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Kmart Chief Spins After Woeful Week

The press wanted to know about Kmart’s post-bankruptcy merchandising, but ceo Julian Day preferred to talk about honesty, discipline and leadership Tuesday.

NEW YORK — The press wanted to know about Kmart Corp.’s post-bankruptcy merchandising, but chief executive Julian Day and other store executives had their own agenda.

This story first appeared in the March 5, 2003 issue of WWD.  Subscribe Today.

Day defined honesty, integrity, discipline and leadership as the four cornerstones of Kmart’s business going forward in a media breakfast at the Inter-Continental Hotel here Tuesday. Reporters hoping to receive details of a merchandising plan as the fifth cornerstone left disappointed.

Kmart has been busy congratulating itself over its approaching exit from bankruptcy proceedings at the end of April, instead of July. However, financial sources told WWD that ESL Investments, one of the two vulture firms footing the bill for Kmart’s exit, threatened to pull its financing if the discounter remains in Chapter 11 past May. That has raised questions in the vendor community over Kmart’s merchandising strategy, or lack thereof. The discounter has been spinning its restructuring wheels without a chief merchandising officer since May 2001.

According to Day, Bill Underwood has temporarily been fulfilling those duties. Day, however, isn’t letting the lack of a cmo get in his way.

“For right now, it is very useful, when I have senior management not there, to use the time to get into the details,” the ceo said. Day explained that he needs to first understand the day-to-day responsibilities of a particular job before he starts recruiting for the position.

The company may still need to make some decisions about its team players, but it has already decided one element of its compensation package. As part of its plan to lure top executives, Kmart will set aside 10 percent of the shares of its reorganized Kmart stock, or 50 million shares, to issue to executives as an incentive to remain at the retail chain.

Meanwhile, Kmart’s associates will strive for better same-store sales, with the focus on profitability. Part of achieving that goal is improving inventory turns and keeping basics in stock in order to maintain margins.

The ceo said that the company can be a successful promotional retailer, suggesting that the success found by Kohl’s is one that can be emulated.

Day also recognized that his team’s success will depend on its execution of the details. In the past, he noted, Kmart “would just go for same-store sales,” blowing an item out the front door.

“But what does the market basket look like?” he asked rhetorically.

For Day, if a promotion on teacups is providing strong sales, there should be a corresponding focus on related items such as napkins.

The company, he argued, needs to make sure that all replenishment stock shipped for the store shelves gets put on the sales floor, instead of being left sitting in the “back room, [which] should be for add-on items.”

He noted that past supply-chain problems were “aided and abetted by a lack of discipline.”

Particularly in light of last week’s criminal indictments of two former Kmart executives in connection with a $42 million accounting fraud, the four guiding principles tie into “best practices” designed to ensure that certain accounting problems don’t recur.

Day, who didn’t elaborate on what those procedures are, observed, “Corporate America currently has to pull its socks up.”

For Kmart, that process will include the seating of an entirely new board when Kmart exits bankruptcy by April 30, “configured in such a way that it is composed of people able to execute checks and balances” to ensure the company’s compliance with regulatory requirements.

“Gone are the deals where the team operates by the seat of its pants,” Day said. He pointed out that he wants his management team to be financially literate, and have a comprehension of the goals that the retailer is trying to accomplish.

Of course, Kmart was never known for the excellence of its communication skills. Jack Butler, Kmart’s chief bankruptcy counsel from Skadden Arps, confirmed what was already whispered in the markets: warehouse matters were undertaken by the logistics department without any thought to sharing of resources with the real estate department. The real estate department, in turn, negotiated its own leases without advice from in-house counsel. Those individual fiefdoms, as they are often termed, are now a thing of Kmart’s past, according to its ceo.

As for specifics about its core customer profile, Day said, “Anybody who walks into the front of the store is our core customer. We may want to add to that base, but now our goal is to stabilize the business.”

Day said Kmart plans to introduce other nationally recognized in-store brands, much like its existing Joe Boxer and Martha Stewart collections.

Kmart has done away with a centralized buying structure in which its store managers had no say in what products were sold in the stores. Instead of headquarters pushing merchandise through to the stores, store managers will determine what and how much to order and based on their interpretation of shoppers’ desires, a more customer-centric approach.