Is Mervyn’s Fate Target’s Fault?

Mervyn’s is suing former owner Target and the private-equity firms the retailer sold the chain to for more than $1 billion. Mervyn’s management claims that the complicated deal gave those firms its owned real estate, which was then sold and leased back to the retailer at higher rates, forcing bankruptcy.

We can understand that the higher lease rates would impact the chain, but at the same time, when we last discussed Mervyn’s, many of you said that the chain was having problems for years anyway.

And can it really blame Target for selling to the highest bidders? Some people think not.

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16 Responses to “Is Mervyn’s Fate Target’s Fault?”


  1. 1 LegalBeagle September 5, 2008 at 9:34 am

    They have a claim, don’t worry. Predatory private equity funds, with their incredible tax breaks (of often paying 10% taxes versus 40%) have had their day in the sun. Tax law changes are on the horizon and the government needs the money.

  2. 2 alden wagner September 5, 2008 at 10:19 am

    That is a very interesting comment. could you e-mail me any articles explaining the anticipated changes. You have an insight that I would like to learn more from.

    alden wagner

  3. 3 James September 5, 2008 at 10:43 am

    How can Mervyn’s management be surprised? This is exactly what the boys from Wharton Business School are trained to do. Mervyns was in trouble before Target purchased it, Target hoped they could make it work and when they couldn’t they sold the company to the highest bidder. They, the highest bidder, developed an exit strategy based on the underlying value of the real estate. In any case, Mervyns should have been making an IRR on invested capital far in excess of any return they could have netted from the real estate. This is a classic leveraged buyout scenario where the LBO firm has no intention of operating the company long term. Private Equity firms are essentially liquidators in tuxedos. Regretably many people lose their jobs and are otherwise harmed but for Management this is like standing on a railroad track and then complaining when you get run over! Quit your whining, this same scenario has replayed itself thousands and thousands of times in many industries, how many blue jeans stores does America need!!

  4. 4 Thrown out the Window September 5, 2008 at 12:40 pm

    To James: There is a difference between a defenestration and standing on the railroad track.

  5. 5 Robert Reilly September 5, 2008 at 3:33 pm

    Would the ending be any diffrent if Target would have rolled Mervyn’s out in an IPO, I think not. The only difference is more people would have lost less money, than the current scenario.

  6. 6 joshua September 5, 2008 at 3:37 pm

    to James: they should be making their IRR of their business model, correct. however, many, many businesses accumulate RE to strengthen their asset base then sell off as sale-leasebacks to recapture capital and take the tax breaks on lease payments and amortized realization. If they had realized profit from that sale, it would have bolstered their balance sheet and keep them humming along. thats no cure for a failing business model, but it would have allowed ample time to organically right the ship. itll be interesting to see how this works out. i dont really see the problem on PE firms LBO’ing a failing business and realizing profit through selling the RE and then closing shop, its what they do. but a case can be made in both ways here.

  7. 7 James September 5, 2008 at 9:00 pm

    I agree being thrown out the window of a moving train is not the same as standing on the tracks, however, the end result is approximately the same. It seems to me Mervyns management has had at least three chances to right their ship, and each time the situation became more dire, and more difficult to fix, primarily because the business fundamentals were not there. The world did not need a Mervyns nor did Mervyns deliver anything the world needed. Why is management surprised that pirates boarded ship to pillage what’s left??

  8. 8 Bill Powers September 7, 2008 at 7:09 pm

    The writing was on the wall when Target sold “Mervyn’s”! As soon as the new owners took over the first thing they did was install their corporate people into the high executive positions and start closing stores. For anyone who thought at that time that Mervyn’s was going to be a growth company, your a fool. Mervyn’s was purchased from the start to be a company to piece-part out and sell off any of its assets that could be sold for current cash assets. Wonder why Target just did not do it when they had a chance?

  9. 9 Phenfen September 8, 2008 at 8:37 am

    Last comment — why didn’t Target just do it while they had the chance? That’s a good question. When May Department Stores owned Venture, they did just that. They mortgaged all the Venture stores property (extremely valuable real estate)to the hilt with Venture Stores, Inc. as the debtor, and then as the owner of all the stock of Venture Stores, Inc., all the mortgage proceeds went into May Co.’s pocket. Then they “sold” Venture Stores, Inc. to management of Venture Stores, Inc. Everyone knew what was going on and what Venture Stores, Inc.’s position was. It then tried to pursue an ambitious expansion in Texas before bringing down the debt it was saddled with — it lasted 6 or 7 more years approximately.

    I really don’t understand the Mervyn’s, Inc. lawsuit. Mervyn’s was a wholly-owned subsidiary of Target Stores, Inc., wasn’t it? It was sold to venture capitalists who pillaged after the sale instead of before the sale like May Co. Who are the shareholders of Mervyn’s, Inc. that have clean hands in this transaction to complain?

    By the way, Mervyn’s was NOT struggling when Dayton Hudson first acquired it. It was purchased as a growth vehicle, and it was indeed grown. When the internal power shifted from the Dayton Hudson department stores over to Target (reflecting corporate name change), that’s approximately when Meryvn’s started running into the ground. Target leadership knows what to do with Target, but they were clueless about Mervyn’s. It’s pretty sad.

  10. 10 CubicleDweller September 8, 2008 at 10:05 am

    Stores open. Stores close. Companies get bought out. New ones get started. Of course, none of this seems to matter at all right now when many of us are more likely to pay $4 a gallon for gas than to go to Mervyn’s and spend the same funds for costume jewelry, a new handbag or pair of socks.

  11. 11 Bill Powers September 8, 2008 at 7:46 pm

    Mervyn’s was a sucessful, very profitable department store chain until the mid 90’s. But when Target tried to make Mervyn’s a discounter like themselves in the mid 90’s, Mervyn’s started to lose its competitive advantage and its “working” core buisness strategy. Merchandise mix, advertising, management structure and store operations where being changed to reflect a discounter model. Target’s competition is discounters such as Walmart, K-marts, etc; where Mervyn’s competition was other department stores such as Pennys, Kohls, etc. Target knows how to operate a discounter buisness and is very good at it but did not have a clue to the department store business. This was the start of Mervyn’s downhill battles and failures. Even with Targets influence Mervyn’s was still a very profitable company. Look at Kohls, another profitable company who exists today and is a growing company. Kohls / Mervyn’s, besides the name on the building, can you see a difference between the two? Today Mervyn’s has one foot in the grave with the other foot soon to join it if Sun Capital has its way. The comment above about $4.00 a gal gas has what to do with Mervyn’s demise?

  12. 12 Last Nail September 9, 2008 at 6:58 pm

    Perhaps, the last nail in the coffin. (It’s the economy…..dumkopf!

  13. 13 Ethics in Business Consortium September 10, 2008 at 3:29 pm

    To Robert Reilly: “The end does not justify the means.”

  14. 14 wendy October 27, 2008 at 12:47 pm

    ALL OF YOU I CANT BELIEVE HOW IGNORANT YOU ARE!! YOU FORGET MERVYNS SHELLED OUT ALOT OF MONEY TO THE AMERICAN CANCER SOCIETY, HELD DURING THE SCHOOL YEAR, BOUGHT UNDERPRIVILIGED KIDS SCHOOL CLOTHES SO THEY CAN ATTEND SCHOOL, HELD CAR WASHES FOR DISABLED CHILDREN, WORKED WITH THE COMMUNITY TO HELP GET KIDS OFF THE STREET AND GAVE THEM JOBS…. OH YEAH BABY IVE WORKED FOR MERVYNS FOR OVER 10 YEARS NOW, WHAT THE HELL DID TARGET DO? SOLD MERVYNS AND THERE LAND SO THEY COULD LEASE IT BACK TO THEM TRIPLE THE PRICE!!!!! GREEDY BASTARDS, THEY DIDNT GIVE TO THE CANCER SOCIETY, GAVE NEEDLY KIDS CLOTHES THEY ONLY HELPED THEMSELVES. I WOULD LOVE TO SEE WALMART BUY THE CREEPS AND PUT ALL OF THEM OUT OF BUSINESS… NOW GUESS WHAT I HAVE TO DO IN 2 WEEKS FIND ANOTHER JOB, AND FAST TO FEED MY KIDS AND PAY MY BILLS, JUST TO SURVIVE!!! THATS MY REALITY SO STOP ACTING SO IGNORANT AND BE ALITTLE SENSITIVE TO OTHER PEOPLES HARDSHIPS CAUSE I CAN GUARENTEE YOU ONE THING ONE DAY YOU WILL BE IN MY POSITION, THEN WHAT WILL YOU DO!!!

  15. 15 terry53 October 28, 2008 at 4:23 pm

    It’s all just “smart business” until you’re the one standing in the unemployment line. Then it gets real personal real fast.

    Wendy and Bill Powers, you’re both absolutely right. The rest of you read the actual lawsuit so you know what you’re talking about.

    http://www.kccllc.net/mervyns

    http://www.kccllc.net/documents/0811586/0811586080902000000000014.pdf

    If you want to get technical you could say that the original sin in the demise of Mervyn’s was Mervin Morris selling his company to Dayton-Hudson, which became Target Corporation, in the first place. But who could have foreseen Target’s apathy towards the success of its own department stores? Target spent 20 years trying to Targetize the department stores (remember “gray-dotting”, Wendy?) instead of letting them pursue their own path. And when they lost interest, they sold Mervyn’s down the river, knowing full well what the intentions of the buyers were.
    Mervyn’s did not fail on its own strengths and weaknesses. If you own a house, and you need money for unexpected or extraordinary expenses- medical emergencies, college tuition, weddings- you can borrow that money against the equity in your house. Cerberus, Lubert-Adler, and Sun Capital stole all of Mervyn’s houses; and then charged them double what they were paying before to go on living there.

  16. 16 angel November 17, 2008 at 11:20 am

    I worked for mervyn’s for 20 years. I quit in 2005. I did my research on the companys that took over a hatch it group. Mervyn’s made a profit for Target of 180 million a year. Target took the money and opened new stores. How many Targets do they open now that they have to use there own money? That’s what cuased Mervyn’s to go down hill. It is very sad, I still keep in touch with my old mervyn’s family. Kohls is out there but they could never take Mervyn’s down. The demise came from the companys that took mervyn’s over.


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