Investors Cheer as Target Weighs Shedding Chains

Investors gave Target Corp. a hearty pat on the back Thursday, pushing its stock up 7% one day after the discount retailer said it might finally shed its weaker department store chains, including Mervyn’s in California.

Analysts said they had been waiting a decade for the Minneapolis-based purveyor of cheap chic to unload Mervyn’s and the higher-end Marshall Field’s chain.

“I think this is one of the most stubborn managements in U.S. retailing, and they took their sweet time coming to this obvious decision,” said Robert Buchanan, an analyst with A.G. Edwards & Sons.

Investors pushed Target’s stock to a 52-week intraday high of $45.66 on the New York Stock Exchange on Thursday despite an overall down day for the market. It closed up $2.97 at $44.70.

The rally was in part an indication of Wall Street’s disdain for Mervyn’s. The Hayward, Calif.-based department store chain has been struggling for years with a variety of problems, including what analysts describe as an unsuccessful attempt to carve out its own identity in the shadow of its trendier parent.

Mervyn’s generated $3.6 billion in sales last year and $160 million in pretax profit, but its growth had stagnated while its earnings were shrinking, analysts said. The division had logged negative comparable-store sales for 28 consecutive months through January, before registering a 1.4% gain in February. Such sales are a key indicator of a retailer’s health because they include only stores open at least a year.

Mervyn’s is sandwiched in a moderate-price niche that’s being squeezed from below by discounters such as Wal-Mart Stores Inc. and from above by tonier stores such as Nordstrom. Mervyn’s woes intensified a year ago when Kohl’s Corp. expanded into California, opening 28 stores in one day.

Analysts say the Marshall Field’s chain, which has 62 stores in eight Midwestern states, could attract buyers headquartered in the region such as Cincinnati-based Federated Department Stores Inc., parent of Macy’s and Bloomingdale’s, and St. Louis-based May Department Stores Co., which operates several chains including North Hollywood-based Robinsons-May.

Mervyn’s, however, could be a tougher sell. If Target does find a buyer for the troubled division, analysts say Mervyn’s isn’t likely to survive as it currently exists.

“I don’t think Mervyn’s will be sold as an ongoing concern,” Buchanan said. “I think it’s a concept that’s been eclipsed by the likes of Target and Kohl’s and a reviving J.C. Penney.”

Experts say other retailers, Kohl’s included, may want to pick off some of Mervyn’s real estate to fuel their own expansion. Almost half of the chain’s 266 stores are in California.

However, a Kohl’s spokeswoman said, “We are not interested in acquiring other companies.”

If California loses Mervyn’s, it will shake up the state’s retail scene, said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp.

“If you’re a mall owner that has a Mervyn’s in your mall, you’re probably a little bit nervous,” he said.

Target could use some of the stores to expand its own presence in the state, he said, because the discounter is now considered a viable mall anchor.