Mervyn's gets the ultimatum to improve

Discount Store News, April 1, 1996

Mired in mediocre performance for several years, Mervyn's is the disappointing division of the Dayton Hudson troika. Its ambiance is outdated and stuffy compared to the department stores, its merchandise unfocused and underpowered compared to Target.

A revealing fact. one reason Wall Street recommends Dayton Hudson shares is the long-held presumption that the stock will soar once DH announces a spin-off of Mervyn's.

That scenario doesn't seem likely any time soon, even though in mid-March the company's management for the first time acknowledged it will consider selling Mervyn's if the 295-store junior department store chain doesn't show immediate signs of a turnaround.

In remarks prior to the release of annual financial statements last month, DH chairman and ceo Robert Ulrich and cfo Douglas Scovanner expressed confidence that Mervyn's will show real improvement during the first half of 1996 and beyond.

They insisted the department store division (Dayton's, Hudson's and Marshall Field's) will not be put on the block. But they also said they could "entertain" the idea of selling the DSD in several years if its results don't improve.

With Mervyn's working against easy comparisons from a year ago, DH execs are hedging hedging their bets. Operating profits at the division dropped 52% last year to $100 million, for an operating profit margin of 2.2%, with much of the damage taken in the first half of '95. Comp store sales slumped 5% last year.

In addition, though DH will cut costs at all three divisions this year, the deepest slashing is reserved for Mervyn's. The department store division will see a $20 million reduction and Target a $50 million, while Mervyn's will get a $100 million cut from less advertising, fewer sales and a continuation of trimming headquarters staff, which saw 127 merchandising posts eliminated in early '96. These moves provide a start toward a profitable year.

Even so, there is no cake walk ahead for this chain, where revenues have been stalled at about $4.5 billion since 1992.

Ulrich appointed a Target protege, Paul Sauser, as Mervyn's president in October 1994, and since then two makeover thrusts have been launched without visibly dramatic results. In a Colorado test, hybrid shopping cart/baby strollers were introduced, departmental checkouts were eliminated and the merchandise mix expanded in women's sportswear, shoes, infant accessories, body and bath care, party goods and casual luggage. Many of these changes were rolled out in '95.

Then Ulrich brought the ailing division directly under his scrutiny by converting seven former Carson Pirie Scott locations in the Minneapolis market to an all-new "Mervyn's California" format. Eight months into this experiment, results aren't clear, but a recent visit to one store revealed what Mervyn's is up against.

In Eden Prairie, a Minneapolis suburb, a modern enclosed mall is anchored by Sears, Target, Kohl's and a Mervyn's California store. Merchandising similarities at Sears, Kohl's and Mervyn's were striking - as were key differences.

All three had power presentations in apparel and domestics. All three strive to be powerhouses in denim, with meaningful presentations of Lee, Levi's, Bugle Boy, Union Bay and other brands. All three offer proprietary denim lifestyle brands. All three consider JCPenney their prime competition.

For Mervyn's, however, the most informative comparison is to Kohl's.

Mervyn's competes against Sears in most of its markets, while it competes against Kohl's mainly in the Detroit and Minneapolis markets. But no other retailer than Kohl's more closely resembles Mervyn's in floor plan, merchandise mix and strategy - and no other chain shows such a dramatic difference in sales and earnings growth.

Operating 132 stores in 13 Midwestern states, Kohl's, with 1995 sales of $1.92 billion, reported a comp store gain of 5.9% in a brutal apparel climate - with operating income increasing 21.0%. It also announced plans for 22 new stores this year and a 2-for-1 stock split.

Kohl's successfully uses a highturn, frequent promotional strategy that analysts say was originally based on the Mervyn's 1996s formula.

Kohl's continues to build a balance of brands and private labels in targeted areas. Its Sonoma denim brand is arguably the best direct knock-off of JCPenney's legendary Arizona program. With a well-designed assortment already in place across men's, women's and children's, Kohl's soon will add a line of Sonoma brand domestics.

Among Kohl's upcoming merchandise gains: Rockport men's shoes and Dockers (which Mervyn's already carries) in men's, women's and boys' by early summer.

Mervyn's California easily had the most action, color and youth appeal in its lifestyle photos, brand name signs and ceiling banners. The impression was that a lot of money had been poured into a former department store location.

If the Mervyn's Malibu Beach Cafe catches on - and it does offer better deli choices than the fast-food-oriented food court in the mall - it could boost domestics, housewares and children's apparel sales. These were clustered on the ground floor with the cafe.