BY URSULA MILLER
The Cincinnati Enquirer
Investors reacted enthusiastically to news Monday that Dillard's Inc. was buying Mercantile Stores Co. Inc. for $2.94 billion in cash. The stock of both companies rallied amid a down market.
But many Wall Street analysts who study the retailing industry were less than impressed by the deal.
"These two (companies) have really been kind of asleep at the wheel, so I question what's going to happen when they get together," said Kim Scott, an equity research analyst at Bartlett & Co. in Cincinnati.
Ms. Scott said there are obvious set opportunities for the combined companies to cut costs and to create efficiencies, but she was pessimistic about how well Dillard's would execute the strategy. Both chains, which sell mostly clothing and housewares, cater to mid- to upper-income customers in medium-sized markets.
"They haven't been shining examples of strong operators or in terms of their ability to generate returns for stockholders," Ms. Scott said.
Dillard's in particular has disappointed Wall Street by not always delivering earnings as expected, said John O'Connor, director of investment research at Fort Washington Investment Advisors Inc., also downtown.
"They're prone to periodic setbacks," Mr. O'Connor said of Dillard's. "They missed the Street estimates by nine cents a share in the January '98 quarter. In October '96, they had another big miss."
Neither Mr. O'Connor nor Ms. Scott was surprised Mercantile is being sold, but both expected either St. Louis-based May Department Stores Co. or Cincinnati-based Federated Department Stores Inc. to be the buyer.
Steve Latz, retail analyst for St. Louis-based A.G. Edwards, conjectured that Federated was involved in recent buyout talks but "Dillard's was probably just willing to pay more."
Salomon Smith Barney retail analyst Richard Church echoed a similar opinion in an interview with Bloomberg News.
"Dillard's kind of came out of left field and outbid a couple other chains," Mr. Church said.
Mr. Latz acknowledged the generally accepted but unconfirmed rumors of May's courtship with Mercantile a couple of years ago, saying the talks "bogged down for whatever reasons" -- making it unlikely that May would try again for Mercantile.
Analysts said Dillard's offering price of $80 a share was fair -- neither cheap nor expensive -- based on earnings expectations.
During a conference call Monday, Dillard's executives talked to analysts about their plans. Few details about the fate of Mercantile's executives or its corporate headquarters operations were provided, however.
One thing is certain: Dillard's plans to convert Mercantile's stores to its strategy of offering every-day pricing with few sales. Mercantile typically uses storewide promotions to draw customers.
After the calls, Mr. Latz published a report in which he questioned the effectiveness of "every-day low pricing" for department stores, a strategy commonly used by major supermarket chains.
Mr. Latz also criticized Dillard's management for its lack of communications with analysts, a problem he said has rendered Wall Street unable to accurately estimate company earnings.
Though Ms. Scott at Bartlett has followed both Mercantile and Dillard's for several years, she hasn't recommended purchase of either largely because she saw more tangible value in Federated, the nation's largest department store operator.
"The value has been tremendous at Dillard's , but we questioned whether we would ever see its value realized," Ms. Scott said, adding that she was hesitant to recommend the stock because the company is controlled by one owner, the Dillard family.
"Mercantile has been a good value, too," Ms. Scott said. "But with Federated you could see all the catalysts that would increase the value of Federated. We didn't see those things clearly with Mercantile."
