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Mervyn's and Fields not on Target?
As sales erode, analysts say the discount retailer may jettison the two chains; Target says no.
January 24, 2004: 1:59 PM EST
By Parija Bhatnagar, CNN/Money staff writer

NEW YORK (CNN/Money) - It's no secret in the retail business that the strength of Target's discount stores has long been weighed down by weak results at its department store chains, Mervyn's and Marshall Field's.

Now, after a long string of declining sales at those divisions, more and more industry analysts are saying the discounter would be better off without the two units.

"Mervyn's & Marshall Field's continue to implode, and there is no sign of stabilization," Todd Slater, analyst with Lazard Freres & Co., wrote in a research report late last year.

Other analysts have issued similar comments.

For its part, Target insists it is sticking with its commitment to improve results at the underperforming chains.

The frustration is that Target's overall sales growth -- which outpaced No. 1 rival Wal-Mart (WMT: Research, Estimates) in five of the past six months on the back of robust sales at its discount stores -- would be even better if the retailer let go of the dead weight, a move that could boost profits and the company's stock price.

Minneapolis-based Target (TGT: Research, Estimates) operates some 1,200 Target discount and "super" stores, the latter also carrying groceries. Mervyn's 265 stores offer mid-priced clothing, mostly in California, and Marshall Field's has 62 stores in the Midwest.

Department store doldrums

Target's second- and third-quarter results felt the impact of weakness at the two divisions. Sales at stores open at least a year tumbled 7.9 percent in the second quarter at Mervyn's and 11.1 percent in the third quarter.

"Comparable-store" sales slipped 2.4 percent at Marshall Field's in the second quarter and 4.9 percent for the third.

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Meanwhile, comp store sales at the Target's discount stores jumped 6.7 percent. Mervyn's and Marshall Field's currently account for a combined 13 percent and 8 percent of Target's sales and operating earnings, respectively.

"Historically, Mervyn's and Marshall Field's have been good generators of cash that funded the growth of the discount stores," said David Campbell, analyst with Davenport & Co. "But in the last two years, their earnings have been below expectations. Target's management is concerned. Selling the units is an option, although it's not clear who the buyers might be."

"Department stores are struggling with declining market share and that's why we're likely to see future consolidation in this group," said Mark Mandel, analyst with Blaylock & Partners, noting he wouldn't be surprised if some or all of the chains are sold.

Who could be interested?

Among names being bandied about as possible buyers for all or parts of Mervyn's and Field's are Kohl's (KSS: Research, Estimates) and May Department Stores (MAY: Research, Estimates).

"Kohl's could be interested in buying a few of the Mervyn's stores as it expands its presence in the state," said Howard Davidowitz, an independent retail consultant and chairman of Davidowitz & Associates.

"The key thing to recognize about Mervyn's is Kohl's entry into California last year," he said, adding that about half of Mervyn's stores are in California. Observers see Kohl's and Mervyn's as head-to-head competitors targeting the same customers and offering about 50 percent or more of the same product lines.

Davidowitz also said Marshall Field's may look attractive to May Department Stores, which runs the upscale Lord & Taylor chain, because of locations such as the Marshall Field's flagship State Street store in Chicago.

Spokeswomen at Kohl's and May declined to comment, saying their companies do not respond to rumors or speculation.

For it's part, Target said it remains committed to the chains.

"Consistent with our prior comments on Mervyn's and Marshall Field's, our top priority is to improve the performance at both these divisions," Target spokeswoman Cathy Wright told CNN/Money. "The policies in place strive to drive sales and traffic and are actively focused on these initiatives."

Heather Brilliant, analyst with Morningstar, has her doubts.

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"Management continues to talk about keeping these chains. They're also trying to improve the image of the State Street store. But wouldn't it make more sense to unload the businesses that keep performing badly?" she said. "Target stores are by far the biggest portion of the company and the focus should be on expanding that division."

To be sure, Wall Street doesn't seem to like the underperforming divisions.

Target shares are down 7 percent from their 52-week high reached last September, and the stock trades at a price-to-earnings multiple of 14 times next year's expected earnings, compared to a P/E of 20.3 for a broader group of retailers.

Daniel Barry, analyst with Merrill Lynch has a "Buy" rating on Target. In a research note this week, Barry wrote "easier sales comparisons, a strengthening economy and lower tax rates" should contribute to improving sales and earnings in the first half of 2004.

But he notes the risks: "a weak stock market and major problems at Target's Mervyn's and Marshall Field's divisions."  Top of page

--analysts quoted in the story do not own shares of Target Corp. and their firms do not have an investment banking relationship with the company.

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