Dayton Hudson Pulled From Buy List; Stock Falls in Heavy Trading

Trading volume in Dayton Hudson surged Thursday to nearly 3.7 million shares on the New York Stock Exchange as takeover speculation continued, and a couple of prominent retailing analysts removed the stock from their recommended lists.

The heavy trading, which saw the company’s shares fall 75 cents to $54.50, pushed the Minneapolis-based parent of the Target and Mervyn’s retail chains into the second most active spot on the exchange for the second day in a row. Volume in the stock has been high since June 3, when speculation spread that Dart Group or another suitor might come forward with a bid. In the past seven trading days, about 15% of Dayton Hudson’s shares have changed hands.

Following Wednesday’s lead by Goldman, Sachs & Co., a Bear, Stearns & Co. analyst removed the stock from his recommended list Thursday, saying the shares’ recent high price was not justified by “business fundamentals.”

“Our recommendation of a few months ago was based on a turnaround in Mervyn’s, which is supposed to begin in the second half of this year,” said Monroe H. Greenstein, the Bear, Stearns analyst. With the recent sharp price run-up, he said, “you’re already beginning to pay for a turnaround in Mervyn’s without its happening yet.

“We do recognize that the company is obviously in play (but) can’t make a recommendation based on the likelihood that someone will make a pass at it,” he added.

Mark D. Witmer, an analyst with Wessels, Arnold & Henderson in Minneapolis, took a different tack. “As I view the stock, it’s been overvalued on fundamentals since about $50,” he said. “But I don’t want customers selling it. Who’s to say one of these rumors isn’t true . . . so why bail out at this point?”

Dart Group officials could not be reached for comment Thursday, but over the past few days the company has declined comment on any interest in Dayton Hudson. Ann Barkelew, a Dayton Hudson spokeswoman, reiterated Thursday that the company does not comment on market activity.

Witmer foresees Dayton Hudson earnings sprinting ahead--but not until next year. “In the current year, earnings will be up, but the real leverage lies next year,” when 51 former Gemco locations will be in full swing as Target discount stores. Witmer projects per-share earnings of $3.25 this year and $4.05 next year. That’s compared to $2.62 last year, when the company suffered its first annual earnings decline since 1970.

Greenstein noted that a takeover of the company, which had sales last year of nearly $9 billion, would not be easy to pull off at the expected price of $60 to $65 a share. “Not too many people would be capable of pulling off a $6-billion deal,” he said, adding that a buyer would probably be inclined to sell divisions.

In addition to Target and Mervyn’s, which together contributed about 80% of operating profit last year, the company owns Midwest department stores and two small specialty chains--Lechmere, which sells appliances and other hard goods, and R. G. Branden’s, a group of home-furnishings stores. The company recently sold its B. Dalton book chain.

With 253 stores in 22 states, Target has recently enjoyed the best reputation and benefited most from the company’s policy of allocating capital for expansion according to performance. The unit plans to open 75 stores this year, including the former Gemco sites, which will enable the company to enter the Northern California market and strengthen its Southern California presence.

Mervyn’s, on the other hand, has been in a slump as a result of poor merchandising, sharp discounting and troubles in Texas, where the division operates 34 of its 180 stores. Witmer said the division is attempting to upgrade its merchandise and move toward a policy of “everyday low pricing” but has yet “to show any real signs of turning up.”

Assuming some progress at Mervyn’s, Glenn E. Johnson of the Piper, Jaffray & Hopwood investment house in Minneapolis estimates the breakup value of Dayton Hudson at “$70 or better.” He noted that the company is bound to resist any takeover effort.

A potential bidder could view the company as a good real estate play, analysts said. Dayton Hudson owns about half of its 500 stores and leases the rest.