Mervyn's exits the Southeast

Discount Store News, Feb 3, 1997 by Richard Halverson

MINNEAPOLIS -- Target will be little affected by the decision of its parent company to close 35 units of its Mervyn's chain, including all 25 in Florida and Georgia -- except for the availability of 2,100 employees in the tight labor markets of Atlanta and Florida.

Moreover, the closings neither buttress nor refute the persistent rumors that DH will scuttle the struggling division in order to devote more resources to growing Target.

Mervyn's reportedly generates hundreds of millions in cash flow that goes into Target's expansion, and the parent company stoutly maintains that none of its retailing divisions is for sale.

Dayton Hudson will raise $350 million in cash from the sale of 10 of 18 Florida Mervyn's stores to Dillards and three out of seven Georgia units to JCPenney, plus the sale of five Marshall Field's stores: four in Texas and the sale/leaseback of one in Milwaukee. The company will use the money to pay down debt and expand its other divisions, Target and the department stores.

In contrast, DH spent $1.4 billion in capital construction last year, 80% of which went for new Target stores. It will spend about the same in 1997, DH spokeswoman Susan Eich said, and Target again will get approximately the same share to open 65 to 75 stores '97.

In addition to the 25 stores that will close immediately in Georgia and Florida, DH plans to sell 10 more Mervyn's stores over the next 12 to 18 months in undisclosed markets. It is seeking buyers for the unsold units in the Southeast. The two rounds of closings will reduce unit count by more than 10% to 265 from 300.

The development is relevant to Mervyn's, not to Target, said Bruce Missett, retail analyst for Morgan Stanley. The Southeastern markets were understored, and DH had to decide whether to expand Mervyn's or withdraw. DH cut Mervyn's overhead expenses by $100 million last year. Now, DH is getting all elements of Mervyn's to where it wants them to be, Missett said.

The closings signal neither intentions to keep Mervyn's or to get rid of it, said David Poneman, retail analyst for Sanford C. Bernstein k Co.

"It's the right thing to do," Poneman said. Performance of the stores ranges from poor to mediocre, he added, and leaving the Southeast removes the complexities of having to merchandise what is for Mervyn's an isolated region.

Draw a line from Detroit to Dallas and there's not another Mervyn's store within a thousand miles, he noted. Based in Hayward, Calif., Mervyn's operates 124 stores in its home state.

The move strengthens the DH balance sheet, Poneman said. The loss of operating profits about equals the decline in interest costs, he pointed out. DH will surrender $375 million in annual sales from the units to be closed.

DH will take a fourth quarter charge of $135 million for costs of the closings.

The $350 million in cash DH will raise doesn't directly affect Target, Poneman said, since the chain isn't constrained by headquarters.

"It was spending the money it wanted to" Poneman said.

Indirectly, however, the Mervyn's closings will provide Target with a new labor pool for the 60 stores it operates in Florida and the n in Georgia.

In announcing the closings, Bob Ulrich, chairman and chief operating officer of both DH and its Target division, reiterated that keeping all three divisions is a core aspect of its retailing strategy. "We remain committed to our objective of improving the performance of the corporation, and believe that this real estate repositioning will help us strengthen our competitive position and achieve our long-term financial goals.