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Kmart: Getting Back on Track

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.<BR><BR>That's the view of leading retail analysts...

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.

Sales are estimated at $41.6 billion for fiscal 1993.

Analysts said the company is in a position now to correct some of its problems, including store size and merchandise.

“Kmart has been in trouble for years, but now it is on the rebound,” said Jeff Edelman, analyst with C.J. Lawrence. “They started off with an obsolete plant — small, inefficient stores. But these moves will definitely give them enough cash to execute the larger stores and address the right issues. Evidenced by the poor performance of the apparel, merchandising also needs to be rethought.”

R. Fulton Macdonald, president of International Business Development, a consulting firm, said this is a case of “reality catching up with Kmart.”

He said, “People buy products, not fixtures. Kmart took its eye off the ball by focusing on multi-billion-dollar renovations. They need to focus on product mix and price points, like Wal-Mart. Then, after those are in order, gradually they can do the refurbishing.”

Macdonald said retailers always get people to come into a new or refurbished store, but it is the merchandise and the perception of low prices that keep them coming back.

“No one, including the consumer, expects Kmart to be a fashion leader,” he said. “There is a nice, fresh assortment of apparel in Kmart, but there is no statement. “Therefore,” he continued, “Kmart must lower its cost structure to the point where the consumer feels it has the low price, but the company still makes a profit. Kmart can out-merchandise Wal-Mart any day with apparel, but first it has to get the people into the stores. The way to do that is lowering the prices.”

“Kmart has been losing market share,” said Karen J. Sack, retail analyst with Standard & Poor’s. “Management has not been very focused over there. They seem to be doing the right things now, but it’s too early to tell whether it will work.”

Sack added that Kmart wants to focus on the bigger stores, which it says are more profitable, and she agreed that selling pieces of the business will raise some operating cash to enable the retailer to accelerate the store-remodeling program.

“Kmart has been operating with a weaker hand with its existing merchandise format,” said Thomas Tashjian, analyst with First Manhattan Co. “The company also has to bring its cost structure down. This strategy will certainly help them make their profits and pricing more competitive.”

He added that while chunks of the divisions will be sold, he did not anticipate Kmart fully divesting the specialty businesses, because it has invested too much money in them.