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MINNEAPOLIS — Target Corp. has finally made its move into international retailing with an agreement to buy the leasehold interests of up to 220 Zellers Inc. locations in Canada.

Target Corp. has finally made its move into international retailing with an agreement to buy the leasehold interests of up to 220 Zellers Inc. locations in Canada.

The purchase for $1.83 billion in Canadian dollars ($1.85 billion U.S.) will enable Target to open the first stores in Canada under the Target banner beginning in 2013.

"This transaction provides an outstanding opportunity for us to extend our Target brand, Target stores and superior shopping experience beyond the United States for the first time," said Gregg Steinhafel, chairman, president and chief executive officer of Target. "We are very excited to bring our broad assortment of unique, high-quality merchandise at exceptional values and our convenient shopping environment to Canadian guests coast to coast. We believe our investment in these leases will strengthen the surrounding communities as well as create strategic and financial value for Target stakeholders."

Target plans to open 100 to 150 Target stores in Canada during 2013 and 2014, and expects the financial returns on them to be in line with the returns achieved by new Target stores in the United States — i.e., dilution to earnings prior to store openings followed by accretion to earnings in the first full year of operation.

As executive committee sponsor of the Canadian market entry, chief marketing officer Michael Francis will oversee the move and direct the rebranding of the stores. "Under Michael’s leadership Target has emerged as one of the most recognizable brands in the world, and I am pleased that he will guide our expansion into Canada," said Steinhafel. "With more than 25 years of experience with this corporation, Michael has a deep understanding of Target and the retail industry."

Target will pay for the purchase in two equal payments of $912.5 million (Canadian), probably in May and September of this year. Zellers will sublease the sites from Target and continue to operate them as Zellers units for an unspecified period of time. Zellers is a subsidiary of Hudson’s Bay Co., Canada’s oldest retailer. “This transaction provides attractive long-term value and will allow us to invest substantial capital into our department store and specialty store businesses,” said Richard Baker, governor of Hudson’s Bay.

Wall Street greeted the news positively. Fitch Ratings noted that it expects Target to pay for the purchase as well as incremental capital expenditures of about $1 billion from 2012 to 2014 out of free cash flow, which is projected to range between $2 billion and $3 billion annually.

"We believe the Canadian expansion provides Target with immediate critical mass to leverage advertising, distribution and corporate overhead, whereas a slower ‘greenfield’ approach would be less dilutive initially but potentially less accretive in the long run," wrote Mark Miller, retail analyst with William Blair & Co., in a research note.

At the same time Target unveiled the Canadian move, it announced that it will seek a buyer for its credit card receivables portfolio, which totaled $6.7 million as of October 30, 2010. The retailer is looking to execute a transaction in which it retains operational control of its financial services business.

Any sale will have to meet what the company considers “appropriate strategic and financial conditions” and be designed to have minimal impact on Target customers and Target employees who provide financial products and services.

Fitch Ratings stated that a sale of the credit business would modestly reduce Target’s operating risk while reducing its consolidated financial leverage. "Based on Kohl’s recent receivables sale, which had four bidders and was likely accretive to earnings, a credit deal for Target could help offset the dilution until these new stores are opened," wrote Deutsche Bank analyst Bill Dreher Jr. in a research note.

Shortly before unveiling the Canadian and credit business initiatives, Target announced that it will open 21 stores in the United States this year.


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