In the full year ended Feb.1, Target's Canadian segment generated $1.3 billion in sales, which the retailer said in its earnings call was "well below" plan and led to "greater than expected markdowns."
Despite the hiccups, a Target representative said the retailer doesn't have plans to shutter any of its locations and will open nine more stores in the country this year. Its goal is to open about 150 Canadian locations over the next several years.
But the focus is now on improving the stores that are open, learning about consumers' shopping patterns and evaluating prices. The discounter said it is encouraged that the stores that have been open the longest are showing the biggest improvement.
(Read more: Tricks to make you spend more online)
"We're a company that's always been focused on the long-term, and when we invested in Canada it was with an eye toward the long-term," the representative said.
Karabus said he remains confident that Target will fix its operational issues, but added it will need to offer shoppers a compelling reason to return.
Living the luxe life
Although Canadian shoppers have a reputation for being cost-conscious, the country has a level of wealth and an appetite for luxury that many don't realize, Karabus said. A lack of choices in the luxury apparel market has resulted in many Canadians traveling abroad to shop.
That's the void high-end department stores Nordstrom and Saks hope to fill. Saks, which was recently acquired by Canada's Hudson's Bay, has plans to open seven full-line stores and 25 Saks Off 5th stores, beginning in fall 2015.
Nordstrom plans to add six Canadian locations by 2016, and spokesman John Bailey said the company hopes to ultimately have eight to 10 full-line stores in Canada, and 15 to 20 Rack outlet stores. It's also eyeing other potential opportunities.
"We have lots of customers in Canada who shop in our stores in the States and online, and we think we can do a lot of business in Canada," Bailey said.
Karabus said Nordstrom's advantage lies in its pricing—as shoppers in Canada have a penchant for affordable luxury. Saks' domestic ownership gives it a leg up in understanding the market's intricacies, Deloitte's Paul said.
"I think anyone who's brand new to a market is going to not understand the nuances of the market as they will a year or two later," she said.
Deutsche Bank's Trussell said the dynamics in Canada's retail space have changed following Hudson's Bay's acquisition of Saks, but he lauded Nordstrom's judicious approach.
Nordstrom expects a $35 million loss for its Canadian operations this year and said the expansion will drag on its earnings per share for the next several years. Ultimately, it sees the country as a $1 billion sales opportunity.
"Canada is a tough market in general, so it'll be interesting to see how long it takes for Nordstrom to turn the corner and become profitable," Trussell said.
For Paul, they key to who will win in Canada ultimately depends on who sets realistic expectations, and who does their homework on Canadian shoppers and the competition. For Karabus, it boils down to opportunity.
"You know what I think it all comes down to? Is there a compelling proposition and a space for that retailer?" he said. "You're not going to do well just because you open your doors."
—By CNBC's Krystina Gustafson. Follow her on Twitter