Dillard?s Discovers Jewel Among Mercantile Stores Division

Arkansas retailer could implement profitable day spas into its new store construction plans

Dillard’s Inc., in a holding pattern since May in its attempt to acquire Mercantile Stores Co., has found a pearl of great value within Mercantile’s divisions.

The Fairfield, Ohio, company, which has 103 stores in 17 states, has extremely profitable day spas within the firm’s hair and nail salon department.

Mercantile exceeded $100 million in revenue last year at its hair and nail salon departments, partly because of the day spas, which provide massages, manicures, pedicures and even soaking tubs. The firm’s McAlpin’s Day Spa & Salon in a Cincinnati mall has 188 stations, making it possibly the largest hair and nail salon in the country.

“They are very profitable businesses,” says Jeff Stinson, a research analyst with Midwest Research Maxus Group in Cleveland. “But they are not a huge percentage of Mercantile’s overall sales.”

Mercantile has a hair and nail salon in almost all 106 stores, but it’s the day spas, in about a half-dozen Mercantile stores, that have drawn Dillard’s attention.

Dillard’s is so taken with the concept that it apparently is planning to keep the day spas in the Mercantile stores and implement them in new Dillard’s stores under construction.

“Evidently, these are big on the East and West coasts,” one source familiar with the spas says. “It’s amazing how profitable they are. In order for a retail company to even think about these, they have to have an amazing dollar-per-square-foot [return]. Retailers don’t want to sacrifice the space that could be used for merchandise.”

The day spas, which have a very upscale design, take up about 2,000 SF in the Mercantile stores and may be about the same size in new Dillard’s stores.

Mercantile apparently is one of the few retailers in the country that use the day spas, Stinson says.

“They do everything under the sun in the day spas — massage, whirlpools, anything you’d find at an upscale health spa,” Stinson says.

Mercantile has five hair and nail salons that aren’t even within a department store, including the giant McAlpin’s salon in Cincinnati.

FTC’s Microsoft distraction

Stinson believes there is no real obstacle preventing Dillard’s from completing the $2.9 billion purchase of Mercantile. Dillard’s has been forced to extend the tender offer, most recently until Aug. 5, to buy Mercantile as it waits on the Federal Trade Commission to approve the deal.

“The FTC has a lot on its plate right now,” Stinson say. “There were probably a lot of people working on the Dillard’s-Mercantile deal originally who have bumped over to the Microsoft case. That’s the case taking top priority and probably taking up a lot of people’s time.”

The federal government has accused Microsoft of antitrust violations.

Stinson expects Dillard’s simply will continue to extend the deadline until approval finally comes from the FTC.

Stinson says it’s still unlikely Dillard’s will retain most of the Mercantile employees at the company’s Fairfield headquarters.t

“It’s a difficult thing [for employees to continue working] when you know you’re going to lose your job at the end of the day,” Stinson says. “The longer it goes on, the more talent you’ll lose from Mercantile’s headquarters going to other retailers.

“So, from that perspective, I think Dillard’s would rather get the deal done sooner rather than later. You don’t want to have to worry about Mercantile running itself as these people continue to leave.”

Stinson says Dillard’s probably will have to dispose of at least 30 stores Mercantile now owns to satisfy regulators. Dillard’s already has agreed to swap seven Mercantile stores in Jacksonville, Fla., and Columbia, S.C., for eight Belk Inc. stores in Virginia and one in Chattanooga, Tenn.

The major markets where Dillard’s probably will have to sell or trade Mercantile stores are Jacksonville, Fla.; Orlando, Fla.; Kansas City, Mo., and Nashville, Tenn.

“Even if you have to divest 30 stores, you’re still picking up more than 70 high-quality locations,” Stinson says. “You’re getting great real estate in markets where you now have dominant market share through the acquisition of Mercantile. So, it’s still a real nice fit for Dillard’s and it makes a lot of sense.”

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Possible buyer

A likely acquirer of some Mercantile stores that Dillard’s will sell is Proffitt’s Inc. of Birmingham, Ala.

“Proffitt’s would probably be interested in some spot stores in Orlando, and would also be interested in the Nashville market and in Kansas City,” Stinson says.

Stinson anticipates there would be more bidders than just Proffitt’s, however. He expects Federated Department Stores Inc. and May Department Stores Inc. also to be interested.

“I think what they did with Belk, to a certain extent, tips their hand,” Stinson says. “They’d rather take stores for stores than stores for currency.”