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Coming Around Again: Kmart’s New Ideas Bear a Familiar Ring

NEW YORK — The new Kmart has taken a step back in time.<br><br>Executives at the broken discount chain say it is on the mend with an improved focus. However, many of Kmart’s strategic initiatives suggest it is revisiting Floyd Hall’s...

NEW YORK — The new Kmart has taken a step back in time.

Executives at the broken discount chain say it is on the mend with an improved focus. However, many of Kmart’s strategic initiatives suggest it is revisiting Floyd Hall’s mid-Nineties vision for the discounter. Along the way, there is even a hint of Chuck Conaway, who resigned as Kmart’s chief executive officer in March.

The similarities with Hall may not be a coincidence. Hall was named chairman, president and ceo in 1995, the successor to Joseph Antonini, who was president and ceo. One early change Hall made was to recruit new directors to Kmart’s board, including James Adamson. Adamson, the current chairman and ceo, remained on the board during Conaway’s tour of duty from June 2000 until he was pushed aside less than two months after Kmart’s Jan. 22 Chapter 11 filing.

Kmart executives, as reported, have been adamant about the discounter’s exit from bankruptcy proceedings sometime next year. Just exactly when remains unclear — first the target date was July, then March and now July again.

While some Wall Street analysts have said they wouldn’t be surprised by a liquidation, retail consultant Walter Loeb believes there’s a good reason for Kmart to exit bankruptcy next year. “I think Adamson is motivated to get the company out of bankruptcy in order to reap the benefits of his bonus package,” Loeb said.

However, Loeb isn’t so sure how Kmart will manage its exit process. “Frankly, I don’t see how Kmart will come out of bankruptcy without closing 400 stores. They have to reduce the costs of the total operation, as well as close warehouse and distribution facilities. If they don’t, the company will be burdened by heavy operating costs, which may again force it back into Chapter 11,” he observed.

Assuming Kmart exits Chapter 11, the question remains whether the long-troubled chain can avoid financial problems for good. On Monday, when it announced September same-store sales results, rumblings in the marketplace had Kmart searching for a partner in its bid to emerge from bankruptcy. Carrefour has been mentioned before as a potential partner, and the rumors have started again. It’s not surprising that, even after its stock rose 13.2 percent on Friday, its market capitalization rested at a meager $301.5 million.

Kmart spokesman Jack Ferry said the possibility of a partner such as Carrefour “is rumor and speculation and we don’t comment on either.”

Even Martha Stewart, long considered the chain’s premium brand, has emerged as an additional albatross as she faces insider-trading issues. Stewart’s products account for $1.5 billion of Kmart’s annual $36.15 billion in revenue. A new holiday line is set to be unveiled shortly at Kmart. According to a study by Brand Keys, a brand customer loyalty planning consultant, Stewart’s legal situation is “adversely affecting” Kmart’s already troubled reputation.

Robert Passikoff, president of Brand Keys, said: “Our study shows that people, to a certain degree, have lost faith in the Martha Stewart brand. It’s a question of trust and associating with someone people don’t trust doesn’t do anybody any good. Kmart’s bankruptcy didn’t hurt the Martha Stewart brand, but her brand has been hurting Kmart lately. With corporate governance at the forefront, maintaining ethical business standards has a positive contribution to customer loyalty.”

Adamson, in an interview earlier this month, denied that Stewart’s situation had caused any adverse impact on Kmart. “You have to separate the company and the brand from Stewart the person. The Martha Stewart brand is a strong partner of ours. The slippage is not there. Whoever is telling you that doesn’t have all the facts,” he said.

Meanwhile, Kmart is reviewing its lineup of suppliers, including its relationship with groceries distributor Fleming Cos. Inc. “We are analyzing our contract with Fleming to find out what’s best for us,” Adamson said. He noted that while food and consumables play a major role at Kmart, the retail chain was specifically reviewing the role that frozen food and meats will play in the Kmart that emerges from bankruptcy. Those items are currently sold at its Super K stores.

What remains unclear is how many stores Kmart will likely close in the coming year. The number, when finally unveiled, will have an impact on Fleming, sales and licensing royalties owed to proprietary brands such as Martha Stewart and Joe Boxer, and the real estate industry.

As reported, rumblings from the Sunshine State suggest Kmart is considering an exit from the South Florida region. Julian Day, president and chief operating officer, told WWD recently that closure decisions have not been made yet, even though there may be people within Kmart who might believe the area is targeted for closure.

“Kmart likely will end up closing some stores, only because having been in retail for a considerable amount of time, you always end up with some stores you wish you didn’t have,” Day said. His immediate focus is the creation of a blueprint for the rest of the store chain based on the results of the Chicago market test.

Meanwhile, as it pushes to turn the red ink on its balance sheet black, the updated look in Kmart’s future incorporates a change from its famed red “K” logo to lime green. In March, the company hyped its White Lake Township store just outside of Detroit as a prototype for future Kmart stores. The so-called test was unveiled earlier this month.

Al Koch, chief financial officer, said the updated look has a central focal point: keeping loyal customers and attracting new ones based on a three-pronged attack on price, product and service. The bulk of the store’s physical changes are: less inventory, wider aisles, brighter overhead lights, larger apparel departments and an emphasis on soft home goods highlighting Martha Stewart Everyday products.

But it isn’t the first time Kmart has tested brighter lights and wider aisles. Its Big K format, a design unveiled in 1997 during Hall’s tenure, featured many of the latest so-called changes at Kmart. A big focus then, as now, was its proprietary Martha Stewart products. Sales rose from $31.44 billion in 1996, the first full year of Hall’s tenure, to $37.03 billion in 2000, his final year at the store’s helm while earnings before interest, taxes, depreciation and amortization remained virtually unchanged, rising to $1.45 billion from $1.44 billion, during that span.

In Kmart’s 2000 annual report, Conaway, in his letter to shareholders, wrote: “Our problems were crystal clear. Execution throughout our supply chain — especially in our stores — was unacceptable, we had minimal operating metrics to measure our true performance, and our culture fostered little cooperation or competitive confidence.”

He told WWD in November 2000 that the company’s “most critical impact area is to fix in-stock positions.” Conaway added then that Kmart was planning to tailor the merchandise in its stores more as a local merchant does, as well as address Hispanic and African-American populations.

What became of those initiatives is somewhat unclear. However, this year Adamson’s team signed singing sensation Thalia for a line of apparel and accessories targeting the Hispanic woman. The team also embarked on a bold new “test,” letting managers at select stores in the Chicago area determine how much consumables inventory should be ordered for each store. As an additional test in stores in Detroit and Chicago, there’s now an in-stock guarantee. When an item is out-of-stock, the store managers hand out rain checks and give price breaks on comparable items.

At least one credit analyst isn’t too enthused about the guarantee. “I like the concept, but knowing Kmart’s history with its in-stock issues, the chain would be in big trouble if it had to do that all the time. Substitutions plus rain checks would definitely hurt their margins.”

Meanwhile, many observers acknowledge that Kmart’s problems reach as far back as the days of Antonini, Hall’s predecessor, with logistics issues a recurring theme. According to Loeb, “Antonini developed new store formats, focusing on diversification such as Office Max, Builder’s Square and Sports Authority. However, his fault was that he did not mind the core business and failed to follow through on logistics. He also didn’t understand the competition from Wal-Mart and Target.

“Hall faced the same issue over logistics. Kmart was always out of stock. In some ways, the best period for Kmart was under Hall, who certainly got them out from the spectre of bankruptcy in 1996.”

According to Cynthia Cohen, president of strategy consulting firm Strategic Mindshare: “I don’t think Kmart has evolved. Kmart took a left turn off the road to success. The company actually did some things right. During Antonini’s reign, the discounter was ahead of Wal-Mart when it put food in their Super K’s. However, he wasn’t able to evolve Kmart into a meaningful concept to its target market: moms with kids. Kmart even now still hasn’t invented a compelling enough concept for moms with kids.”

The introduction of Martha Stewart was a masterful move, she continued, “but it wasn’t enough in part because Antonini didn’t recognize the power of Target. Then Wal-Mart began moving into food and Kmart found itself in a squeeze play between the real low price guy, Wal-Mart, and the cool innovator, Target.”

Jeffrey Hornstein, managing director at the investment bank of Peter J. Solomon, said that, while Target is price-competitive, but with style, and Kohl’s competes admirably and efficiently in soft goods, “Wal-Mart is so successful at competing on one basis: price. They are almost maniacal in terms of having store managers shop the competition weekly to make sure they always have the lowest price. It is the one-and-only metric that the managers are measured on.

“The overall retail environment near term is probably the most difficult for retailers that we’ve seen in a long time,” he continued. “Kmart is strapped for cash, and it doesn’t have a lot of money to spend to convert stores into its new prototype. The lack of financial flexibility [creates] a difficult environment when you have other giants competing for market share.”

He concluded: “We, as a firm, don’t see a whole lot of hope for the viability of Kmart.”