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TORONTO/CHICAGO (Reuters) - Retailer Target Corp is making its first foray into an international market, taking over Canadian leases for Zellers stores owned by Hudson's Bay Co, North America's oldest company.
The deal sets the stage for the long-anticipated opening of the first Target-brand discount stores outside the company's home turf. By 2014, the No. 2 U.S. discount retailer plans to operate 100 to 150 stores under its own name in Canada, where archrival Wal-Mart Stores Inc already has an extensive presence.
Target, known for its cheap but chic merchandise, will pay Hudson's Bay about C$1.83 billion ($1.84 billion) for up to 220 of its leases and run the stores under the Zellers brand for a period of time. Hudson's Bay, founded in 1670 as a fur trader, will continue to run the rest of the Zellers locations.
Target "had the balance sheet for some time to expand internationally," said Wall Street Strategies analyst Brian Sozzi. "The opportunity is quite sizable for Target - they're going in there with proven sites. It could move the needle, absolutely."
Target, whose shares were down slightly on Thursday, also said it was looking to sell its $6.7 billion credit card receivables portfolio.
The move north will put pressure on Target's profit at first as it invests more than C$1 billion to revamp the Zellers stores and add to profit in the first full year of operations.
It expects its Canadian stores to have similar revenue to its U.S. locations. In 2009, Target earned $2.49 billion on $65.36 billion in revenue.
Minneapolis-based Target, with more than 1,700 stores in 49 U.S. states, ranks as the second-largest discount chain in the United States, trailing Wal-Mart, the industry leader. It has built its reputation on offering a range of lower-priced clothing, housewares and other goods that appeal to more upscale American shoppers.
Wal-Mart operates 4,434 international stores, 30 more stores than it has at home. Wal-Mart already has 323 stores in Canada, where it first opened up shop in 1994.
"While the Canadians love Wal-Mart, they'll love Target even more, I think," said Patty Edwards, chief investment officer of Trutina Financial.
Target has considered expanding outside the United States for years but became more vocal about its plans in 2010.
Chief Executive Gregg Steinhafel told Reuters last May that Canada was a natural place to start an international expansion, pointing out that 60 percent of Canadians were familiar with the Target brand and its red-and-white bull's-eye logo.
The company may be interested in opening stores in other countries but has no details to announce yet, a Target spokeswoman said.
Analysts expect the company to take a couple of years after entering Canada before wading into a new market.
Before focusing on an international plan, Target likely wanted to tackle improving its U.S. operations, Edwards said. In recent years it had to fight off a push from hedge fund manager William Ackman while dealing with the impact of the recession on Americans' spending habits.
"I don't believe the U.S. consumer is going to get that much better for a number of years," said Edwards. "So you want to go where the money is, and frankly, the money's in Canada."
Canadian retailers have faced growing competition as U.S. rivals look to the relatively healthy market north of the border. Canada's recession was shallower than that in the United States, and comparably modest retail rents have made it a logical place to expand.
Other U.S. retailers tipped to expand into Canada include Marshalls and Dick's Sporting Goods.
Wal-Mart does not break down non-U.S. sales by country, but rang up more than $100 billion in international revenue last year.
There are 279 Zellers stores across Canada, and Hudson's Bay said there were no plans to close the remaining stores or discontinue the Zellers brand.
"The plan is to continue to run the rest of the Zellers stores," said spokeswoman Freda Colbourne. "There are a lot of places across the country that Target's probably not interested in moving into, where Zellers enjoys a great presence."
Colbourne said other retailers may want to purchase some of the remaining spaces.
Hudson's Bay 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. Walter Zeller launched the company in 1931 when he bought 14 Canadian stores from American retailer Schulte-United.
Target shares, which initially rose to $56.28, were down 13 cents at $55.22 in New York.
Additional reporting by Brad Dorfman in Chicago and John Tilak in Toronto; editing by Janet Guttsman and Frank McGurty