By and  on February 21, 2006

HAYWARD, Calif. — When Mervyns changed hands in September 2004, one of the first things the new owners did was remove the apostrophe from the store's corporate name.

That was just the tip of the iceberg.

A whole new management team, a slew of store closures, a nifty real estate transaction and a revamped merchandising structure soon followed. The changes — which have resulted in eight consecutive months of comp-store sales increases — are designed to position the $3 billion, midtier department store retailer based here to compete more effectively with Kohl's, J.C. Penney, Wal-Mart and Target.

"We want to stay in the game," said Rick Leto in his first full-fledged interview since taking over as Mervyns' president and chief merchandising officer in December 2004.

When Target Corp. sold Mervyns to an investment consortium led by Sun Capital Partners Inc., Cerberus Capital Management LP and Lubert-Adler/Klaff and Partners LP for $1.2 billion in cash — about eight times Mervyns' pretax profits of $160 million — "everybody said it was a real estate play," Leto recalled. "The operating company was not valued and the three owners knew they'd get their money back from the real estate. But they asked me to come out here and see what I could do."

Leto, a 31-year retail veteran, had been executive vice president and general merchandise manager of apparel and accessories at Kohl's for eight years, and a key player in that company's explosive growth in the Nineties. Earlier in his career he was with Macy's and he had spent a short time at Galyan's before joining Mervyns.

The first thing Leto realized when he walked through the door was that the chain had been neglected for quite some time. "There had not been a lot of capital investment for many years," he said. Step one was to "assess the real-estate portfolio and divest ourselves of the drains on our profitability."

When the investment group bought the chain, Mervyns operated 257 stores in 13 states, mostly in the West and South. In September, it revealed plans to close nearly a quarter of those stores and lay off 4,800 people in an attempt to cut its losses. The 62 underperforming units slated to be shut were mainly in Michigan, Oklahoma, Colorado, Louisiana and Texas, and represented only 17 percent of sales. Two distribution centers were to be closed.

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