Canada is the new battleground for grocery stores, and a poor decision by a rival may just allow Target Corporation (NYSE:TGT) stock to ride the express train higher.
The country that shares our northern border is proving to be a market worth fighting over. In addition to Target Corporation (NYSE:TGT)’s expansion there earlier this year, rival Wal-Mart Stores, Inc. (NYSE:WMT) is investing heavily, with an aggressive $450 million expansion plan. And where the domestic operations of Sears Holdings Corporation (NASDAQ:SHLD) are dwindling away to nothing, its partially spun-off Canadian operations have long been one of the retailer’s bright spots.
So it was surprising to see that grocery story chain Safeway Inc. (NYSE:SWY) chose to abandon the Canadian market altogether in an effort to focus more closely on its U.S. operations. Last week it agreed to sell its 223 stores (including 199 that have pharmacies in them) to Sobeys for $5.7 billion, and though the market initially appeared to like the move, spiking Safeway Inc. (NYSE:SWY)’s stock higher, it seems the move will ultimately be a mistake.
Safeway’s U.S. business comprised 85% of its revenues in 2012, but the Canadian operations make up a third of its operating profits and 43% of its net earnings. By jettisoning its profit center, the grocery store chain may have made a shortsighted move of taking money up front at the expense of a stronger and growing business later on. I agree with my colleague Andrew Marder, who believes Safeway is going to waste money on repurchasing shares, which only props up earnings per share while doing nothing for its underlying business.
Then again, Target Corporation (NYSE:TGT)’s entry into the Great White North may have been the writing on the wall for Safeway. The discount department store has only been in Canada for a quarter, rolling out its first 24 stores in March — but with another 100 planned for the rest of the year — and already Wal-Mart Stores, Inc. (NYSE:WMT) is stumbling, with same-store sales falling last quarter.
But Wal-Mart’s not ceding ground either, as it is planning to complete at least 37 additional supercenters by next January, bringing the total number of Canadian stores to 388. It also throws down the gauntlet to Target Corporation (NYSE:TGT), whose food offerings tend to be more limited.