Dayton Hudson (DH)
Jim: Now here's what you'd call a department store conglomerate, Mike. Dayton Hudson, with about $30 billion-plus in sales, has 1,200 stores in 44 states, but they serve all range of pocketbooks.
Mike: Right. Dayton Hudson is everything from soup to nuts. Or to put it another way, everything from consomme to lobster bisque.
Jim: The lobster bisque being Marshall Field's, which is mainly in the Midwest and East, along with Dayton's. Then we have the consomme, which is Target and Mervyn's, out here in the West. Truth is, the real story at Dayton Hudson these days is the Target chain, which sells apparel and all sorts of general merchandise, and which is simply thriving.
Mike: I agree. You look at this company, and to me there's Target and there's everything else.
Jim: It sounds odd, yet this discount chain has suddenly become a hip place to shop for people of all incomes. Let's start with that retail statistic we frequently cite--"same-store" sales, or those of stores open at least a year. In September, the retail industry had a decent 6% gain from a year earlier. Dayton Hudson did even better, at 6.9%. But Target? It was up 8.6%. And it's been that way for some time now.
Mike: Yes, and I noticed that Mervyn's--which sticks mostly to apparel--was up a handsome, uh, 0.3%.
Jim: And therein lies the problem with Dayton Hudson these days. Target is doing great, Mervyn's is struggling, and Marshall Field's and Dayton are holding their own. So the question seems to be: What to do about Mervyn's? It's not a bad store and it offers attractive prices, but it's drowning in a sea of apparel retailers.
Mike: You know, we can draw some lessons about Dayton Hudson from some of the other retailers we've looked at, such as J.C. Penney and Sears Roebuck. The point being that, once you're on the schneid as a retailer, it's hard to get back on track.
Jim: On the what?
Mike: But to Dayton Hudson's credit, it created the Target chain, and it was no small niche. They've built it into a chain that competes very well with the king of discount, Wal-Mart Stores. But that still doesn't answer the problem about Mervyn's.
Jim: Well, Dayton Hudson a year ago supposedly gave Mervyn's an ultimatum to get things fixed or else, and it's made some progress. Now Mervyn's is trying to get more teenagers into its stores by making its apparel a lot more fashionable for the young set. But let's face it: That effort is like turning around a huge ship in the ocean--it's going to take time.
Mike: Not to mention that there are a lot of shoals lying out there by the name of, oh, let's just cite one--Gap. See, even if Dayton Hudson could get Mervyn's turned around halfway, it could still hit the rocks.
Jim: So far, though, there's been no indication as to what Dayton Hudson plans for Mervyn's. But thanks to Target, Dayton Hudson's stock has done very nicely. Trading in the mid-$60s, it's up 50% for the last 12 months, though it's been little changed since March. That's a concern, because retail sales have been pretty strong in recent months.
Mike: Good point. But now what?
Jim: I'd buy the stock. First, whatever Dayton Hudson decides for Mervyn's--whether it cuts it loose or whatever--will help the shares. Also, Target will keep doing well even if the economy goes south, because it's a place where people go to save money.
Mike: Agreed. In the past, Target has shown that even an overall slowdown in consumer spending has only a negligible effect on its sales. Plus, Dayton Hudson management gives me the impression it's on top of the constant changes in retail--save Mervyn's--and it knows how to adapt to them, unlike Sears' or Penney's. So I'd buy the stock, too.
Jim: I also like how the profit margins at Target are continuing to grow, which is a remarkable achievement, really, when you consider that Target is a discount center. Maybe it's because they scrimp on cashiers, which is why their checkout lines are always so long.
Mike: That's not all. Target has big expansion plans for the Northeast. Now, the chain has been a bit shy about that region before, but I think it'll manage it well. They've made one mistake--being so much more successful than they thought they would that they got stuck without enough merchandise in the stores. But I don't think they'll make that mistake again.
Jim: And, finally, Dayton Hudson's stock is selling for a reasonable 27 times this year's expected earnings per share, so it's not overly expensive.
Mike: Hmmm, I remember when a P/E like that wasn't so reasonable.
Jim: And it won't be again if the whole stock market keeps slumping. But I'd still buy the stock.
Harrah's Entertainment (HET)
Mike: Now, Jim, we return to one of my favorite industries--the endlessly fascinating casino business. And today's gamble, if you choose to put your money down, is Harrah's.
Jim: Geez, you've had a whole week to prepare and that's the best line you could come up with?