TROY, Mich. -- Citing margin erosion, Kmart Corp. reported operating profits at its general merchandise stores division tumbled 58 percent in the fourth quarter and 32.3 percent in the year, before special charges.

In the quarter, operating earnings before charges fell to $313 million from $745 million. After a previously announced charge of $904 million to expand its store modernization program, Kmart's discount chain showed an operating loss of $591 million.

Sales inched up 5.3 percent to $8.5 billion from $8.1 billion. Same-store sales gained 2.9 percent.

In the year, general merchandise profits before the charge fell to $1.05 billion from $1.56 billion a year earlier. After the charge, the group had operating earnings of $150 million. Sales rose 5.9 percent to $28 billion from $26.5 billion, with same-store sales up 3.6 percent.

The declining operating earnings in the year stemmed from a drop in gross margins to 24.9 percent of sales from 26.5 percent. Kmart said margins were particularly depressed in the fourth quarter by its inventory reduction program and increased markdowns at its fashion division. Also, margins were hurt by a sales mix shift toward lower-margin goods.

Overall, Kmart reported a loss of $1.2 billion in the quarter after restructuring charges of $1.3 billion. The drop also reflects losses of $503 million related to the sale of Pace Membership Warehouse stores and the sale of Payless Drug Stores.

In the year-ago quarter, Kmart had a profit of $535 million, or $1.07 a share. Sales advanced 8.7 percent to $10.3 billion from $9.4 billion.

In the year, Kmart reported a loss of $974 million after the charge compared with a profit of $941 million, or $2.03 a share. Sales increased 10.1 percent to $34.2 billion from $31 billion.

Kmart in early January decided to accelerate its expansion program as a result of the success of its larger store formats, particularly the 110,000 square foot prototype Kmart and the Super Kmart Center concepts. Kmart's traditional stores are 60,000 square feet. At the end of 1993, 1,321 stores had been updated, representing 57 percent of U.S. Kmart stores.

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