potential sale.
Minneapolis-based Target, with more than 1,700 stores in 49 U.S. states, is the No. 2 discount chain in the United States, trailing industry leader Wal-Mart Stores Inc
But the company has been looking for areas to expand. Chief Executive Gregg Steinhafel told Reuters last May that Canada was a natural place for that, and he said 60 percent of Canadians were familiar with the Target brand and its red-and-white bull's-eye logo.
Target shares were up 31 cents at $55.76 in New York.
Target said its expansion would create thousands of Canadian jobs, first in construction as it modernizes often-dated Zellers stores, and then in retail. It plans to invest more than C$1 billion to revamp the Zellers stores.
The deal will let Target ramp up its Canadian operations quickly, Edward Jones analyst Matt Arnold said.
If you think about the real estate opportunities in Canada, there's only a few attractive markets and then lots of rural space between those markets, Arnold said.
Canadian retailers have faced growing competition as U.S. rivals look to the relatively healthy Canadian market. Canada's recession was less deep than that in the United States, and comparably modest retail rents have also made it a logical expansion target.
Other U.S. retailers tipped to expand into Canada include Marshalls
Closely held Hudson's Bay started operations as a fur trader in 1670, making it North America's oldest company, and it once owned 3 million square miles (7.8 million square km) of what is now Canada -- an area more than 10 times the size of Texas.
It acquired the 80-year-old Zellers, its discount brand, in 1978.
Arnold said that in selling the credit card receivables, Target would still retain ownership of its Red Card credit card business and be able to use it for marketing and promotion, while moving the credit risk off its books.
Target recently launched a program in the U.S. where shoppers who use a Target credit card get a 5 percent discount, and it is counting on that program to help draw in shoppers.
(Additional reporting by Brad Dorfman; editing by Janet Guttsman)