Byline: Catherine M. Curan

NEW YORK--With all three divisions finally performing smoothly, Dayton Hudson reported Tuesday that its second-quarter earnings more than doubled, outstripping retail analysts estimates. Mervyn's had been a drag on the company's earnings for more than a year, but analysts say it has fallen into place and should continue to do well. "Apparel at Mervyn's had a pretty significant improvement," said Edward Weller, analyst at Robertson Stephens. "Fashion is somewhat more interesting and better priced than in the last few years." Thomas Tashjian, First Manhattan, said he expects continued improvement at the division, particularly as they introduce several categories, including extended sizes, maternity and licensed children's goods.
Mervyn's operating improvement increased significantly over last year's very low base, the company said. Total revenues were up 3 percent, while same-store sales declined 1 percent.
Wall Street analysts said the retailer should perform well now that all cylinders seem to be firing. "The whole company benefited from exceptionally good weather," said Daniel Barry, Merrill Lynch, adding, "The outlook is very bright. I see it as the triple turnaround: Mervyn's, California, and the apparel cycle."
In the second quarter, Dayton's earned $49 million, or 62 cents a share, against $24 million, or 28 cents. The analysts' consensus was 58 cents a share. Sales in the quarter, ended July 30, rose 12 percent to $4.8 billion from $4.3 billion, with same-store sales up 6 percent.
DH's chairman and chief executive officer, Robert Ulrich, said, "It was a strong quarter driven in part by substantial markdown performance improvement in all three divisions." He noted Target outperformed expectations, while Mervyn's and the department store division were in line. Ulrich also said the divisions benefited from good weather.
Dayton's said Target posted a solid operating profit gain even after an $18 million pre-tax charge for repositioning several stores. Sales rose 18 percent, and same-store sales climbed 9 percent.
Gross margin rate improved on a substantial decrease in the markdown rate. Expense ratio was up due to lack of sales leverage and increased advertising expense.
In the quarter, Mervyn's recorded an $8 million pre-tax credit as costs from the January earthquake were less than expected. This was more than offset by a pre-tax charge of $10 million for remodeling 11 Colorado stores, which will pilot new merchandising and store design. At the department store division, operating profit rose against year-ago results excluding a non-recurring pre-tax credit of $9 million. Both total and same-store sales rose 2 percent.
"Although we do not expect a repeat of last year's substantial fourth-quarter LIFO credit, our three businesses are positioned to perform well in the second half of 1994," said Ulrich. Analysts' estimates for the year range from $5.60 a share to $5.90, fully diluted, against $4.77 last year.
In the latest half, earnings jumped 63 percent to $88 million, or $1.10, from $54 million, or 63 cents. Operating profit advanced 19 percent.
Sales in the half rose 11.3 percent to $9.2 billion from $8.3 billion. The stock rose 1 3/4 to 85 1/4 Tuesday on the New York Stock Exchange.
--Fairchild News Service

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