These days, it's Target's (NYSE:TGT) secondary concepts that are sporting the signature bulls eye. Last night, the company announced that it is analyzing the sale of its Mervyn's and Marshall Field's units.
It's about time!
From a practical perspective, it's easy to see why Target has lugged around its other concepts. Laggards as they may be, Mervyn's and Marshall Field's produce positive cash flow which the company has been able to invest in opening new Target locations. The two chains may not pack the Target sizzle, but they combined to produce $267 million in pre-tax profits last year -- on $6.2 billion in sales.
But when it comes to investing, folks want growth stocks like they like their sirloin -- lean. Walk into any of the more than 1,200 Target stores and you feel something special. It's Wal-Mart (NYSE:WMT) for those who need something more than vanilla. It's Kmart (NASDAQ:KMRT) for those who can't stomach the rocky road.
Cheap chic works. Mervyn's and Marshall Field's, on the other hand, lack definition in a "me too" department store world. The real Target is the only reason any investor owns the stock in the first place.
But will Target find a buyer? It won't be easy. By its own reckoning, the concepts are years away from Target's standards of financial health. Potential suitors like May (NYSE:MAY), Federated (NYSE:FD), or Dillards (NYSE:DDS) may be interested, but not at lofty levels. To get there, Target would have to take the time to nurse the chains back, and the company is probably better served by cutting loose its coattails and becoming the pure play stock everybody wants.
Consider, Wal-Mart sells for nearly 30 times earnings. Target sells for a more modest 22 times. And while Wal-Mart offers superior valuation metrics, a lot of that stems from Target's two ugly stepsisters. It's time for Target to stand up and be counted -- alone.
Are discount department store chains a great way to save some money, or do you troll through the deeper discounters for values? How can you buy what you want and still stay under your budget? All this and more -- in the Living Below Your Means discussion board. Only on Fool.com.
Longtime Fool contributor Rick Munarriz prefers Target to Kmart and Wal-Mart when it comes to shopping. However, he does not own shares in any companies mentioned in this story.
