Article May 24, 1995

<CR><RD><BR><CS:BOLD>KMART'S CEO SEARCH DRAGS ON; CHAIRMAN WANTS OUTSIDE TALENT<BR><BR>Byline: </CS>Mark Tosh<BR><BR>DEARBORN, Mich. -- Kmart Corp.'s search for a new ceo appears to be running into difficulties and may now be focused on candidates...


Byline: Mark Tosh

DEARBORN, Mich. — Kmart Corp.’s search for a new ceo appears to be running into difficulties and may now be focused on candidates from outside the company.
After the discounter’s annual meeting here Tuesday, Donald S. Perkins, Kmart chairman, conceded he missed his target date for naming a new ceo in time for the meeting.
When asked if he favored an outsider, Perkins responded, “The quick answer to your question is yes.” He also told reporters, “You would expect that when four of our five operating people are outsiders, that we respect the need for bringing talent into Kmart from the outside.” In the past nine months, Kmart has added a new rung of executive vice presidents, all recruited from other companies. They include Ronald J. Floto, president of Super Kmart Centers; Charles Chinni, merchandising; Marvin P. Rich, strategic planning and finance, and Kenneth W. Watson, marketing and product development.
“A lot of what needs to be done at Kmart is to get a cheerleader or team leader, someone who can get people feeling differently about themselves,” said Perkins. He added that he is looking for someone who also has experience in turnarounds. “No one wants to complete the search any more than I do. My target was today; I didn’t make it.”
Responding to a Wall Street Journal report last Wednesday that Kmart had offered the ceo slot to Richard G. Cline, chairman of Nicor Inc., Perkins said, “Only the Wall Street Journal offered the job to Mr. Cline.” Cline and Perkins both previously worked at Jewel Cos., a Chicago supermarket chain. Cline was elected a member of Kmart’s board Tuesday.
When asked if it was still possible an insider could get the job, Perkins said, “Anything is possible.”
Leading inside candidates are reportedly Floto and Rich.
Perkins, who succeeded Joseph E. Antonini as Kmart’s chairman in January, said he wants to name a new ceo “at the earliest opportunity,” but declined to provide a timetable. He also acknowledged that a number of executives approached by Kmart have said they “are not interested.” Antonini resigned as president and ceo of Kmart on March 21.
Earlier, Perkins addressed about 1,500 shareholders at the annual meeting, held at the Hyatt Regency Dearborn, which lasted two hours. Perkins told the crowd that management “better understands” Kmart’s problems today than a year ago.
“Although there are beginning to be some positive signs, we know there is still a lot of hard work ahead before Kmart will report sustainable and improving profitability,” he said.
As reported, Kmart had a loss of $28 million in the first quarter, despite an 8 percent increase in sales, its best sales results in years.
Perkins patiently listened to a total of 36 questions and comments from shareholders and even managed a joke in his first stint at conducting the annual meeting. Asked by a shareholder to list the board’s criteria for a new ceo, Perkins said deadpan, “Well, it would help if he could walk on water.”
Wednesday’s meeting was much calmer than last year’s, when shareholders loudly opposed the company’s specialty division spinoff proposal and defeated it.
On Tuesday, the board was rebuffed in its attempt to block a shareholder proposal that all directors stand for election annually. Currently, some Kmart directors are elected to three-year terms.
The proposal, submitted by shareholder Gerald J. Switzer of Birmingham, Mich., carried, with 189 million votes in favor and 123 million against. Switzer, who owns almost 13,000 shares, said the current system “makes it difficult for stockholders to make meaningful changes to a board of directors and subsequently a management team, as a majority of the directors is never up for election at any one time.”
Kmart’s board claimed the staggered term system was better suited to fight off an unsolicited takeover attempt.
Some shareholders said they were offended by Antonini’s severance, which entitles him to his 1994 annual salary of $923,000 for two more years and a pension of $527,000 annually.
A representative of Newbold’s Asset Management, one of Kmart’s largest shareholders, asked Perkins to set public goals for sales per square foot, return on equity and profit margin.
In response, Perkins said, “We have set some goals for this year for traffic counts, in-stock percentage and sales per transaction.” He added that the new ceo should take part in any decision to establish earnings targets.
Perkins also said Super Kmart Centers, the company’s combined general merchandise and grocery store, are not hurting Kmart’s traditional discount stores when they open in the same market. They are producing sales per square foot “that make them highly attractive,” he told shareholders, but he did not specify a figure. “Super Kmarts are bringing in customers we didn’t get before,” he said.
About 22 Super Kmart Centers and 43 discount stores are expected to open in 1995. The discounter has closed about 90 stores this year and plans to close about 120 more.
Perkins said Kmart’s most serious problems are being out of stock, particularly on advertised items, and customer service. Kmart units are now being monitored by “mystery shoppers” who visit each store 16 times a year to rate service, ambience and merchandise availability. Store management compensation is linked to the mystery shopper’s rating.
To remedy the inventory problem, Kmart is “fixing” its systems to provide better information for stores, warehouses and buying offices, Perkins said.
The discounter’s goal is to reduce out-of-stocks by 18 percent this year, he added.
He also said Kmart has made some strides and cited the 6.5 percent same-store sales increase at Kmart discount stores in the first quarter and the $475 million reduction in operating costs.
“But gross margins continue to be under pressure, and the net result is disappointing earnings,” Perkins added. “It also is frustrating that the energy and hard work of so many wonderful Kmart people, whom I have enjoyed getting to know, have not yet paid off.”