Tag: Target Canada

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FILING BANKRUPTCY IN CANADA: RETAILER BANKRUPTCIES AND CO-TENANCY

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If you would prefer to listen to an audio version of this filing bankruptcy in Canada Brandon’s Blog, please scroll to the bottom and click on the podcast.

Introduction

I read one article and one legal case over this past weekend that gave me the idea for this Brandon’s Blog about filing bankruptcy in Canada. The article was about the large US jewelry and accessories retailer Charming Charlie’s filing Chapter 11 bankruptcy for the second time in just over a year. In its 2018 filing, the retailer shed almost half of its 400 stores in a restructuring. Unfortunately, that was not good enough to save them. They have now filed again and announced they are closing their remaining stores.

The case I read is Old Navy (Canada) Inc. v. The Eglinton Town Centre Inc., 2019 ONSC 3740 (CanLII). This decision of the Ontario Superior Court of Justice was released on June 21, 2019. This case involves a retail tenant’s right to put into play rights it has as a result of a co-tenancy requirement under its commercial lease.

What Is Co-Tenancy Provision?

Simply put, a co-tenancy clause in retail lease agreements permits retail tenants to reduce their lease payments if key renters or a specific variety of lessees leave the retail premises. The idea being that certain tenants are major draws to a shopping centre and produce traffic for themselves and the other tenants. Those types of tenants are called anchor tenants.

A retail tenant agrees with the landlord to specific lease terms, especially the amount of rent to be paid. The commercial tenant agrees to those terms expecting a certain level of traffic in the mall or shopping centre. If anchor tenants leave, a co-tenancy provision allows a tenant to decide if it wishes to remain or not. If it decides to stay, then the lower amount of rent to be paid when a co-tenancy provision comes into play is meant to compensate the tenant for the lower traffic volume.

The Players

Old Navy is a famous retailer of clothes. It runs stores throughout Canada, the United States, and worldwide. Old Navy is a subsidiary of Gap Inc. (GAP), which is headquartered in San Francisco, California. Old Navy’s operations and stores are owned and operated by GAP.

GAP is the biggest specialty retailer in the USA. It has roughly 3,700 locations globally, consisting of 240 shops in malls and strip/power centres throughout Canada. GAP also owns the Banana Republic brand. Of the three, Banana Republic is taken to be on the top end of the GAP household of brand names, while Old Navy is the reduced level, affordable or budget brand name.

The landlord, The Eglinton Town Centre Inc., is owned and run by Lebovic Enterprises, a major Canadian property developer with its head office in Toronto, Ontario. Among others, it owns and runs the “Power Centre”, situated at Eglinton Opportunity East (the Centre).

The Old Navy Canada Lease

The Old Navy Canada lease, of course, had many terms in it. It included a co-tenancy provision. The clause named the key retailers (Key Shops) and their square footage. The Key Shops are the following retailers with the flooring area indicated:

Key ShopsSquare footage
Cineplex68,000 sf
Roots6,545 sf
Globo Shoes12,084 sf
Danier Leather 6,548 sf

Although the co-tenancy clause had various alternative remedies in it, all of them are not essential for you to know for the purpose of this Brandon’s Blog.

It is important for us to know that the co-tenancy section consisted of three main parts: (i) the number of Key Shops; (ii) a gross leasable area test; and (iii) a requirement for the landlord to advise the tenant in writing when a co-tenancy failure has actually happened.

Simply put, if the co-tenancy provision kicked in Old Navy Canada had the option to either:

  1. Shut down its store and leave on proper notice to the landlord; or
  2. Remain and pay a lesser “Alternate Rent” for the period that the co-tenancy issue remained unresolved.

The Danier Leather bankruptcy

Danier Leather (Danier) was a prominent Canadian seller of leather clothing and related leather items. The landlord entered into a lease with Danier for a preliminary 10-year term from June 10, 1999, to June 9, 2009. Danier’s lease was renewed in 2009 and Danier continued to be a renter of the Centre up until 2016. Danier’s premises of 6,548 square feet of space was out of a total of 285,425.37 square feet of gross leasable area in the Centre. Danier’s retail outlet represented just 2.3% of the gross leasable area.

Danier was a public company. Its shares were traded on the Toronto Stock Exchange. Nonetheless, public filings showed that Danier had been battling financial issues since 2014. Decreased earnings and yearly losses were unfortunately now its norm.

The negative operating results were thought to have been attributable to a change in the preferences of the buying public. There was a sentiment among some people to stop wearing leather items and apparel. On February 4, 2016, Danier submitted a Notice of Intention to File a Proposal (NOI) under the Bankruptcy and Insolvency Act, R.S.C., 1985 c. B-3.

Certainly, Danier’s insolvency was major news in the retail market. It was publicly reported in the nationwide media. At the time of the NOI filing, Danier operated 84 stores throughout Canada. Every one of the shops was leased. Ultimately, nonetheless, Danier determined not to submit a proposal and instead made an assignment in bankruptcy. A receiver was also appointed over Danier to liquidate the shops. Danier continued running until July 2016.

Definitely, every one of the occupants at the Centre, including the local staff of the Old Navy shop, would have recognized that Danier was conducting a going out of business inventory sale. It was unclear if anyone from Old Navy Canada told this to its senior management at the GAP.

Throughout the duration of the closing of the Danier outlet, the various other retailers at the Centre were growing. The Centre’s construction had long been completed and was well over 90% rented at the time of Danier’s insolvency. Cineplex was drawing audiences daily. The remaining stores in the portion of the Centre in which the Old Navy shop was located, across the parking area from the Danier outlet, were all operating. There was no proof they were not operating well and profitably.

The Dispute

The landlord believed that the closure of Danier had no material impact whatsoever on traffic at the Centre or on Old Navy’s sales. Given its interpretation of the co-tenancy requirements, the landlord ruled out that a co-tenancy failing had actually occurred. Therefore it did not provide any notice to the Old Navy care of GAP.

By September 15, 2016, GAP asserted they had ultimately found out about Danier’s filing bankruptcy in Canada. Thus, Old Navy issued a Notice of Co-Tenancy Failure to the Landlord and took the view that:

  • Danier’s bankruptcy constituted a “co-tenancy failure” under the lease;
  • that the landlord had breached the lease by not advising Old Navy of Danier’s bankruptcy; and
  • that Old Navy was, as a result, exercising its “right” under the lease to pay the lesser rent to the landlord, retroactive to May 1, 2016.

The landlord argued that the Centre was in co-tenancy failure as a result of the closure of Danier and stated that if the current lease was not paid, the landlord would declare Old Navy Canada to be in default under the terms of the lease.

Various communications took place between lawyers for the landlord and Old Navy Canada. The landlord also kept them up to date on discussions it was having with various potential retailers that would be interested in either the Danier space or larger premises. One such retailer was a global party supply store chain. Another, that ultimately entered into a lease and began operating in the Centre, was a retailer of pets and pet products.

Old Navy Canada, through its parent the GAP, took the position that only a retailer of upscale clothing like Danier was, would be a suitable replacement. It also stated that it had a corporate policy not to be located in shopping centres that had a pet retailer as a tenant.

It turns out that assertion was untrue. The landlord produced evidence that there is a power centre in the west end of Toronto where the opposite is true. That centre was the Stock Yards Village, where the anchor was Target Canada until it failed several years ago. There is an Old Navy store operating in that shopping centre along with a PetSmart retail outlet. This contradicted Old Navy Canada’s and the GAP’s position on suitable co-tenants.

The landlord and Old Navy Canada continued to agree to disagree. Old Navy Canada continued to pay the normal rent but under protest. Ultimately, Old Navy Canada launched the litigation against the landlord looking for reimbursement of rent that it asserts to have actually overpaid to the Landlord.

The Court’s decision

The Court went through a complex analysis of legal precedents that are beyond the scope of this Brandon’s Blog. After careful consideration of the lease, the issues involved and precedent case law, the Judge decided:

  1. Old Navy’s interpretation of the provisions of the lease for the co-tenancy requirements is rejected.
  2. He accepted the landlord’s interpretation of the relevant terms as being the most objective.
  3. GAP/Old Navy’s evidence which was speculative.
  4. It was not sensible for GAP/Old Navy to anticipate to be able to occupy the facilities for the rest of its lease term without paying proper rent, merely because of a technical issue that had no noticeable effect on its operations.
  5. The landlord acted throughout in a commercially reasonable way.

Summary

What this case shows is that the bankruptcy of a retailer may very well invoke co-tenancy rights. However, it is not the bankruptcy that is the determining factor. Rather, it is the terms of the co-tenancy clause and its formulas contained in the clause that we have to look to. As seen in this example, the breach was not just because one of the Key Shops no longer operated. The terms of the Old Navy Canada Lease also forced a gross leasable area calculation to be performed. If the gross leasable area test was not met, then there was no breach.

Is your company experiencing financial problems? Are you on the brink of insolvency just like Danier was? Don’t wait until it is too late to properly restructure your company’s financial affairs. You don’t have to be another one filing bankruptcy in Canada.

As a Trustee, we are the only professionals licensed, authorized and supervised by the federal government to offer insolvency advice and to implement solutions under the Bankruptcy Act Canada. We will help you to select what is best for you to free you from your debt issues.

Call the Ira Smith Team today so we can eliminate the anxiousness, tension, discomfort and pain from your life that your cash problems have caused. With the unique roadmap, we develop just for you, we will promptly return you right into a healthy and balanced problem-free life.

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SEARS CANADA NEWS TODAY: ARE THEY SABOTAGING THEIR OWN RESTRUCTURING?

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Sears Canada news today: Introduction

“I will certainly not invest one red cent in your shop … no severance, no sale,”

A (typical comment) posted on the Sears Canada Facebook page before the company blocked new comments and made old ones vanish.

Well there has been a lot of Sears Canada News today and in the last month. The company sought bankruptcy protection only last June 22, 2017. It has been only a little over 1 month, but there has been so much media attention it seems a lot longer.

Sears Canada news today: Social media backlash

We’ve seen on social media that Sears Canada is facing a backlash when it comes to how they’re handling this liquidation. Notice that I am using the word liquidation, as opposed to restructuring. This is in spite of they are currently operating under the Companies’ Creditors Arrangement Act (Canada) (CCAA). This statute is designed as a restructuring statute.

Sears Canada news today: Why KVETCH about a KERP?

It comes just as the company began its liquidation sales at those fifty-nine stores they’re looking to close. There is a boycott in Canada that is gaining some traction on social media. People are upset with Sears Canada’s senior management. They obtained on the first Court application, approval from the Court on their plan to pay themselves retention bonuses. These bonuses would be paid under the terms of what is commonly called in complex corporate restructurings a “Key Employee Retention Plan” (KERP).

The retailer introduced that, as part of a Court-supervised restructuring procedure. It is shutting 59 of its 255 shops and letting go 2,900 workers. None of them will get severance pay. Sears also will stop payments to the employees’ defined benefit pension plan. The retailer recently accepted to delay that pension plan payment issue till September 30th.

Sears also accepted the compromise with the former employees to maintain paying health benefits for an extra 3 months until the end of September. This is so the people could have that time to get alternate coverage. It is still not great though. The employee pension plan will remain underfunded. The employees will have to look for a new health plan. To date, there is no provision for former staff to receive any sort of package.

Sears Canada news today: What exactly is a KERP?

It is normal in complex corporate restructurings to set up a KERP. The concept of a KERP began in US corporate restructurings in the 1990’s. The theory is that to have a successful restructuring, senior management have specific knowledge and ability. If they walked away from the company in bankruptcy protection, such as to accept a senior position elsewhere, the company would have a much more difficult and costly time in restructuring. Hence the idea was born that those essential managers should be promised a bonus to create the most value possible in the restructuring for the stakeholders. This is in addition to their normal compensation.

Often KERPs are now viewed as either:

  1. a standard item that senior management expects to receive; or,
  2. a greedy money grab negatively affecting other stakeholders.

I have not yet read any material to show why the Sears Canada bankruptcy protection case is so complex. I have not read how Sears Canada could not liquidate without existing senior management. It is earlier and current senior management who have not created a retail vision niche for Sears Canada for years.

Sears Canada news today: Time to “come back”

Thankfully, all CCAA protection orders have a standard “come back” clause. The reason for this is that not every stakeholder receives notice of the company applying for the bankruptcy protection order. Any stakeholder can come back to Court to oppose any part of the original order they did not receive notice of. They could not tell the Court of their position, and now want to come to Court with their complaints.

The Court appointed a law firm to represent the interests of the employees and former employees. As part of their motion material filed with the Court, they are asking the Court to amend the Sears Canada KERP. They state:

  1. the amounts are excessive under the circumstances; and
  2. the KERP does not incentivize senior management to enhance the value of Sears Canada.

It will be very interesting to follow this.

Sears Canada news today: It didn’t have to be this way

You may recall that Target Canada took a slightly different route towards its former employees when it decided to liquidate and leave Canada. It also liquidated under the CCAA. In our blog “TARGET CANADA CLOSING: $5.4 BILLION AND COUNTING”, we told you about the liquidation and that Target US established a trust fund for payment of the Target Canada obligations to its employees. For sure personal hardships occurred. At least they tried to soften the blow.

So now, while Sears Canada wants customers to come and buy at the liquidation sale, they have a PR nightmare on their hands.

Sears Canada news today: No comments please

It is so bad, that Sears Canada is not permitting public messages on its Facebook page. Most the messages from the public so far are negative against the company. CBC News recently noted that Sears Canada’s Facebook page was riddled with remarks from Canadians objecting exactly to what was happening to the company’s employees. Sears Canada has removed those comments from its Facebook page as well as blocking new comments.

sears canada facebook comments layoffs
Picture courtesy of CBC News

Sears Canada news today: Certainly a funny way to stay in business

You must wonder if Sears Canada really wants to restructure, or if they are just liquidating their inventory. They are also trying to sell whatever other assets they can. If it was a true restructuring, you would think that senior management would want to see more customers who would be loyal to (the new) Sears Canada when it would exit bankruptcy protection.

So instead of growing a loyal customer base, Sears Canada’s actions have spawned a strong and growing “Boycott Sears” momentum. They’re going to have to deal with that. It’s going to be interesting to see exactly how this plays out while Sears Canada currently is shopping for a buyer.

According to Sears Canada, the unhappy remarks did not motivate it to close the public articles or to remove many of the bitter statements. Regardless, the former employees are still faced with now with the question “how do you collect salary owed to you from an employer that goes out of business”.

Sears Canada news today: What to do if you or your company have too much debt

If your company or you are experiencing financial problems, contact Ira Smith Trustee & Receiver Inc. We’re here to tell you on your restructuring and other options to avoid bankruptcy. If necessary, we can also talk to you about your bankruptcy options.

We can help you put your financial house back in order and set you on a path to debt free-living. You’ll be amazed at the difference one phone call to Ira Smith Trustee & Receiver Inc. can make.

Contact us today. We are a licensed insolvency trustee and will listen to your issues and offer compassionate, professional assistance to aid you to avoid bankruptcy.

With our help, you can regain control of your life, Starting Over, Starting Now.

UPDATE: CHECK OUT OUR NEW VLOG BY CLICKING ON:

SEARS CANADA IS CLOSING: THE #1 REASON YOU HAVE TO RUN AND NOT JUST WALK TO REDEEM YOUR GIFT CARDS AND CREDITS

SEARS CANADA CLOSING DOWN 1

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TARGET CANADA LIQUIDATION BEGINS FEBRUARY 5; ATTENTION TARGET CANADA SHOPPERS

Target Canada liquidation, Target Canada, Companies’ Creditors Arrangement Act, CCAA, 17,600 employees, debt, Target Corporation, liquidation plan, creditor protection, Ira Smith Trustee & Receiver Inc., Starting Over Starting Now, restructuring of insolvent corporations, restructuringThe Target Canada liquidation plan for the sale of its inventory, fixtures, store leases and other real estate was approved by Order of The Honourable Regional Senior Justice Morawetz on February 4, 2015. In this blog, we will focus only on the Target Canada liquidation of the inventory, furniture and fixtures located at its retail stores, distribution centres and corporate head office. Hopefully, we will succeed in explaining it in plain English!

Target Canada sought and obtained creditor protection on January 15, 2015 under the Companies’ Creditors Arrangement Act (R.S.C., 1985, c. C-36) (“CCAA”), a Canadian federal statute. As we indicated in our earlier blog, TARGET CANADA CLOSING: $5.4 BILLION AND COUNTING, the CCAA, which is normally used for the restructuring of insolvent corporations with debts over $5 million, in order to preserve all or a portion of the business and jobs. This time, rather than being used for a restructuring and turnaround, it is being used to provide for an orderly liquidation.

The closing of the Target Canada stores will put 17,600 people out of work over the next five months. The Initial Court Order provided for an Initial Stay Period was to expire on February 13, 2015. In order to carry out the Target Canada liquidation plan, part of the relief it sought and obtained was an extension of the Stay Period to May 15, 2015.

The two questions that we have been asked the most are: 1. what is the Target Canada liquidation plan for its inventory and chattels and how long will it take; and 2. will the suppliers receive everything they are owed from the liquidation?

The first question is easier to answer than the second. First, below in point form is a summary of the Target Canada liquidation plan for its inventory and chattels which is now approved by the Court:

  1. An exclusive agent was approved to conduct the Target Canada liquidation of the inventory, furniture and fixtures located at the retail stores, distribution centres and corporate head office, to liquidate in its entirety.
  1. The exclusive agent is a contractual joint venture comprised of Merchant Retail Solutions ULC (“ULC”), Gordon Brothers Canada ULC and GA Retail Canada. ULC will collectively act as the exclusive agent.
  1. The current time estimate is that the Target Canada liquidation will end no later than May 15, 2015 for the stores, April 30, 2015 for the distribution centres and March 31, 2015 for the corporate office. Circumstances may alter this schedule, but this is the current plan.
  1. All sales will be “final sales” and “as is” and all advertisements and sales receipts will reflect same.
  1. The exclusive agent has guaranteed that Target Canada will receive a net minimum amount of 74% of the “Cost Value” of the Merchandise (the “Guaranteed Amount”), computed in accordance with the Agency Agreement, and subject to adjustment in accordance with the Agency Agreement, if: (i) the aggregate Cost Value of the Merchandise is less than $445 million or greater than $475 million; and/or (ii) the Cost Value of the Merchandise as a percentage of the Retail Price of the Merchandise exceeds 63%. (This part was not plain English!!).
  1. What this means is that if there is no adjustment to the Guaranteed Amount calculation based on the Agreement, Target Canada is guaranteed to receive a minimum estimated amount of $340 million from the liquidation of the inventory, furniture and fixtures (based on an average Cost Value of $460 million).

Now for the second question. Target Canada owes money to nearly 1,800 businesses around the world, from India to Shanghai and Brampton to Winnipeg. It is impossible to estimate at this time what suppliers may expect to receive from the Target Canada liquidation, for the following reasons:

  1. There is no current estimate for what the net proceeds may be from the sale of the Target Canada store leases and real estate.
  1. There will be further deductions from the Target Canada liquidation including the:
  • trust claims of any party, statutory or otherwise, against the assets, properties and undertaking of Target Canada;
  • operating costs and liquidation specific costs for which Target Canada will have used its own cash flow rather than having borrowed those funds;
  • exclusive agent’s Charge and Security Interest (on the Limited Inventory Charged Property only);
  • Administration Charge (to the maximum amount of $6.75 million);
  • KERP Charge (to the maximum amount of $6.5 million);
  • Directors’ Charge (to the maximum amount of $64 million);
  • Financial Advisor Subordinated Charge (to the maximum amount of $3 million); and
  • DIP Lender’s Charge.
  1. The final amount of claims to ultimately be filed and admitted in the Target Canada liquidation are unknown. All we know is that in its initial motion material, Target Canada stated that it owed a total of $5.1 billion, of which $3.1 billion was owed to an entity related to Target Corporation in the United States. Target Corporation has stated that it will subordinate its $3.1 billion claim to those of the unsecured creditors.
  1. What claims may come before the claims of unpaid suppliers? The unpaid suppliers are ordinary unsecured creditors. The scheme of distribution, which has not been developed yet by Target Canada or submitted to the Court for approval, will have to reflect that the claims of trust claimants, other secured creditors and preferred creditors must be paid first before the claims of the ordinary unsecured creditors.

On paper, it seems that the Target Canada liquidation will provide sufficient proceeds to pay off all creditors in full, with assets and liabilities both in the $5-billion range. But the true value of the recorded assets will be less than stated. So for now, this second question cannot be answered.

We will continue to watch and blog about the Target Canada liquidation. If your business is showing signs of financial stress, contact Ira Smith Trustee & Receiver Inc. before your business problems lead to your business closing. The earlier you begin to deal with debt, the more options you’ll have. We approach every file with the attitude that financial problems can be solved given immediate action and the right plan. Starting Over, Starting Now you can live a debt free life.

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TARGET CANADA SEEKS COURT APPROVAL FOR LIQUIDATION

This blog about Target Canada is courtesy of the article written by Francine Kopun, Business reporter, The Toronto Star, published in the Saturday, January 31, 2015 edition. Our Ira Smith is again quoted.

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This image courtesy of The Toronto Star, January 31, 2015

Target Corporation announced Jan. 15 that it was pulling out of Canada, less than two years after opening its first stores. Instead of turning a profit within a year as expected, the company has lost $7-billion.

Liquidation sales at Target Canada stores could begin as early as Thursday, with its properties and leases going up for sale at the same time, according to new court documents.

Target Corporation announced Jan. 15 that it was pulling out of Canada, less than two years after opening its first stores. Instead of turning a profit within a year as expected, the company has lost $7-billion.

It was the Minneapolis-based discount retailer’s first international expansion attempt. Canadian stores were run through a wholly owned, indirect subsidiary called Target Canada Co.

Target Canada is to present a motion to the court on Wednesday asking for approval to appoint a joint venture of liquidation companies to sell off the contents of its 133 stores across Canada.

If the motion is approved by the court, the sale could begin the next day.

“The Target Canada Entities believe that it is crucial to begin a sales process immediately in order to implement the orderly wind down of the business and to maximize the amounts available to their respective stakeholders,” according to the document.

Between them, the liquidation companies have conducted nearly all major retail liquidations in Canada, including Eatons, Dylex, Bombay, Zellers and currently, Mexx.

According to the court documents, notices of termination have been sent to the vast majority of 17,600 employees – almost half of whom work at Target stores and offices in Ontario. The head office in Mississauga is being operated with a reduced team focused on winding down the business in an orderly fashion.

Target Corporation has also agreed to increase the employment trust to $90-million from $70-million (Canadian), to ensure the Canadian employees receive their full severance payout.

The liquidation is to be completed no later than May 15, but sales at some stores are expected to be finished as early as the end of March, according to the documents.

The company has stipulated that no signs shall advertise the sale as a “going-out-of-business sale,” or “bankruptcy sale,” and all fixtures, furnishings and equipment must go out the back doors of the buildings, after shopping hours.

Target Canada is putting all its leases and properties up for sale at the same time, publishing national ads as soon as practicable, to solicit bids as early as March 5.

“It’s not an ‘en bloc’ sale. It will, I am sure, turn out to be multiple sales. I doubt very much that one party will want to take all the real estate, but it’s one process they’re seeking approval for,” said Ira Smith, of Ira Smith Trustee & Receiver Inc.

In addition to numerous store leases, office space leases and distribution centre facility leases, Target Canada owns three distribution centres: in Milton, Calgary and Cornwall.

The stores range in size from 88,700 square feet in Corner Brook, Nfld., to 157,500 square feet at the recently opened Toronto Stockyards location.

Don’t wait until your business loses so much money that the only option is liquidation through a receivership or bankruptcy; you need professional help long before then in the form of a trustee. Contact Ira Smith Trustee & Receiver Inc. as soon as possible after the first sign that your business may be in trouble. If your company is in serious debt, from an ill-conceived start-up or otherwise, there are many options including a review & monitoring and then a restructuring & turnaround in order to preserve the business and jobs.

We approach every file with the attitude that financial problems can be solved given immediate action and the right plan for you. Business problems are the enemy that can be conquered and Starting Over, Starting Now we can get your viable business restructured and nursed back to financial health.

 

 

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Target Canada owes more than $5-billion to creditors

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Image courtesy of The Toronto Star

This blog about Target Canada is courtesy of the article written by Francine Kopun, Business reporter, The Toronto Star, published on Thursday January 22, 2015. Our Ira Smith is quoted extensively.

From India to Milton, Target Canada owes money.

Target Canada owes money to nearly 1,800 businesses around the world, from India to Shanghai and Brampton to Winnipeg.

The list runs 44 typed pages. It includes 3greenmoms, makers of eco-friendly sandwich bags in Potomac, MD ($3,751); 20th Century Fox Home Entertainment in Toronto ($3.7-million) and the Banhat Rattan Bamboo Co-operative in Ho Chi Minh City ($1,596).

Target Canada owes $1,926 to the Retail Council of Canada and $433,248 to Roots Canada Ltd. Roots was behind the popular Beaver Canoe line of goods tailor-made for Target Canada.

Target Canada owes Revenue Quebec $6.529-million. It owes more than $12-million to the Canada Revenue Agency.

“Did I see this coming? No,” said Jennifer Carlson, founder, Baby Gourmet Foods Inc., an Edmonton-based company owed $62,701.

Carlson said her first thought, when she heard the news of Target Canada shutting down, was for the employees who would be losing their jobs, and their families.

“Target was a great partner for us and at this point, it’s going to be (about) growing with our other retail partners,” said Carlson.

Target Canada announced last week it was seeking creditor protection as it winds down operations, closing all 133 stores and putting 17,600 people out of work over the next five months.

As of Thursday, all Starbucks operating within Target Canada stores will be closed, a Target spokesman confirmed.

“Generally speaking, the team members will be re-assigned to other areas of the store,” said Target Canada’s Eric Hausman.

Unable to keep shelves stocked and customers interested in their retail offering, Target executives made the decision to leave Canada rather than spend another five years chasing profits.

It has lost about $7-billion on its Canadian operations so far.

On paper, it seems that Target Canada is in a position to pay off all creditors in full, with assets and liabilities both in the $5-billion range. But the true value of the recorded assets is always less than stated, said Ira Smith of Ira Smith Trustee & Receiver Inc.

“Everything gets recorded at original cost — what they paid for the assets. When they do the inventory sale, they will not recoup the original cost. The racking and fixtures, once they shut down, is by the pound,” said Smith.

Some assets listed by Target Canada include credit owing from vendors, but as Smith points out, once Target Canada stops paying the vendors, the vendors won’t be making good on those credits.

What Target Canada will be able to realize from the sales of leases and properties it owns will also likely be less than what they originally paid.

“Who is going to step in and pay what Target Canada did? No one,” said Smith.

Some – not all – the properties leased to Target Canada, were guaranteed by the parent corporation in Minneapolis.

Target Canada likely has its own internal estimate, but that is not something it is going to share, said Smith.

Target Canada has 30 days from the date of filing for creditor protection to present a plan that will satisfy creditors. It may also seek a 30-day extension from the courts, said Smith.

The parent company is owed at least $3.1-billion, but Smith, who has read the filings, said the amount is unsecured.

Contact Ira Smith Trustee & Receiver Inc. before your business problems lead to your business closing. The earlier you begin to deal with debt, the more options you’ll have. We approach every file with the attitude that financial problems can be solved given immediate action and the right plan. Starting Over, Starting Now you can live a debt free life.

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TARGET CANADA CLOSING: $5.4 BILLION AND COUNTING

Target Canada closing, Target Canada, Target Canada, Target Corporation, Companies’ Creditors Arrangement Act, CCAA, restructuring of insolvent corporations, restructuring and turnaround, business failure, orderly liquidation, Zellers, starting over starting now, financial viability, financial hardship, receivership or bankruptcyTarget Canada closing was announced on January 15, 2015, when Target Canada Co. and related entities commenced court-supervised restructuring proceedings under the Companies’ Creditors Arrangement Act (“CCAA”). The CCAA, which is a Federal statute normally used for the restructuring of insolvent corporations with debts over $5 million, in order to preserve all or a portion of the business and jobs. This time, rather than being used for a restructuring and turnaround, it is being used to provide for an orderly liquidation.

What went wrong? Target Canada is an indirectly wholly-owned subsidiary of the United States-based retailer Target Corporation. Target Corporation was founded in 1902 as Dayton Hudson Corporation, and is one of the largest retailers in the United States of America. You would think they had the experience to avoid such a disaster. It seems that everything went wrong and right now Target Canada estimates that this business failure will result in a loss of $5.4 BILLION!

The mistakes made by Target Canada and its US based parent seem to be very basic. The mistakes made leading to the Target Canada closing can be summarized in the following 9 point list:

1. Walk before you run – Target Corporation’s leadership saw expansion into Canada as an opportunity to extend the Target shopping experience to a broader group of people and thereby expand its revenues and profits. They also believed that there were significant opportunities in the Canadian market that made their strategies well positioned to succeed.

However, rather than starting off with a few stores in select Canadian markets, they began in 2011 by purchasing the net amount of 135 store leases from Zellers Inc. for a net purchase price of $1.6 billion. Perhaps a more modest start would not have put so much financial pressure on Target Canada from the very beginning.

This is reason number one leading to Target Canada closing.

2. Failure to implement your plan in a reasonable period of time – Although Target Canada entered Canada in 2011 through the purchase of the leases, they first undertook necessary renovations and leasehold improvements before Target Canada opened at many of the former Zellers locations under the Target banner. The first stores did not open until March 2013 – more than 2 years after the decision was made to acquire the Canadian locations.

This obviously gave Target Canada’s competitors a long lead time to plan for the Target invasion. The major competitors include Wal-Mart, The Bay, Sears, and also major supermarket chains like Loblaws, electronic retailers like Best Buy and Future Shop, and home improvement stores like Canadian Tire, Home Depot, Rona and Lowes.

This is reason number two leading to Target Canada closing.

3. Miscalculation of Demand for your Product – The opening of that many stores resulted in market densification – particularly in large cities served by more than one Target store – and reduced the impact of many of the new store openings. There were too many stores for the marketplace.

This is reason number three leading to Target Canada closing.

4. Poor Supply-Chain Management – Target Canada encountered significant supply chain issues. Stores were often: (i) out-of-stock for important merchandise, resulting in consumer dissatisfaction; and (ii) over-stocked on other merchandise, necessitating discounts to manage the inventory and impairing operating margins. These supply chain issues created a poor first impression. Therefore, many potential customers appear to have returned to or maintained the shopping practices they had before Target’s entry into Canada where such problems didn’t exist.

This is reason number four leading to Target Canada closing.

5. Tinkering with a proven model – Canadian consumers expected Target Canada to follow Target’s U.S. prices, which is a significant source of loyalty to the Target brand. Rather than match or reflect the U.S. prices in Canada, its pricing model was designed to compete with other similar Canadian retailers and included generally higher prices than Target’s U.S. stores. This appears to have limited Target Canada’s ability to distinguish itself in the competitive Canadian retail marketplace. It appears to me that Target Canada did not attempt to distinguish itself on a superior customer experience and did not attempt to distinguish itself in its pricing model.

Many of the Target Canada suppliers, either directly or through related entities, supplied merchandise to both the Canadian stores and Target Corporation’s U.S. stores, and many of those cross-over vendors have operations in Canada. Couldn’t Target have used its buying clout to not have Target Canada’s pricing model to be the same as its Canadian competitors?

This is reason number five leading to Target Canada closing.

6. No online presence – Need I say any more? Any home-based business owner knows you need to have an online presence today.

Although Target US has an established and successful online retail business, Target Canada elected to focus on the build-out of the physical stores and improving store operations, and did not prioritize the establishment of an online retail business for Canadian customers. This turned out to be a significant competitive disadvantage as the retail market moves beyond traditional bricks-and-mortar stores. By the time Target Canada woke up, it was too late.

This is reason number six leading to Target Canada closing.

7. Too little too late – Beginning in Spring 2014, Target Canada added internal resources and consulted at great length with a variety of strategic, operational and financial advisors in an attempt to improve Target Canada’s operations and identify strategies that could make the Canadian operations viable in the long term. Target Canada could not identify an option that would result in TCC breaking-even in the next five years. Were any of these financial viability studies conducted before the net spend of $1.6 billion on leases in 2011? Would not those same studies have identified what senior executives should have done to have a successful Target Canada launch?

This is reason number seven leading to Target Canada closing.

8. Not understanding the marketplace – In 2011, Canada had a population of 34.4 million. In comparison, this was slightly smaller than the population of the State of California at the same time. The financial returns for Canadian stores were expected to be in line with historical returns for U.S. store openings. This typically meant losses until the completion of the first full year of store operations, and profits thereafter. Target Canada never made any money. For the 2013 and 2014 fiscal periods, Target Canada’s losses totalled $3.6 billion (before interest and taxes).

This is reason number eight leading to Target Canada closing.

9. Management – Based on the above, clearly Target management miscalculated the success of an expansion into Canada out of the US. No doubt other US retailers who may be considering an expansion into Canada, must look at this expansion failure before embarking on implement their own expansion into Canada.

This is reason number nine leading to Target Canada closing.

At the time of filing, Target Canada had 17,600 employees. Because this is an orderly liquidation and not a restructuring and turnaround, those jobs will not be saved as a result of Target Canada closing. No doubt these job losses will create financial hardship for many of these employees’ families. To its credit, Target US has established a trust fund for payment of the Target Canada obligations to its employees. This trust fund is in addition to the proceeds from the sale of the Target Canada assets.

The lessons to be learned from the Target Canada closing story is that every business, regardless of size, must not only have a properly vetted business plan before implementing any business strategy, but management must have carefully studied and tested it to ensure as best as possible that management understands the marketplace it wishes to operate in and that the implementation of the plan will be successful for the business.

Ira Smith Trustee & Receiver Inc. acts for both debtors and secured lenders, in the performance of financial and viability assessments for financially challenged businesses. The earlier that we are consulted, the better the chances are that we can construct and assist management in implementing its plan to return to financial health without the need for receivership or bankruptcy proceedings.

Contact Ira Smith Trustee & Receiver Inc. before your business problems lead to your business closing. The earlier you begin to deal with debt, the more options you’ll have. We approach every file with the attitude that financial problems can be solved given immediate action and the right plan. Starting Over, Starting Now you can live a debt free life.

UPDATE: CHECK OUT OUR NEW VLOG BY CLICKING ON:

SEARS CANADA IS CLOSING: THE #1 REASON YOU HAVE TO RUN AND NOT JUST WALK TO REDEEM YOUR GIFT CARDS AND CREDITS

Note: The facts contained herein regarding Target Canada Co. (“TCC”) and Target Corporation, and the expansion of Target Corporation into Canada was derived from the Affidavit of Mark J. Wong, General Counsel and Secretary of TCC, sworn January 14, 2015 in support of TCC’s CCAA application.

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