Mervyn’s — The Chain Sold Its Stores, Then Couldn’t Make Rent

Summary

Mervyn's was a Western mid-tier department chain that sold affordable apparel and home goods to the American middle class for almost six decades, and at the end of December 2008 it finished liquidating every store. Mervin G. Morris opened the first one in San Lorenzo, California, on July 29, 1949, and built the format that defined the chain: a clean, value-priced department store pitched a notch below the upscale floors and a notch above the discounters, with the seasonal "Big Brand Sale" circulars and the "open, open, open" jingle that a generation of Californians can still hum. By its physical high-water mark at the end of 1996 it ran roughly 300 stores across 16 states, mostly in the West, and it had spent the previous two decades as a quiet, dependable subsidiary of the company that owned Target.

What killed Mervyn's was not a shift in shopping habits, though those were real enough. It was a financial structure. Target Corporation, having decided the chain no longer fit its strategy, sold Mervyn's in 2004 to a consortium of Cerberus Capital Management, Sun Capital Partners, and the real-estate firm Lubert-Adler. The buyers promptly did the thing that makes this a case study rather than a footnote: they split the company in two, separating the valuable real estate into one entity and the store operations into another. The operating company, which had owned much of its property outright, now had to pay rent to occupy buildings it had effectively just sold — and the rent, by the creditors' later account, was set high enough to help finance the buyout itself.

A store chain that walks into a recession carrying a brand-new rent bill it never used to owe has a short runway. Mervyn's filed for Chapter 11 on July 29, 2008 — its fifty-ninth birthday to the day — and when no rescue materialized the case converted to a Chapter 7 liquidation that October. Going-out-of-business sales ran through the holidays; the last stores went dark at the end of the year. Roughly 18,000 employees lost their jobs, and the suppliers left holding unpaid invoices went to court alleging the buyout had been engineered to fail. In 2012 the financiers and several banks paid Mervyn's creditors $166 million to settle, admitting no wrongdoing. The chain that had owned its own real estate was, in the end, liquidated for not being able to afford it.

Timeline

The Store Between the Tiers

Mervyn's succeeded for the most ordinary of reasons: it sat in the right place on the price ladder and stayed there. In 1949 the American department-store world was sorted by income — the carriage-trade names at the top, the five-and-dimes and discounters at the bottom — and Mervin Morris built his chain squarely in the underserved middle, selling brand-name clothing and household basics at prices a single-income family could plan around. The stores were bright and uncrowded, the layout legible, the sale calendar relentless; the "Big Brand Sale" was less a promotion than a recurring civic event in California suburbs. For a working family, Mervyn's was where you bought the school clothes, the towels, the work shirts, the things you needed rather than coveted.

That positioning made it an attractive acquisition. In 1978 Dayton-Hudson — the Minneapolis company that would later rename itself Target Corporation — bought Mervyn's for around $300 million and ran it as a standalone subsidiary, a regional department-store complement to its growing discount business. For a while the arrangement suited everyone. Mervyn's expanded across the West and reached roughly 300 stores by the end of 1996, a profitable, unglamorous workhorse inside a portfolio whose real star was emerging next door. And that was the quiet beginning of the end: as Target became one of the most admired retailers in America, Mervyn's became the sibling that got the smaller allowance. New-store openings slowed, remodels lagged, and the chain that had defined the value middle started to look every one of its years. By the early 2000s the parent had concluded that the middle was a hard place to stand — squeezed from below by Walmart and Kohl's, from the side by Target itself — and that Mervyn's was an asset better sold than fixed.

The Real Estate Walks Out the Door

What it was sold into is the heart of the matter. In 2004 Target divested Mervyn's to a consortium of two private-equity firms, Cerberus Capital Management and Sun Capital Partners, and a real-estate specialist, Lubert-Adler, in a transaction valued at roughly $1.65 billion. The composition of that buyer group was itself a tell: when a real-estate firm is a lead partner in acquiring a department-store chain, the buildings are at least as interesting to the buyers as the business conducted inside them. Mervyn's owned or controlled a great deal of well-located retail property, and that property — not the apparel margins — was the prize.

The mechanism that followed is the LBO playbook's signature move, executed cleanly. The new owners separated Mervyn's into two pieces: a real-estate entity that held the property, and an operating company that ran the stores. The operating company, which had previously occupied much of its footprint rent-free as an owner, now signed leases and began paying rent to the property side. By the creditors' later account, those rents were set high — high enough, they alleged, to help service the debt taken on to buy the company in the first place. In effect, the value that had been locked up in Mervyn's real estate was extracted and monetized, while the obligation to pay for the use of that same real estate was loaded onto the operating business. The chain's own assets were turned into its own fixed cost.

A retailer can survive a tough market or a heavy rent bill; surviving both at once, with no slack, is another matter. The operating company spent its short independent life under pressure — multiple chief executives in a single stretch, store closures, and a brand starved of the investment it had already lacked under Target. When the credit markets froze and consumer spending collapsed in 2008, a chain paying rent it never used to owe had nothing left to absorb the shock.

The Five Factors

Aftermath

The people came first in the cost and last in the proceeds. Roughly 18,000 Mervyn's employees lost their jobs as the stores liquidated into the 2008 holiday season, entering one of the worst labor markets in living memory; the suppliers who had shipped goods on credit waited four years for the partial repayment the 2012 settlement provided. The $166 million the financiers and banks paid was a fraction of what an operating chain would have been worth, and none of it could undo the closures. The empty Mervyn's boxes — distinctive, mid-sized, anchored to aging shopping centers across the West — joined the dead-anchor inventory of the late-2000s retail landscape, many of them carved up for other tenants, some left dark for years.

The brand itself became a minor online afterlife and then a footnote; the real legacy is the lawsuit. Mervyn's is now a standard citation in the argument over private-equity ownership of retailers, the case where creditors did not merely complain about a buyout but sued to call it a fraudulent transfer — and extracted a settlement. The sale-leaseback that hollowed it out was not unique to Mervyn's; the same maneuver recurs across the failures of the era. What Mervyn's added to the record was the explicit allegation, paid to settle, that the structure had been engineered to extract value while the stores carried the risk.

Lessons

References

• 6 retailers that went bankrupt and never recovered — and lessons from their demises Retail Dive
• Mervyn's Bankruptcy Case Reaches Settlement WWD
• Creditors of Mervyn's to get $166M in settlement Star Tribune
• Cerberus, Sun Capital named in Mervyns lawsuit Private Equity International
• Mervyn's Wikipedia