NEW YORK — The books are out on Marshall Field’s and Mervyn’s and the bidding has begun.

Target Corp. will take preliminary offers on its Field’s and Mervyn’s divisions, with first bids said to be due Monday. This raises the possibility of completing deals in the summer, according to retail and financial sources.

This story first appeared in the May 6, 2004 issue of WWD. Subscribe Today.

While there’s not expected to be an outpouring of widespread interest, the two Target Corp. divisions could command healthy prices despite being underperformers. That’s because Federated Department Stores and May Department Stores are seen battling it out over the 62-store Field’s, which could be sold at a premium — $2 billion or more — and certain investment companies are believed to be interested in Mervyn’s as an ongoing business or real estate play. Before, Mervyn’s was widely perceived as just a breakup candidate.

For years, the industry has been expecting Target Corp. to put Field’s and Mervyn’s up for sale so it could concentrate its efforts and resources on its much larger and more successful Target discount chain. Target Corp. officially put them on the selling block in March.

The performance of Field’s and Mervyn’s has been up and down, yet Field’s in particular has experienced a prolonged pattern of declining revenues and profits. Field’s pretax profits in the year ended Jan. 31 plunged 21.1 percent to $107 million, while its sales fell 4 percent to $2.58 billion. Mervyn’s saw its pretax profits decline 32.6 percent to $160 million on a 6.9 percent fall in revenues to $3.55 billion.

But Field’s towering State Street flagship in Chicago remains one of the world’s premier department stores. Target Corp. invigorated the store last year with floor renovations, leased shops with limited distribution, unconventional adjacencies and an eclectic assortment with everything from Australian homemade ice cream to Thomas Pink shirts from England, across the 812,000 square feet of selling space. However, State Street, the second-largest store in America next to Macy’s Herald Square, doesn’t stand by itself. Field’s 61 other stores are of widely varying size from less than 100,000 to 500,000 square feet. Many are mired in weak local economies and have not received the level of upgrades seen on State Street.

“Marshall Field’s is a plum,” said Hal Kahn, the former chairman and chief executive officer of Macy’s East. “It’s one of the great acquisitions around.” “It’s a dominant, upscale retailer with just about all the better brands and great real estate in great malls, but it has underperformed in the last seven or eight years.”

Arnold Aronson, director of retail marketing strategies, Kurt Salmon Associates, said, “This is a once-in-a-generation-type acquisition. It’s a very clean deal for an existing department store power and will have resounding long-term effects on growth and profits. Target has already squeezed some of the back office costs out, but there is still opportunity to reduce redundancy even more by a department store, rather than a mass discounter.”

Another retail source said, “May Co. would be willing to spend more” than Federated. “My money is on May Co., even though strategically it fits very well into Federated.”

By buying Field’s, May would narrow the size gap on Federated. It would also bring May a little more upscale, which the company has been trying to do. Several sources indicated the possibility that Federated and May might divide up Field’s, but that would be difficult since the State Street flagship would be coveted by both parties. They also believed that May Co. could go after some Mervyn’s sites, as well.

May declined to comment on Field’s, while Federated has already confirmed its interest in buying the chain. In 1990, May lost out to Target Corp., at the time called Dayton Hudson, in the contest to buy Field’s from Batus Retail.

In April, J.C. Penney sold off its Eckerd drugstore chain, sparking speculation that the Dallas-based retailer might bid on Field’s, which was wrong. “There is no interest on our part,” Allen Questrom, chairman and ceo of Penney’s, told WWD. “It doesn’t fit into our strategy” of focusing on moderate department stores with a heavy dose of their own brands.

There’s also been speculation that Saks Inc. might be interested, since the firm has a track record of acquiring regional department store chains. But for Saks, that’s ancient history. Since acquiring Saks Fifth Avenue in 1998, Saks Inc. has shifted its strategy to become more of an operating company focused on strengthening Saks Fifth Avenue and its department store group, rather than acquisitions. Also, the company is disbursing $285 million in dividends this spring and plans to spend significantly on Saks Fifth Avenue renovations, making a Field’s bid unlikely.

“We are very focused on improving operating margins and getting more productivity out of our current businesses,” said Steve Sadove, vice chairman of Saks Inc. Asked about Field’s, he replied, “I have no comment on individual businesses.”

On Mervyn’s, a source familiar with the “book” of financial information on the chain said the retailer has a liquidation value of at least $1 billion, noting the chain owns a lot of its property. Previously, industry sources felt Mervyn’s would most likely be sold off in pieces, and cherry-picked for locations by such chains as T.J. Maxx and Kohl’s. Financial investors are now said to have expressed interest in Mervyn’s, though, including Kohlberg-Kravis-Roberts. The Blackstone Group also reportedly examined Mervyn’s. Blackstone and KKR officials couldn’t be reached for comment.

“Personally, I think there is at least a 50 percent chance Mervyn’s will be sold off in pieces or liquidated,” said the financial source. “But, because of the sheer scale of it and its dominance in Texas and California, and because of all the interest retailers have in selling more to the Hispanic population, a lot of people are looking at Mervyn’s, including a number of private equity guys who would need to find an operator, like a retail ceo, to partner with.”

The 266-store Mervyn’s is regarded as long neglected by a parent corporation devoting more resources to the Target chain, but is still profitable with moderate growth potential. Mervyn’s spits out close to $200 million in annual EBITDA and has the potential to capitalize further on Hispanic customers, considering Mervyn’s two biggest markets are Texas and California. “It’s like an annuity. It’s not high growth. It’s not very exciting but it continues to generate cash,” said the financial source.

Goldman Sachs, which is handling the Target Corp. sell-offs, has been distributing four “books” containing confidential financial data on the retail and credit card operations of Field’s, and the retail and credit card operations of Mervyn’s.

“Target is allowing you to bid either way,” said the financial source. “There’s flexibility.”

After Target eliminates low bids, remaining players get to “kick the tires” and begin the due diligence process.

According to one retail ceo, Field’s is a better fit with Federated than with May. Field’s and Federated were longtime members of the former Associated Merchandising Corp. buying office cooperative, where they shared information. “The income strata of their customers, the vendor structure, the cultures — so much aligns with the Federated group,” the source said. The Field’s vendor list is said to be about 90 percent similar to Federated’s, but only 60 percent to 70 percent similar to May’s.

“This would be a very clean buy for Federated. Aside from a couple of Bloomingdale’s stores [there are four in the Chicago area and one in Bloomington, Minn.], there is very little overlap,” the retail ceo said.

Retail sources familiar with the operations of Federated point out that the company would wait several months to a year before attaching the Macy’s name to Field’s stores and gradually phase out the Field’s name when it felt Midwesterners were comfortable with the new banner. Also, Federated is involved in other consolidations regionally, and is centralizing its home business, so it might take a while to convert Field’s.

Aside from dominating the Chicago market, Field’s also dominates the Detroit and Minneapolis markets. Since those stores were a few years ago under the Dayton and Hudson nameplates, Federated might do a faster conversion to Macy’s where consumers haven’t been living as long with Field’s.

Twenty years ago, Macy’s operated in the Midwest but pulled out. A Field’s buy would mark Macy’s return to the Midwest, even into certain markets such as Chicago, where it has never been, and small cities such as Flint and Grand Rapids.

But name changes are tricky.

“In these older northern cities, people are really attached to company names,” observed Ed Nakfoor, a retail consultant in the Detroit area. “Folks in the Target corporate office miscalculated about how passionate people are about having a hometown store and how attached they were to that Hudson’s name. Hudson’s, Field’s, Dayton’s, all stood for a lot. That’s why so many stores [including May and Federated] never entered the marketplace. They couldn’t compete.”

Some industry experts believe the Macy’s East division of Federated, rather than Macy’s West, would run Field’s. While Macy’s West is more fashionable and slightly more upscale, Macy’s East operates in climates that are more similar to Field’s territory. Macy’s East, based here, is also geographically closer to Field’s, and only an hour time difference away, versus a two-hour time difference with the San Francisco-based Macy’s West.

At least a couple of Field’s units could become Bloomingdale’s, including the one in the Somerset Collection, in Troy, Mich. It’s a higher-end store with a heavy component of bridge lines and some designer brands, such as St. John. On the other hand, there is a strong Field’s unit in the Oakland Mall in Troy, which is not as upscale as the Somerset unit.

Overall, the merchandise at Field’s is priced at and above Macy’s and below Bloomingdale’s, but it’s not as promotional as Macy’s and as contemporary or trendy as Bloomingdale’s.

If May took over Field’s, its strategy would be different. Lacking a national retail nameplate, May most likely would try to maximize the Field’s name and capitalize on its better brand assortment to help elevate other divisions. “May is focusing more selectively on certain brands and trying to do a much better job of merchandising,” said a retail consultant. “May had kind of backed off from higher-end brands, especially when the economy was less resilient, to compete with Kohl’s and Penney’s. They now see opportunities by taking the high road” with such brands as Polo Ralph Lauren.

Analysts said it’s unlikely May or Federated would take Field’s far outside its current reach by adding many new stores, since it would then bump into their own divisions and steeper competition. Also, in the Eighties, Field’s opened stores in Texas, which flopped and were eventually closed and sold off.

“Marshall Field’s lost its way somewhere along the way,” Nakfoor said. “They tried to be too many things to too many people. The State Street remodel is a good model, though the company hasn’t done a good job of translating much or any of it to branch stores.”

By the Numbers
ANNUAL SALES: $15.3 billion
ANNUAL PROFITS: $693 million
ANNUAL SALES: $13.3 billion
ANNUAL PROFITS: $434 million
458 stores in 34 states 1,124 stores in 46 states
NAMEPLATES: Bloomingdale’s, Macy’s, Bon-Macy’s, Burdines-Macy’s, Goldsmith’s-Macy’s, Lazarus-Macy’s, Rich’s-Macy’s NAMEPLATES: Famous-Barr, Filene’s, Foley’s, Hecht’s, Kaufmann’s, L.S. Ayres, Meier & Frank, Robinsons-May, Strawbridge’s, The Jones Store, David’s Bridal, After Hours Formalwear, Priscilla of Boston
KEY MARKETS: California, Florida, New York, Washington KEY MARKETS: Texas, California, Pennsylvania, New York
Source: Company Reports
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