Target success helps drive Dayton Hudson stock - Target Stores, parent firm Dayton Hudson - Target Power Merchandising

Discount Store News, April 18, 1994

Wall Street looks favorably on Target and is taking an increasingly favorable view of the stock of its parent, Dayton Hudson, because Target has come through with another a strong year in a weak retailing environment, particularly in California.

But evaluating DH stock is "bit confusing," said Dean Ramos, analyst for Dain Bosworth, Minneapolis, because it's not a pure play: neither a discount stock, a department store stock nor a stock of a mid-price soft-goods chain, Mervyn's.

And Mervyn's continues to drag DH stock down, with operating profits slumping 37% in '93, while Target's showed a 15% gain.

Target's operating profit increase would have been 16.7% except for an $8 million write-off for store damage from the Los Angeles earthquake in January, said Tom Courtney, retail analyst for Montgomery Securities, San Francisco.

Target's numbers speak well for the chain, Courtney said. "They prove Target can co-exist with Wal-Mart," which has been heavily expanding into Target territory in California, the Pacific Northwest and its Midwest heartland.

The key to Target's results in '93 was cutting prices in '92 to match Wal-Mart's on some 10,000 items they carry in common, Courtney said. The pricing strategy for Target is not to be the pricing leader, but rather to make sure that Wal-Mart doesn't underprice it on common items, Courtney said. Surveys show that Target is close to Wal-Mart on its pricing.

Target got into a real fight with Wal-Mart last year when it took our newspapers ads complaining that Wal-Mart was incorrectly claiming to offer lower prices on various items. Target incensed Wal-Mart officials by claiming in the ads that such unfair tactics would never had happened if Wal-Mart founder Sam Walton were still alive.

Wal-Mart recently signed a consent decree with the Michigan attorney general in which it agreed to be more careful with price comparisons. While that was a vindication of sorts for Target, the agreement offers no great advantage, Courtney said.

Venturing into supercenters is a positive step, Courtney said, but Target has embarked on a long road. "Wal-Mart and Kmart took years to develop their supercenters," he said.

Over the past three years, the price of DH stock has bounced from $61.88 at the close of '91 to $75.75 in '92 to $66.83 in '93. As of March 31, it had recovered to $73.

Recovery for DH hinges on a rebound in Mervyn's operations, Courtney said.

Mervyn's made a dismal mistake by dropping women's dresses in 1992, and DH took the unusual step of shifting Paul Sauser from his Target post as senior vice president to president of Mervyn's in an attempt to turn the chain around.

Along with Wal-Mart, Target did the best last year among discounters, Ramos of Dain Bosworth said.

Target gets the bulk of DH capital spending, he said. In 1992, DH invested a total of $938 million, $571 million of which went into Target. In comparison, Mervyn's got $294 million and the department stores, $72 million.

Ramos applauded Target's move into supercenters. His only criticism is that Target took too long a look at the idea. "The company is very conscious of analysis and making sure of the right moves regarding return on investment," Ramos said.

The key for DH stock performance in '94, however, is not Target's supercenter, but a turnaround of Mervyn's, Ramos said. The issue is getting all three divisions to click together.

It would be hard to dump Mervyn's, which after all produced $4.44 billion in sales, even though comp store sales plunged 6%, and operating profits fell to $179 million in '93, especially when it is doing poorly, Ramos pointed out. DH has no choice but to improve Mervyn's in order to boost its stock price. "If it can fix Mervyn's, its stock would go great guns," Ramos said.

Target performed well last year "under amazing pressure" of a poor apparel market, Ramos said. Its increase in operating profits came in the face of a customer shift in spending to hard lines, with smaller margins, from apparel, he said.

In order to keep growing, Target eventually will have to expand into the Northeast, Ramos said.

Target also is looking into opportunities in Canada, The Globe and Mail of Toronto reported, but Target chairman Bob Ulrich said a move north of the border would come only after Target becomes a national chain by expanding into the Northeast.

If Target were an independent chain, its stock would be worth $60, analysts estimate. Not that DH would ever unload the crown jewel that contributed 60% of its operating profit in '93, compared to 53% in '92 and 50% in '91.

In '93, Target sales of $11.74 billion represented 61% of the corporate total of $19.23 billion.