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NEW YORK — Is Kmart getting a makeover?

This story first appeared in the June 24, 2002 issue of WWD.  Subscribe Today.

The Troy, Mich.-based retailer, which filed for bankruptcy in January, is quietly working with Peter Arnell, chairman and chief creative officer of the Arnell Group, to develop “the store of the future,” WWD has learned.

Known for creating high-end store concepts for DKNY, Donna Karan and Iceberg, as well as in-store boutiques for Emanuel, Arnell has been hired to rethink the entire Kmart shopping experience, from fixturing, flooring and lighting to graphics, dressing rooms and shopping bags, said sources. Neither Arnell nor Kmart officials could be reached for comment.

Arnell, who began his career in architecture, currently does advertising and strategic development work for such clients as Reebok, PepsiCo, Aquafina and Daimler Chrysler.

Sources indicated that Kmart expects to roll out a prototype store within the year. They pointed out that the retailer is not looking to abandon its customer base, nor move into a different retail strata, but to make the shopping experience more enjoyable and memorable.

As part of the upgrading of the Kmart experience, the retailer launched a new brand positioning campaign in February, including commercials directed by Spike Lee, as reported. The commercials, featuring the tag line “Kmart. The Stuff of Life,” focus on its brands, convenience and value. In April, Kmart announced its second link to Hollywood by retaining Creative Artists Agency, the talent and literary firm that also represents Coca-Cola, Motorola and Boeing, to help it develop entertainment-related marketing strategies and brand-building programs. Kmart hopes to capitalize on projects in film, TV, music and video games as they relate to its existing marketing efforts and exclusive core brands.

Kmart, which installed James Adamson as chief executive officer in March, posted a loss for its full fiscal year ended Jan. 31, 2002, of $2.42 billion, or $4.89 a share. As reported, Kmart’s sales last year dropped 2.4 percent to $36.15 billion from $37.03 billion, ranking them fourth in U.S. revenues among non-food retailers behind Wal-Mart, Sears and Target, but ahead of J.C. Penney Co.

Exclusive of charges totaling the better part of $1 billion, the firm posted losses for the first quarter ended May 1 of $408 million, or 81 cents a share. This compared with the year-ago deficit of $218 million, or 45 cents, after charges. Sales for the quarter sank $8.4 billion to $7.64 billion, or 8.8 percent, on a comp basis.

And Kmart continued to struggle on Friday, revealing steep losses in May and coming under pressure to stop severance payments to former managers and for hiring an outside law firm to represent its directors. In an 8K filing with the Securities and Exchange Commission, the retailer said net losses for the month ended May 29 mounted to $96 million. Losses before interest, income taxes and a $17 million reorganization expense totaled $68 million.

Sales for the four weeks totaled $2.59 billion. Comparable-store sales, excluding 283 recently closed doors, dropped 11.4 percent.

The financial institutions’ committee overseeing Kmart’s bankruptcy wants the firm to halt $4 million in annual severance payments to former managers, according to published reports. Meanwhile, creditors objected Friday to Kmart’s previous motion in federal bankruptcy court in Chicago asking for permission to hire Dewey Ballantine LLP to represent its board.

It’s unclear whether the severance payments, made under Kmart’s supplemental executive retirement plan and voluntary early retirement plan, are slated for former top executives or lower-level managers. A Kmart spokesman said that while the firm “respects the financial institution committee’s right to file a motion with the bankruptcy court, we are disappointed that they have taken this position.”

He said the payments in question were part of Kmart’s first day order where it “sought to immediately protect the compensation and benefits of our associates and retirees.”

Declining to provide specifics regarding the committee’s action, he noted: “Kmart will address this matter in the normal course of the bankruptcy proceedings.”””