Byline: Catherine M. Curan

NEW YORK--After Kmart Corp. reported its sixth consecutive quarter of declining earnings Monday, Wall Street analysts said they still expected some bottom-line improvement for the year and a pickup in apparel at the chain this fall.
In the quarter ended July 27, Kmart's net earnings dropped 24.8 percent to $94 million, or 20 cents a share, from $125 million, or 27 cents, in 1993. The year-ago results were restated to exclude Pace Club
warehouses and Payless Drug Store businesses, which were both sold.
"Kmart has made good strides," noted Steve Kernkraut, retail analyst at Bear Stearns, "but the competition has made bigger strides. That's the age-old problem with Kmart."
Kernkraut estimates $1.50 a share for the year, against $1.15, noting Kmart should benefit from an overall better climate for apparel selling.
"For a year and a half, they've had poor results," said Janet Mangano, analyst at Burnham Securities. "It's time for a turnaround in the discount business. For the core Kmart business, back-to-school sales are the critical variable," she added, noting that the season should bring improved sales. Meanwhile, Kmart has a board meeting scheduled for today, where a critical decision on the fate of the specialty store operations, including Sports Authority, OfficeMax, Borders and Waldenbooks, and Builder's Square, could be reached. The company declined to comment.
In June, management failed in an effort to spin off the units to raise cash to bolster the discount operation. The company is still working on an alternative strategy.
The attempted spinoff and the continuing losses have analysts divided over the performance of Kmart chairman and chief executive officer Joseph E. Antonini. Some analysts view him as central to a turnaround at the discount operation; others take a more negative outlook.
"I'm always surprised he's still around," said a source from the investment community. "A lot of other companies with such poor performance would have changed captains by now."
However, Mangano at Burnham Securities said, "Antonini has to stay. He's the one who has been responsible for progress Kmart has made since last year, and the company needs him more than ever to oversee any strategic changes in the future."
Linda Morris, retail analyst at PNC Bank, Philadelphia, noted Antonini's problem continues to be the U.S. discount stores: "The competition is doing well, yet Kmart isn't." She said the shareholder concern is that as long as Kmart keeps working on its specialty store spinoff plan, the main piece of the business is being neglected.
The company insists it is not neglecting its core discount business, said Morris, but "whether it is inventory, the look of the stores" or some other factor, Kmart's discount stores are not doing well.
Morris said she expects a pickup in women's apparel sales, fueled by slightly better fall fashion. However, she questions whether Kmart will gain market share, noting that competitors Wal-Mart and Target are doing well.
Morris also estimates $1.50 for the year, against a "very depressed" $1.15 in 1993. But, she observed, "because of easy year-to-year comparisons, the results will look better than they may actually be."
"Performance in the core U.S. Kmart division is below our expectations," Antonini said in a statement. He added that the company is working to improve sales and profitability for the balance of the year.
"We are encouraged with the excellent seasonal apparel sell-through and the much better-balanced stock position in our stores during the second quarter," he said.
A Kmart spokesman said the company entered the quarter with light inventories. He noted a strong sell-through rate of women's and men's seasonal apparel, partly attributable to having less merchandise, resulting in fewer clearances this year. Kmart now has a full assortment of fall and back-to-school merchandise, which was brought in a little early instead of replenishing summer merchandise, he said. Year-to-year apparel comparisons in August are better than June and July, he added.
But the lack of clearance merchandise dented net sales, the spokesman said. Comparable-store sales at Kmart's discount stores in the U.S. declined 1.2 percent. Total Kmart same-store sales, including overseas and specialty units, were almost flat. Sales in the quarter rose 4.6 percent to $8.8 billion from $8.4 billion. Gross margin declined to 24.8 percent of sales from 25.2 percent, reflecting below-plan sales on fixed occupancy costs.
Lower-than-planned sales more than offset cost-control programs, the company said. Selling, general and administrative expenses rose marginally to 23 percent of sales from 22.8 percent.
On the plus side, net interest expense on debt was down 24 percent in the quarter, reflecting reduced borrowings as a result of lower average inventory levels and the early retirement of high cost debt.
In the half, net earnings fell 38.8 percent to $112 million, or 24 cents, from $183 million, or 39 cents. Sales rose 5.4 percent to $16.6 billion from $15.8 billion.
Kmart shares closed Monday at 17 1/8, up 1/4, on the New York Stock Exchange.
--Fairchild News Service

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