By and  on September 9, 1994

NEW YORK -- Kmart Corp. has begun the Herculean task of shoring up its ailing discount business.

After ardent pressure from shareholders to resurrect its core discount store business, the Troy, Mich.-based retailer said Thursday it will close 110 underperforming U.S. discount stores and slash 2,300 management positions -- 10 percent of Kmart's management staff -- and 6,000 store personnel.

The staff cuts will be made over the next 18 to 24 months.

A spokeswoman said the stores will close on Jan. 15 and Feb. 12, 1995.

Kmart chairman Joseph E. Antonini said the latest restructuring efforts "represent strong steps toward focusing on the core U.S. Kmart business." "Much remains to be done," he said. "But we are making considerable progress with initiatives to strengthen the core Kmart discount business and enhance the profitability of Kmart Corp."

The latest efforts are part of a program begun last January. Kmart took a $1.34 billion pretax charge in the fourth quarter of 1993 to cover this and other restructuring efforts. A Kmart spokeswoman said no new costs are involved.

The closings represent about 5 percent of the Kmart discount stores in the U.S.

Kmart's stock was up 1/2 to 18 Thursday in trading on the New York Stock Exchange.

Analysts described the move as an important step in fixing the troubled giant. Industry observers have consistently said Kmart desperately needs to improve its systems and slash overhead in order to get back in the game in an increasingly competitive mass market.

The hardest-hit states are Indiana and Texas, each with 12 stores closing; six stores will be closed in Missouri; five in California, Florida, Georgia, Kansas, Kentucky and North Carolina; four in Iowa, Illinois and Nebraska; three in Arkansas, Massachusetts, Minnesota, New Mexico, North Dakota and Tennessee; two in Louisiana, Michigan, Mississippi, New York, Oregon, South Carolina and Wisconsin, and one each in Alabama, Colorado, Oklahoma, Ohio, Virginia and Wyoming.

Kmart has been under the gun for more than a year, battling the competitive pressures of the discount market, which is dominated by behemoth Wal-Mart Stores, the world's largest retailer, with sales of $67.3 billion last year and $85 billion projected for this year.Over the past decade, Kmart's share of the discount department store market has slipped from an estimated 40 percent to roughly 25 percent, while Wal-Mart's share has grown to 40 percent.

Kmart had sales of $34.1 billion last year. In the second quarter ended July 27, its U.S. general merchandise operating profits fell 18.6 percent to $201 million. Total Kmart net earnings declined 7.8 percent to $94 million from $102 million. Sales rose 4.6 percent to $8.8 billion from $8.4 billion.

Wal-Mart's strength has been in its superior use of information and technology systems, which allows it to operate more effectively and at a lower cost, according to industry analysts. This cost savings is passed on to the consumer, the core of Wal-Mart's low-price strategy.

Kmart's sub-par performance over the past six quarters caused restless stockholders to clamor for management to start paying attention to the discount stores. This led to a shareholder fight earlier this year, culminating in a tense annual meeting in June, in which a management-supported proposal to sell targeted stock in three of its specialty divisions -- Sports Authority, Borders/Waldenbooks and Office Max -- was defeated.

Ultimately, Kmart sold its stake in Coles Myer, an Australian retailer, and said in August it would sell majority stakes in the three specialty divisions via initial public offerings.

Antonini has come under the most fire for the sagging results. At the annual meeting, he acknowledged that 1993 was "a down year" -- profits at the discount stores plummeted 32.4 percent -- but said by the end of 1994, the changes resulting from Kmart's massive store renewal program would start to prop up the bottom line. The company has been refurbishing stores since 1990, and by the end of the year, about 1,600 of its 2,400 units will have been renovated.

Analysts said the pressure was on Antonini to get some improved results fast. In a June interview, Antonini declared he was staying put at the helm of the company and that he had the support of the board.

"It's significant in that it shows management's attention refocusing on the core U.S. discount business," said Eileen Gormley, an analyst from Pershing, a division of Donaldson, Lufkin & Jenrette. She said she views the announcement positively, noting, "They're weeding out the underperformers. Hopefully, that will help improve profitability of the core business."Terrence McEvoy, an analyst with Janney Montgomery Scott, said these measures "certainly can't hurt." He termed the latest cuts "another step in a long series of actions that hopefully will stabilize things or turn it around." However, McEvoy noted, "There are still a lot of stores that need to be updated, renovated and remerchandised. The older stores are not competitive in today's increasingly difficult [discount] environment." Management consultant Walter Loeb of Loeb Associates said, "We knew they were going to do something like this, we just didn't know the magnitude. This is an important step, not only in response to investors, but to show a focus on the core business and go back to the basic roots of the company.

"Finally, they are rationalizing their core discount business, focusing on the return on investment of their existing stores," he added. "I suspect another 200 to 400 stores could join this list."

Loeb said the move will result in better earnings, which should satisfy shareholders, and more importantly, will make the stores more competitive, a benefit to consumers.

He said Kmart has been doing well in apparel, home goods and shoes. The Jaclyn Smith line is "well developed and well accepted," he said, and basics and children's wear are also healthy.

He added that Kmart is competitive in hard goods, but there is not much differentiation in that area between stores.

"The company will get recognition for this," Loeb said. "It's not really a question of catching up with Wal-Mart -- they have almost triple Kmart's sales -- but it will make Kmart more competitive, which is the most important thing."

"It's a positive step," said Linda Morris, analyst at PNC Bank, Philadelphia. "It's an indication that the company is willing to get serious about improving the profitability at its discount store division."

While most mass merchandisers are strongest in hard goods, especially in light of the "up-and-comers getting stronger in apparel, like J.C. Penney, Sears and Kohl's," Morris said Kmart is improving its soft goods. "They realize they have to do this," she said. "They must focus more on quality. They're not going to be the next Target."Morris added she hoped this was the first step in repairing the discount operation and noted it takes the heat off Antonini a bit.

"I'd still like to see some outside management come in to run the discount operation," she said, "but whether that will happen, I don't know."

Morris estimated Kmart would earn $1.50 per share, before charges or special items, for fiscal 1995. A year ago, Kmart earned $1.15, excluding special items.

As part of the program, Kmart appointed Ronald J. Floto as president of Super Kmart centers and executive vice president of the corporation, effective Oct. 1. Floto, formerly with Kash N Karry Food Stores, succeeds Richard S. Miller, who is retiring as executive vice president. Miller will stay on through the end of the year.

Virginia G. Rago, who joined Kmart in April 1994, will be promoted to vice president of Kmart store systems development.

Kmart's cost-cutting move caught some vendors by surprise, but they see it more as an adjustment to the weak business environment than a precursor to more layoffs.

"I am surprised by the move," said one vendor, who does a big business with Kmart, but wanted to remain anonymous. "The stores have looked really good. Payments have been on time. I don't see it as the tip of the iceberg."

"Kmart has been a very good customer of ours, and yes, I was a bit shocked," said Donald Levy, president of Lou Levy & Sons Fashions Inc., which sells outerwear to the mass merchant. "We always felt it was a dominant player, and the store closings don't bode well. If the result is a stronger Kmart, then I think it is a prudent move. I think what they were doing was reacting to the business environment." He added that his business will be down somewhat because of the closings.

Peter Baum, vice president of Essex Manufacturing Inc., which sells umbrellas to Kmart, said he was not surprised.

"It's no secret Kmart was having problems, but I think this is a good step to make them become more focused and efficient," he said.

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