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Kmart’s Plan: All but the Goods

NEW YORK — The reorganization plan filed by Kmart Corp. in a Chicago bankruptcy court last week detailed almost everything about the post-Chapter 11 edition of the company, except for a merchandising plan to get it out of the...

NEW YORK — The reorganization plan filed by Kmart Corp. in a Chicago bankruptcy court last week detailed almost everything about the post-Chapter 11 edition of the company, except for a merchandising plan to get it out of the doldrums.

While the still-distressed retailer appeared to address its financial issues and debt structure, the disclosure statement that was also filed last week said little about its merchandising strategy. The company has several proprietary licensing programs, namely Martha Stewart Everyday, Joe Boxer, Sesame Street, Kathy Ireland, Jaclyn Smith and the fast-approaching launch of Thalia apparel and accessories featuring the Latin pop star.

As reported, Julian Day, former president and chief operating officer, was chosen to succeed James Adamson as chief executive officer earlier this month, even before the company exited Chapter 11, in part to allow him time to put together his senior management team, including a chief merchandising officer.

According to the disclosure statement, merchandising wasn’t really a driving factor in the development of Kmart’s business plan. “A primary focus of Kmart and its constituents during these Chapter 11 cases has been on rationalizing and optimizing the company’s store and lease portfolio,” the disclosure statement said.

The court filing did address why the retail chain elected to close fewer stores than many expected — 609 between 2002 and this year’s closures versus estimates that ran as high as 800 — prior to its scheduled exit from bankruptcy at the end of April. Kmart will have about 1,500 stores with sales of about $25 billion after the closings are completed.

Court papers said officials at Kmart believe “there are disadvantages to a substantially smaller chain. There are significant economies of scale relating to purchasing, advertising, distribution and licensing that will be jeopardized if a large number of additional stores are closed. The store closings to date have resulted in increased sales and cash flow per remaining store, consistent with the overall aim of optimizing the number of stores in the portfolio.”

Kmart, for its part, is still in the final stages of its internal review of the former stewardship of the company. Charles Conaway, former ceo, completed his question-and-answer session with Kmart’s lawyers last week. Still to be questioned, according to court documents, are Anthony B. D’Onofrio, executive vice president for systems capability and chief supply chain officer, on Jan. 30, and Mark Moreland, divisional vice president, treasury and assistant treasurer, on Feb. 6.

This story first appeared in the January 28, 2003 issue of WWD.  Subscribe Today.

After the former executives are deposed, some or all of Kmart’s board of directors will be queried as to “what extent the board was apprised of certain events and activities that occurred at the company, among other matters.” The depositions are set to take place during the first quarter of fiscal 2003, and could place Adamson, former ceo and current nonexecutive chairman, on the list of those to be questioned.

One of the issues that the board members are likely to be questioned on concerns loans to former Kmart executives. Among the top recipients are Conaway, at $5 million; Mark Schwartz, former president and chief operating officer, $3 million; D’Onofrio, $2.5 million; Cecil Kearse, executive vice president, merchandising, $2.5 million, and John T. McDonald, chief financial officer, $2.5 million.

The retailer also disclosed that a significant portion of the items it sells — ranging from electronics and beauty care products to seasonal items — are delivered to Kmart on consignment. Two of its key jewelry consignment vendors are M. Fabrikant & Sons Inc. and Samuel Aaron International Inc.

Sources insisted Monday that asset rationalization and optimization strategies may not be enough to insure Kmart’s long-term survival.

“I don’t see how Kmart can carve a niche in the middle of two 800-pound gorillas. Wal-Mart and Target aren’t going away,” Robin Lewis, of the retail consulting firm that bears his name, observed. “I also don’t hear from anyone that somebody out there believes this company has a solid business plan to take the discounter into the future.”

Restructuring expert Jim Harris of Seneca Financial Group said: “The fault of the different Kmart store configurations is that the retailer is targeting a multiplicity of consumers. At the end of the day, no one knows what Kmart stands for because the retailer doesn’t have one single policy in terms of merchandise and store format. It still needs to find the core group of stores that could speak to consumers and carry a message that distinguishes it from Wal-Mart and Target.”