Dayton Hudson a Good Target, and Gambling on Harrah’s

Dayton Hudson (DH)

Jim: Now here’s what you’d call a department store conglomerate, Mike. Dayton Hudson, with about $30 billion-plus in sales, has 1,200 stores in 44 states, but they serve all range of pocketbooks.

Mike: Right. Dayton Hudson is everything from soup to nuts. Or to put it another way, everything from consomme to lobster bisque.

Jim: The lobster bisque being Marshall Field’s, which is mainly in the Midwest and East, along with Dayton’s. Then we have the consomme, which is Target and Mervyn’s, out here in the West. Truth is, the real story at Dayton Hudson these days is the Target chain, which sells apparel and all sorts of general merchandise, and which is simply thriving.

Mike: I agree. You look at this company, and to me there’s Target and there’s everything else.

Jim: It sounds odd, yet this discount chain has suddenly become a hip place to shop for people of all incomes. Let’s start with that retail statistic we frequently cite--”same-store” sales, or those of stores open at least a year. In September, the retail industry had a decent 6% gain from a year earlier. Dayton Hudson did even better, at 6.9%. But Target? It was up 8.6%. And it’s been that way for some time now.

Mike: Yes, and I noticed that Mervyn’s--which sticks mostly to apparel--was up a handsome, uh, 0.3%.

Jim: And therein lies the problem with Dayton Hudson these days. Target is doing great, Mervyn’s is struggling, and Marshall Field’s and Dayton are holding their own. So the question seems to be: What to do about Mervyn’s? It’s not a bad store and it offers attractive prices, but it’s drowning in a sea of apparel retailers.

Mike: You know, we can draw some lessons about Dayton Hudson from some of the other retailers we’ve looked at, such as J.C. Penney and Sears Roebuck. The point being that, once you’re on the schneid as a retailer, it’s hard to get back on track.

Jim: On the what?

Mike: But to Dayton Hudson’s credit, it created the Target chain, and it was no small niche. They’ve built it into a chain that competes very well with the king of discount, Wal-Mart Stores. But that still doesn’t answer the problem about Mervyn’s.

Jim: Well, Dayton Hudson a year ago supposedly gave Mervyn’s an ultimatum to get things fixed or else, and it’s made some progress. Now Mervyn’s is trying to get more teenagers into its stores by making its apparel a lot more fashionable for the young set. But let’s face it: That effort is like turning around a huge ship in the ocean--it’s going to take time.

Mike: Not to mention that there are a lot of shoals lying out there by the name of, oh, let’s just cite one--Gap. See, even if Dayton Hudson could get Mervyn’s turned around halfway, it could still hit the rocks.

Jim: So far, though, there’s been no indication as to what Dayton Hudson plans for Mervyn’s. But thanks to Target, Dayton Hudson’s stock has done very nicely. Trading in the mid-$60s, it’s up 50% for the last 12 months, though it’s been little changed since March. That’s a concern, because retail sales have been pretty strong in recent months.

Mike: Good point. But now what?

Jim: I’d buy the stock. First, whatever Dayton Hudson decides for Mervyn’s--whether it cuts it loose or whatever--will help the shares. Also, Target will keep doing well even if the economy goes south, because it’s a place where people go to save money.

Mike: Agreed. In the past, Target has shown that even an overall slowdown in consumer spending has only a negligible effect on its sales. Plus, Dayton Hudson management gives me the impression it’s on top of the constant changes in retail--save Mervyn’s--and it knows how to adapt to them, unlike Sears’ or Penney’s. So I’d buy the stock, too.

Jim: I also like how the profit margins at Target are continuing to grow, which is a remarkable achievement, really, when you consider that Target is a discount center. Maybe it’s because they scrimp on cashiers, which is why their checkout lines are always so long.

Mike: That’s not all. Target has big expansion plans for the Northeast. Now, the chain has been a bit shy about that region before, but I think it’ll manage it well. They’ve made one mistake--being so much more successful than they thought they would that they got stuck without enough merchandise in the stores. But I don’t think they’ll make that mistake again.

Jim: And, finally, Dayton Hudson’s stock is selling for a reasonable 27 times this year’s expected earnings per share, so it’s not overly expensive.

Mike: Hmmm, I remember when a P/E like that wasn’t so reasonable.

Jim: And it won’t be again if the whole stock market keeps slumping. But I’d still buy the stock.

Harrah’s Entertainment (HET)

Mike: Now, Jim, we return to one of my favorite industries--the endlessly fascinating casino business. And today’s gamble, if you choose to put your money down, is Harrah’s.

Jim: Geez, you’ve had a whole week to prepare and that’s the best line you could come up with?

Mike: Yo-leven!

Jim: Well, to use another lousy metaphor, it’s fair to say that in the gaming kingdom, Harrah’s is one unique animal.

Mike: And it’s worked at staying unique, because it’s now the only truly national brand name in casinos. Harrah’s wants to be the place you visit no matter where you travel, whether it’s Tunica, Miss.; or Chicago, Atlantic City or Las Vegas. Harrah’s also owns the Showboat and Rio casinos.

Jim: So it’s fair to say Harrah’s didn’t want to put all its chips on Las Vegas.

Mike: OK, that was your last “comp” for bad jokes, Jim. You have to pay for the next one. Anyway, Harrah’s has worked to exploit its national presence with a nationwide club membership. You get a card at one Harrah’s and you can rack up playing points at any other.

Jim: Sort of like an airline frequent-flier card. The more you use it, the more you qualify for free rooms, food, that sort of thing.

Mike: Now, other casinos have similar promotions. But none of them has as many places to go. And it’s adding to its stable by planning to buy Players International, which has riverboat casinos in Louisiana and Illinois. By the way, in what other industry would you hear a company say that its price for an acquisition includes a reserve for fines? But that’s what Harrah’s is saying about Players, which is facing regulatory action from Louisiana.

Jim: I’m mixed on Harrah’s. I like its geographic diversity, because it’s a buffer against one gaming center hitting tough times. But you know, that same diversity means Harrah’s isn’t one of the giants in Las Vegas, so it hasn’t been able to take full advantage of the boom in that city this year.

But I don’t think the boom in Las Vegas is going to last much longer. There are so many huge, opulent properties coming on line there, and pretty soon there are going to be a lot more rooms than customers.

Mike: Well, we part company again. Look, I was thumbs-up on Mirage Resorts a year ago just as its new Bellagio was coming on line in Vegas, and I spent lots of time being sorry about that recommendation.

Jim: I wasn’t; I said pass on Mirage.

Mike: But it seems to be things are going full steam in Las Vegas again. And the opening of all these new venues--the Bellagio, the Venetian, Mandalay Bay--is going to lift all boats as people come to town to see them. And that means profit margins are going to increase.

Jim: Don’t get me wrong. Harrah’s has done a good job managing its expansion, and the stock shows it. The shares, now in the high-$20s, are up 72% over the last year and still only trade for about 18 times this year’s estimated per-share profit. But any buy recommendation on my part would be very tepid.

Mike: Well then, go all the way and give it a thumbs-down. Put your money where your mouth is.

Jim: All right, I will. Even though Harrah’s is nicely diversified, you’re right: Whatever happens in Vegas is going to lift, or topple over, all boats. And I think Vegas is headed for more trouble, and Harrah’s will get caught in that--fairly or unfairly.

Mike: Wrong, and I’d buy Harrah’s. Casino stocks are on the upswing, the economy continues to improve, the gamblers will fill all the new capacity in Vegas, and it looks as if Asia’s economy is also improving, which will give Vegas occupancy another punch.

Jim: The casinos had better hope so. One of the reasons they hit the skids last year was because the number of Asian high-rollers fell off sharply. So they had better start coming back in big numbers if you’re going to be right. I don’t think it’s going to happen any time soon. And if I’m right, that still leaves a lot of empty rooms in Vegas.

Mike: Oh, well. That means there will be even more comps available for you and me.

Write or e-mail with a stock you would like to see discussed in this column. Staff writer James Peltz (james.peltz@ latimes.com) covers the markets and corporate financial trends. Staff writer Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the new book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).

Dayton Hudson

Monday: $65.81

Harrah’s

Monday: 28.31