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Aiming at the Bull’s-Eye: Target Move Signals New Strategy in Retail

Some see Target Corp.’s decision to sell its Marshall Field’s and Mervyn’s units as a sign that the era of retail conglomerates is coming...

A dramatic view from Marshall Field’s State Street store in Chicago
Mervyn’s has 266 units with the bulk in California
Designer lines including Yves Saint Laurent are featured at Field’s
The MAC counters at Field’s

The MAC counters at Field’s.

Photo By WWD Staff

NEW YORK — Focus, not diversity.

That seems to be the growing trend in retail, signaled by Target Corp.’s disclosure last week that it has hired Goldman Sachs to review “strategic alternatives” for both its department store divisions, Marshall Field’s and Mervyn’s.

Federated Department Stores could emerge as the likely candidate to swoop up Marshall Field’s — giving Federated a strong foothold in the Midwest — but May Department Stores might give it a run for its money, said industry experts. Some believe Mervyn’s is more apt to be sold piecemeal to a big-box retailer such as Linens ‘N Things or Best Buy, or rivals such as Kohl’s and J.C. Penney Co., although Target’s preference would obviously be to sell Mervyn’s as a package.

Carol Sanger, a spokeswoman for Federated, declined comment on its interest in buying the Field’s or Mervyn’s chains. Sharon Bateman, a spokeswoman for May Co., said the company had no comment.

Analysts estimate Marshall Field’s could fetch as much as $3 billion, while the more beleaguered Mervyn’s could go for as little as $700 million and as much as $1.2 billion. Target said assets of Mervyn’s and Field’s are worth $1.8 billion apiece. The review process is expected to take several months.

Wall Street, for its part, cheered the proposed divestiture. The stock has been trading up since the disclosure Wednesday after the markets closed. Shares of Target closed Friday at $45.63, up 93 cents, or 2.1 percent, in trading on the Big Board.

In Target’s decision to sell off its long ailing Mervyn’s and Field’s divisions, some see a larger trend — specialization and the death knell of the retail conglomerate. Department stores, in general, have continued to consolidate, lose market share and suffer from merchandise sameness and slim comp-store gains. As reported, total retail sales of department stores, including national chains such as Penney’s and Sears, fell 5 percent to $319.3 billion last year, from $336.1 billion in 2000, according to the U.S. Census Bureau.

“There was a retailing habit of putting together different business in the hopes of synergy,” noted Richard Hastings, vice president, retail sector at research firm Bernard Sands. “What they’re finding out is there is no synergy. Penney’s is selling Eckerd, Target is dropping its side businesses, the Limited is smaller than what it was, and even Wal-Mart sold its [grocery] distribution business [McLane’s] to Berkshire Hathaway.”
Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates, added, “What’s happening is the extreme differences in corporations is narrowing. They’re becoming more focused. With a more focused approach, they’re getting much more leverage instead of multitasking.”

In Target’s case, selling off its two department store divisions will enable it to focus on its core 1,167-store mass-market chain, where it is a strong number two in the U.S. But number one is Wal-Mart, the world’s largest retailer with sales of $256 billion a year — a number that dwarfs Target’s revenues of $47 billion. To spur growth, Target is accelerating the opening of its Super Target format that combines general merchandise and food. Target needs to substantially grow its food sales if it wants to close the gap on Wal-Mart even partially — its aim is to grow sales fourfold by 2012, to about $160 billion, although analysts are worried the new focus on food might distract the retailer from its general merchandise development.

Meanwhile, news of the putative sales of Field’s and Mervyn’s — which had long been speculated about — had industry experts wondering what company is most likely to go after the two divisions.

In a research note, Smith Barney analyst Deborah Weinswig applauded Target’s decision and said it would allow a “keener focus” on the flagship business. She raised the stock’s target price to $50.

“A return to better health [for Mervyn’s and Field’s] would take too many years,” she wrote. “We believe that [Wednesday’s] announcement is indicative of management’s belief that a turnaround of Mervyn’s and/or Marshall Field’s in a timely manner is unattainable.”

Assuming a purchase multiple of 0.6 times gross sales, she valued Mervyn’s at $2 billion and Field’s at $1.4 billion. She agreed with industry consensus that the company will not lack for interested buyers.

Kohl’s is “the first to come to mind,” as a buyer of Mervyn’s, she observed. She also noted that Kohl’s stated goal to grow square footage by 15 percent rather than their customary 20 percent next year may “lend credence to our theory that they could be a potential buyer and grow square footage through an acquisition of Mervyn’s real estate.”
KSA’s Aronson said, “The logical contenders [for Field’s] are Federated and May, which have coveted having a major penetration in the Midwest. Marshall Field’s has locked both of these companies out of it.”

He believes both Federated and May “are ready, willing, able to justify a deal, and whoever writes the bigger check will get them.” He believes there’s a good match-up with either company, since Field’s has a “good, better, best” operation, which is similar to what May and Federated have.

As for the 266-store Mervyn’s, KSA’s Aronson believes Kohl’s would be interested in some of the locations, but not all of them. He said Target or Wal-Mart could take over some of the sites.

“There are enough big-box players in different categories, such as Linens ‘N Things and Bed Bath & Beyond. It’s less likely there’s one customer for all of the stores,” said Aronson.

Hastings ranked Federated as the best fit culturally for Field’s, but wouldn’t rule out a management-led buyout, citing the number of stores and the relatively reasonable purchase price. He believes May Department Stores should not take on another flagging department store.

“May Department Stores needs to pay attention to their own issues,” he opined.

Walter Loeb, president of Loeb Associates, a retail consultancy, said, “As far as Marshall Field’s is concerned, I think it will be a bidding war between May and Federated. Both are interested and would like to own Chicago.”

Field’s, a traditional department headquartered in Minneapolis, celebrated its 150th anniversary last year. The chain operates 62 stores in eight states in the upper Midwest. Over the past three years, Field’s has experienced a prolonged pattern of declining revenues and profits. Sales were $2.58 billion in 2003, down from $2.69 billion in 2002, $2.78 billion in 2001 and $2.97 billion in 2000.

Operating profits in 2003 came to $107 million, representing 4.1 percent of revenues, against $135 million in 2002 (5 percent of revenues), $133 million in 2001 (4.8 percent of revenues) and $190 million in 2000 (6.4 percent of revenues).
Mervyn’s, a promotional, middle-market department store based in Hayward, Calif., sells nationally-branded merchandise such as Adidas, Levi’s, Nike, Nine & Co. and Van Heusen. Targeting women between 25 years and 44 years old with a moderate income, the chain operates in 14 states, primarily in the west and south. Its financial performance has also been on the same downward spiral. In 2003, Mervyn’s sales were $3.55 billion, down from $3.82 billion in 2002, $4.03 billion in 2001 and $4.14 billion in 2000.

Its operating profits were $160 million in 2003, or 4.5 percent of revenues, against $238 million in 2002 (6.2 percent of revenues), $286 million in 2001 (7.1 percent of revenues) and $269 million in 2000 (6.5 percent of revenues).

Chicago is where Field’s has had the most opportunity to attract upscale shoppers. Detroit, a Field’s stronghold, has been hit hard by the thousands of layoffs at the Big Three auto firms. The company didn’t experience the kind of sales lift that retailers in other regions had in the second half of last year, with the possible exception of the State Street flagship, which underwent a complete overhaul last year, with major floor renovations, leased shops with limited distribution, unusual adjacencies and an eclectic assortment — motorcycles, pianos, organs and multiple food concepts — in a strategy modeled after Selfridges in London.

Retail sources attribute Field’s domination in the Chicago, Detroit and Minneapolis markets to less intense competition than that on the East and West Coasts. Field’s competes most directly with Kohl’s, Carson Pirie Scott, Sears, Roebuck & Co., and Penney’s, as well as discounters such as T.J. Maxx and Old Navy. Hennes & Mauritz opened in Chicago last year, and is slowly expanding west from Chicago, and also south from Washington, D.C. Bloomingdale’s, too, has a few locations, though its parent corporation, Federated, and May Co., have little presence in Field’s Midwestern market.

Field’s core customer is between 40 and 60 years old with the median customer age at 48 and the median family income at $63,000. It has about two dozen branches in the 300,000-square-foot range, considered large, or “A,” locations. The smallest Field’s department stores are 150,000 square feet.
“Our stores are in very good condition,” said Linda Ahlers, president of Field’s, in an interview with WWD last year. Over the last eight years, a significant amount of capital has been poured into improving the look and physical character of branches, she added.

Field’s has benefited enormously from its big corporate parent, utilizing Target’s corporate store planning, engineering, design and purchasing operations. Much of the manpower and purchasing power for installing new shops and fixtures at the State Street flagship, and the speed with which it all happened, is attributable to Target. Conversely, Field’s has served as an in-house fashion forecasting and trendsetting service for Target that some key competitors like Wal-Mart and Kmart don’t have.

Mervyn’s is a murkier situation. Already, observers believe Mervyn’s is expected to draw bids lower than its $1.8 billion book value.

A problem is that Mervyn’s stores are in inferior locations, either in “B” or “C”malls or power centers that may not be attractive to new growth retailers. “That was one of the reasons Mervyn’s was underperforming to begin with,” Holdsworth said.

Daniel Hurwitz, executive vice president for Developers Diversified Realty, which serves as Mervyn’s landlord in several markets, said the chain’s units range from 60,000 square feet to 100,000 square feet. That potentially makes them attractive to a wide range of players, as does their location in high-density areas.

He predicted aggressively growing category killers — such as Best Buy, Bed Bath & Beyond and Petsmart — will take a gander at the sites. TJX Cos., which has been testing large-size Mega Marshalls or units that combine a Marmaxx unit with a Home Goods for one large box, is also on the prowl for bigger spaces.

Asked if a purchase of either Target Corp. property was possible, a Wal-Mart spokeswoman issued the retailer’s customary response that it would not speculate on future business.

However, “Wal-Mart is sure to have their location scouts out there looking around at Mervyn’s,” predicted Hastings of Bernard Sands. He didn’t think it likely that the frugal Bentonville, Ark. giant would spring for the whole 266-store bundle, but would instead cherry-pick locations.
“Some of the Mervyn’s locations are real problems,” he said. “Wal-Mart will probably do a very microscopic analysis and would not purchase any location if the lease agreement is not to their liking. They have the money to develop anything they want, anywhere they want.”

Whether it’s to Wal-Mart or to someone else, it’s likely the Mervyn’s chain will be sold piecemeal and the name would be pried off the door, he continued. He ranked Kohl’s and Penney’s as top candidates for the purchase. With the divestiture of Eckerd, Penney’s will have cash and management attention for new growth. Hastings believes a Penney’s purchase of Mervyn’s could shift the dynamic between it and rival Kohl’s.

“If they outbid Kohl’s, theoretically you are looking at a major sea change in the whole Kohl’s story — and not for the better,” he said.

But some believe Kohl’s is not as obvious a choice as it was five years ago, when buying Mervyn’s 126 doors in California would have facilitated a western expansion. Kohl’s has since gone ahead on its own and opened 40 stores in California, Nevada and Arizona in March 2003, and is continuing to fill out areas in Northern and Southern California.

Last week, Kohl’s opened seven stores in Northern California, including four in the greater Sacramento area. The chain plans to open five more units in the San Diego area by April, and San Francisco should get at least one Kohl’s by the third quarter of this year, according to a spokeswoman.

Although Kohl’s has not performed as well on the West Coast as expected, its entry was the kiss of death for Mervyn’s. Not only did Mervyn’s lack Kohl’s financial muscle and price leverage, it never had the support of Target, said analysts. Some predicted the chain lost between 2 percent and 4 percent of its sales when Kohl’s entered the market.

Kohl’s could be more interested in picking up a few Mervyn’s locations to complete its expansion in the state, but observers said it would be unlikely. “If you asked Kohl’s, ‘Would Mervyn’s still be attractive?’ I would say it would be only in pieces,” said Gary Holdsworth, an analyst at Wedbush Morgan Securities in Los Angeles. “And I doubt that Target is going to sell it in pieces.”
Richard Giss, an analyst at the retail services group of Deloitte & Touche in Los Angeles, agreed. “If they have underperforming stores, they might try to shed those but, frankly, to split it up and to try to sell it in pieces — I don’t know if you get the same price as selling it whole. And it would complicate the sale,” he said.

Loeb agrees that finding a buyer for Mervyn’s may be difficult. He believes Penney’s could be interested once it sells Eckerd, and it could look at Mervyn’s as a freestanding operation. “Kohl’s loves to have their own type of store, but yes, I think they’d be interested,” said Loeb.

Loeb doesn’t know if Mervyn’s will continue as it is. “It doesn’t have the image. It experimented and tried too many different approaches,” he added.

Loeb thought it was surprising that Target decided to sell both department stores at the same time. He figured it would have tried to sell Mervyn’s first. He added that with Target carrying so many brands these days, such as Isaac Mizrahi and Mossimo, “they don’t need [a Marshall Field’s] to get an entree to Calvin Klein.”

Harry Bernard, executive vice president and chief marketing officer at Colton Bernard, a San Francisco-based consulting firm, felt Federated was the better fit for Field’s than May.

“Marshall Field’s has spent millions of dollars restructuring the image of the store, and it still has cachet. I would suspect Federated would do anything it could to get it. It would give them a cross between Macy’s West and Bloomingdale’s,” said Bernard.

Ed Nakfoor, a retail consultant working in the Detroit area, observed, “When the name of the [Daytons and Hudsons] store was changed, the theory I heard here was that a sale would be easier for one brand than three. I have been predicting that Federated Department Stores would snap up some of the Marshall Field’s locations because we don’t have any stores here that are part of the Federated umbrella.”

Nakfoor noted that based on the store sites he’s seen, his expectation is that in certain malls a Bloomingdale’s could easily open up in a Marshall Field’s site. “Everybody here knows Bloomingdale’s and Macy’s since they’re all traveling east at one time or another,” he observed.
Some of the older locations in the suburbs would make more sense for a Macy’s, he said. As for Mervyn’s, Nakfoor wasn’t sure what its future may hold. “Nobody really knows what it is and Mervyn’s doesn’t really register when there’s a J.C. Penney or Kohl’s nearby,” the consultant noted.

Analysts believe Target will be financially better off without Mervyn’s and Field’s.

Gary Balter, retail analyst at UBS, wrote in a research note that the sale of the two chains “will enhance both the growth rate of the remaining entity and the multiple as investors can now buy a superb discount store without distractions.”

As a stand-alone Target, and assuming the discounter uses the cash received to buy back stock or retire debt at the beginning of the year, the firm should earn between $2.20 and $2.30 per share in 2004, according to Balter. “If Target gets the multiple it deserves as a 15 percent plus growth company, then we believe a low 20s multiple is within grasp, reaching our current target price,” he wrote.

As for valuation, there seems to be a wide discrepancy on the price tag each chain could command.

According to Balter, “Marshall Field’s is where the value lies and we get a $2.9 billion value for it. They are the dominant player in the Midwest and should obtain a better valuation than the public companies because of synergies and currently lower margins.”

He noted that Mervyn’s is the one that promises to be a challenge, but that it could fetch $700 million, or less than three times cash flow.

Emme Kozloff, analyst at Bernstein Research Call, applauded the divestiture decision, writing in a research note: “We view this action as a major positive given that management’s strategic rationale for owning the divisions has become decreasingly relevant (cash flow, merchandising expertise and scale) and a stand-alone Target discount division is a cleaner and more attractive story.”

She estimated that Target could sell Field’s for $1.5 billion while Mervyn’s could yield something near the $1.2 billion range.

Anyone who purchases Mervyn’s, however, will need to budget for improvements.
“Target Corp. has not dedicated capital to maintaining the infrastructure of the buildings for years,” said Hurwitz. “They will need substantial renovations — at least a facelift and an updated look — for any potential buyer.”

Ilse Metchek, executive director of the California Fashion Association, pointed out that most of Mervyn’s stores in California were those of the now-defunct Broadway chain. “The history of those spots is not great wherever they are,” she said. Metchek also believes that Mervyn’s is representative of a dying niche. “In the early Seventies and Eighties, pre Wal-Mart or Target, they introduced low-priced branded merchandise and that was a big thing,” she said. “But now whoever is in that moderate niche is having a hell of a time and it’s not just Mervyn’s,” she said, noting competitor Robinsons-May is also having trouble. “Who would want them? Who thinks they could do it better?”

— With contributions from Vicki M. Young and Dan Burrows, New York; Kristin Young, Los Angeles and Katherine Bowers, Boston

Snapshot
Mervyn's
 
2003
2002
Change
Same store sales
Revenues
3,553
3,816
-6.9%
-7.6%
Operating Profit
160
238
-32.8%
STORES
California
126
Utah
8
 
Texas
42
Oregon
7
 
Washington
14
Louisiana
6
 
Arizona
15
Nevada
6
 
Michigan
15
Oklahoma
3
 
Minnesota
9
New Mexico
3
 
Colorado
11
Idaho
1
 
Total
266
 
 
Marshall Field's
 
2003
2002
Change
Same store sales
Revenues
2,584
2,691
4.0%
-2.6%
Operating Profit
107
135
-20.7%
STORES
Michigan
21
Ohio
1
Illinois
17
North Dakota
3
Minnesota
12
Indiana
2
Wisconsin
5
South Dakota
1
Total
62
   
Figures in Millions, Except Store Counts. Source: Company Reports