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Questions Remain as Kmart Exits Ch. 11

Kmart Corp.’s exit from Chapter 11 Tuesday proved it can clean up its balance sheet, but the rebuilding of a retail franchise may take more time.

NEW YORK — Kmart Corp.’s exit from Chapter 11 Tuesday proved it can clean up its balance sheet, but the rebuilding of a retail franchise may take more time.

Even after the completion of its 16-month tour of duty in bankruptcy court, many remained unconvinced that the Troy, Mich.-based discounter, now 600 units lighter than in January 2002, can gain a permanent foothold. Doubts center on its lack of a solid focus or market niche. Many believe the retailer is exiting bankruptcy too soon, before it has had a chance to fully fix the problems that led to its filing.

Kmart is headed by Julian Day, who brought a finance background with him from Sears, Roebuck & Co. Day, who has been focused on closing stores and logistical supply chain issues, had planned on naming his management team by the time Kmart exited Chapter 11. At press time, no chief merchant had been named.

“Without a merchant, Kmart can’t do anything,” observed retail consultant Walter Loeb of Loeb & Associates.

Cecil Kearse, who departed as Kmart executive vice president of merchandising a year ago, was the last person to have that distinction. A Kmart spokesman said that Bill Underwood, executive vice president for sourcing and global operations, has in the interim assumed many of the merchandising responsibilities.

Few consider such a division of labor adequate. “You need a chief merchant to provide a focus and leadership for the guys below. It is the vision and execution that drives what is sold in the stores,” Loeb said.

Loeb was also critical of Kmart’s coming-out party as being too premature. “Once it has a new merchant, he or she will want to change some of the inventory, which will mean more markdowns. That person may also have other ideas about how the retailer should be positioned, which could mean maybe some more stores closed. All of those issues are better accomplished while still in Chapter 11,” the consultant said.

Kmart has been focused less on its merchandising and more on fixing its financials. To be sure, the chain did have to restate some of its quarterly results, and get in place certain “best practice” procedures to ensure that accounting questions don’t resurface.

As reported, Kmart has been cooperating with the Securities and Exchange Commission on its investigation, in conjunction with the Detroit Office of the Federal Bureau of Investigation, of issues in connection with Kmart’s previous stewardship. In February, two of Kmart’s former vice presidents were indicted in Detroit on charges of securities fraud and conspiracy. Leading up to the criminal indictment was a $42 million accounting misstatement in 2001, which was also a contributing factor to Kmart Corp.’s escalating financial problems. The SEC filed its own civil action against the two, charging them with violations of the bookkeeping and reporting provisions of federal securities laws. Both investigations are ongoing.

The SEC had until April 29 to file a claim against Kmart in bankruptcy court regarding penalties in connection with the alleged malfeasance of former executives, but didn’t take action.

However, an SEC source said, “Normally, the Commission will seek penalties against just the individuals because they’re the ones who were really the responsible parties. When you seek fines from a corporation, it’s the shareholders who ultimately get hurt. Sometimes we do go after the corporation when the [misdeed] is egregious, but then oftentimes the penalty is nominal. Again, that’s because of the impact on shareholders.”

Gene Silverberg, executive vice president at Hilco Merchant Resources, had praise for others involved in the effort to extract Kmart from its woes, calling the emergence of the store “a perfect example of where some people working on the turnaround were brilliant technicians. A merchant couldn’t have done it on his own.”

However, he cautioned that one “can’t answer that question regarding survival until you know who the merchant will be. There is no reason for Kmart to die. Consumers need an alternative place to shop, and retailers need some competition to keep themselves up to date on the changing needs in the industry.”

Data from STS Market Research in Boston indicates that Kmart still gets its share of the megastore sportswear dollar — about 16 percent. Heading the list is Wal-Mart, grabbing 21 percent of the pie, followed by Kohl’s at 19 percent and J.C. Penney at 17 percent. Below Kmart is Sears, taking 15 percent of the dollar share, and then Target, at 11 percent.

As for the different age brackets of Kmart’s female customers, empty nesters over 55 account for 26 percent, followed by older Baby Boomers between the ages of 45 and 54 representing 25 percent of women shoppers. Younger Boomers between 35 and 44 weren’t too far behind, coming in at 21 percent. Generation X, those between ages 25 and 34, represented 17 percent. After that, female teens between 13 and 19 accounted for 7 percent, with Generation Y, trailing at 4 percent.

The top brands by dollar share at Kmart among women, according to STS Research, were Basic Editions, Route 66, Guess, Riders, Chic and Jerzees.