Target's ( TGT) announcement last week that it will probably put its two department store chains up for auction had Wall Street buzzing, but at least one analyst found the news inauspicious, saying the best time to sell passed long ago. "The current optimism, on both pricing and the stand-alone growth excitement of Target stores, is unwarranted on a number of levels," said Eric Beder, an analyst at Northeast Securities. Beder said in a research note that without the Mervyn's and Marshall Field's stores in the company's repertoire, investors are sure to notice that Target has had less-than-steady EPS growth in the past few years -- a trend he sees continuing in 2004. Moreover, the chains aren't as valuable as they once were. "Given the almost 40% drop in EBITDA for these units since their peak in 1998, it is obvious that the optimum time for selling Mervyn's and Marshall Field's has passed," said Beder, who has a sell rating on the stock. Earnings before interest, taxes, depreciation and amortization at Marshall Field's were $414 million in 1998 and $429 million in 1999, compared to $222 million in 2003.
Last Wednesday , Target said it will seek "strategic alternatives" for the two department store chains -- holdovers from the old Dayton Hudson empire from which Target sprang. After the news, the company's investment rating was upgraded by several brokerages, including Credit Suisse First Boston, SunTrust Robinson Humphrey and Smith Barney Citigroup. Shares of Target jumped about 7% in the first day of regular trading after the news and reached an all-time intraday high of $45.86 on March 12. The shares were recently fetching about $45. Mervyn's and Marshall Field's have been a drag on Target for years. Both have had negative same-store sales in each quarter since mid-2001, and 2000 was not a great year either. For full-year 2003, Mervyn's pretax earnings fell 32.6% to $160 million on a 6.9% drop in sales, while Marshall Field's pretax profit dropped 21.1% to $107 million on a 2.6% decrease in sales, according to Target's financial statements.
"A stand-alone Target discount division is a cleaner and more attractive story," said Bernstein analyst Emme Kozloff. Kozloff thinks Target has demonstrated its own fashion-oriented merchandising skills and no longer needs a relationship with high-end chain Marshall Field's. Beder concedes that a sale makes sense, partly because of the amount of money that would be needed to maintain the chains in the coming years. Still, the announcement's grand reception baffles him. Stripped down, he believes, Target is a "mediocre growth" play with "a persistent inability to register steady, year-over-year increases in the face of tough comparisons." Beder noted that if results are adjusted for the rollout of the company's Target Visa program in 2001, the Target division had double-digit operating income growth when faced with a double-digit comparison during only two quarters in the last three years. With credit card results included, the Target division has had quarterly operating income growth of 15% or higher in just five of the last 12 quarters, he said. And in only two of the last 12 quarters has the Target stores division produced same-store sales that were up more than 3% in months when the year-ago period showed an increase of 3% or more. According to Target's financial statements, the Target stores division's total pretax earnings increased 12.3% to $3.4 billion in 2003. They were $3.08 billion in 2002 and $2.5 billion in 2001. Beder also cited a lack of significant expansion in its Target stores in the last few years as a reason for worry. The company grew its Target stores by 8.8% in square feet from 2002 to 2003, adding 78 stores. By contrast, footage rose 12% in 2002 and 10.9% in 2001. Target lists the book value of both Mervyn's and Marshall Field's at around $1.8 billion each. Bernstein's Kozloff and Smith Barney Citigroup analyst Deborah Weinswig have valued Mervyn's from around $1.2 billion to $1.4 billion and Marshall Field's from around $1.5 billion to $2 billion. According to Beder's analysis, Target could get between $3 billion and $3.7 billion for both properties, which at best could be a slight premium over their given book value. In contrast, Beder thinks that Target could have received $4.8 billion in 1998 for the stores, based on EBITDA of $792 million. "Why sell now?" Beder asked. "By any measure, Target has missed the boat on when to maximize returns on their investment in Marshall Field's and Mervyn's."