By  on January 12, 1994

NEW YORK -- The steps announced last week by Kmart to fix some nagging problems may be drastic, but perhaps that's what it will take to get the nation's second-largest retailer to turn things around.

That's the view of leading retail analysts and consultants, who say that one key is lowering the cost structure so the discounter can lower its prices to compete with archrival Wal-Mart.

Last year was a disappointing one for Kmart, ending with a same-store sales increase of just 1.1 percent in the critical month of December and 1.8 percent for the year. Analysts feel better days are coming.

Barry Bryant of Ladenburg, Thalmann & Co., an investment company, said in a report that he expects Kmart's restructuring moves to enhance earnings and valuation. He also said that basics in the discount stores are likely to turn around in the spring season. Prospects for the retail environment, particularly in apparel, are expected to improve this year, the report said.

Among Kmart's strategies, as reported:

  • Selling stakes of 20 to 30 percent in its specialty units -- including Officemax office supply stores, Builders Square home improvement centers, Sports Authority sporting goods megastores and Borders and Waldenbooks bookstores -- through initial public offerings. Borders and Waldenbooks are to be consolidated.

  • Substantially enlarging its store modernization program, with 800 stores relocating, 700 expanding and 670 being refurbished. The company will have closed 150 Kmart stores by 1996 (75 units have already been closed since 1990). The company operates 4,170 domestic outlets and 155 international stores, including 2,430 Kmart discount stores.

  • Selling 91 of its sluggish Pace Membership Warehouse Clubs to Wal-Mart Stores, a deal expected to be closed this month.

  • Selling PayLess Drug Stores for more than $1 billion to the parent of Thrifty Drugs.
Joseph E. Antonini, Kmart chairman and ceo, said the larger-format stores -- the Super Kmart Centers -- are exceeding expectations, and that stores that have been refurbished also are doing well.

The company said earnings, however, are expected to dip "well below" year-ago profits of $1.15 for the fourth quarter and $2.06 in the year that will end Jan. 26.

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