With the end of Target's ( TGT ) operations in Canada, Wal-Mart ( WMT ) has gone easy on its investments. In a recent news, the company stated that it will be investing only $269 million (C$340 million) in 2015 in Canada, compared to over $450 million (C$500 million) invested last year. Wal-Mart began selling groceries in Canada back in 2006 and it forayed aggressively into fresh foods when Target announced its entry in the country in 2011. The cheap chic retailer opened its first store in the country in 2013, and even though it failed terribly in attracting customers, it did raise concerns of growing competition for Wal-Mart.
In 2014, the retail giant announced that it would invest C$500 million during the year to extend its reach in Canada and bolster its e-commerce operations. The company's Canadian division CEO stated during the announcement that Wal-Mart Canada would open six new Supercenters, expand 10 existing stores and add fresh foods to 19 outlets. Alongside, the retailer laid out plans to invest C$91 million in its distribution network to reduce the lead times of its food products. These plans were clearly aimed at diluting the competitive threat from Target with a preemptive strike.
This year, even though Wal-Mart is planning to invest a smaller amount in Canada, it plans to complete the construction and staffing of 29 new Supercenters. While the expansion seems aggressive, it was most likely a step taken when Target was present in the country. We believe that Wal-Mart started the construction of these Supercenters some time last year, when it was planning to strengthen its position in the market against Target. However, Target's demise in Canada reduced Wal-Mart's competition considerably, and might have also negated the need of aggressive expansion. But at the same time, it presented an incredible opportunity for Wal-Mart to grab a sizable share of the groceries market by acquiring Target's remaining assets ahead of its closest competitor, Loblaw. Nevertheless, we believe that decreased investments this year better defines Wal-Mart's stand on the market after Target's exit.
Our price estimate for Wal-Mart stands at $81 , implying a discount of about 5% to the current market price.
Wal-Mart Canada's Plans For 2015
Wal-Mart will be investing C$340 million this year for store expansion and addition of fresh foods to different outlets. The company plans to open 29 Supercenters in fiscal 2016, following the opening of 11 such stores in January alone. Wal-Mart Canada expects to end the year with 396 locations including 309 Supercenters and 87 discount stores. The company will also continue to extend the reach of groceries in its store network. Wal-Mart stated that the completion of its Supercenter projects, including remodeling, expansion and addition of groceries, will cost it around C$230 million. It will spend around c$75 million on distribution centers and another C$35 million on e-commerce initiatives.
Why It Makes Sense To Go Easy On Investments
One of the reasons why Wal-Mart has narrowed its budget for Canada appears to be Target's exit from the country. Even though Target was not too successful in establishing itself in Canada, its mere presence in the market was a threat to Wal-Mart. The retail landscape in Canada is highly developed and the target population of shoppers is small. Hence, growth of a new retailer comes at the expense of existing players. Target's entry in the country meant that Wal-Mart would lose some of its customers to the cheap chic retailer, which explains why it was aggressive in its investments last year. However, Target's exit from the country has given Wal-Mart an opportunity to relax, as it is almost certain that Target's customers will automatically gravitate to Wal-Mart.
The Canadian retail market is somewhat saturated and the country's population is small. Hence, over-expansion can easily lead to self-cannibalization, which will subsequently impact profits. Also, Canadian buyers are very fond of cross-border shopping due to duty free exemption, which further reduces the need of a wide store network in the country. Hence, we believe that Wal-Mart will carefully evaluate how many stores the market can sustain, and will not repeat Target's mistake of expanding aggressively. We expect the retail giant to de-intensify its expansion plans going forward and focus on increasing store productivity instead, which would require lesser capital.
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