AS PRESSURE MOUNTS, ANTONINI STEPS ASIDE AS CHIEF OF KMART

Byline: By David Moin and Mark Tosh With contributions from Thomas J. Ryan

NEW YORK — With pressure mounting from all sides, Joseph E. Antonini stepped down Tuesday as Kmart Corp.’s president and chief executive officer, ending a 31-year career on a down note but opening the door to a fresh start for the depressed discounter.
Antonini, 53, clung to the reins of the $34 billion chain for months, amid rising shareholder dissatis-faction, negative publicity and intense competition from Wal-Mart and Target.
He had been under fire for Kmart’s eight consecutive quarters of declining earnings and dwindling market share. There were also concerns about his leadership abilities and some of his strategic decisions.
Last January, Antonini let go of the title of chairman, raising speculation that his days at Kmart were numbered.
On Tuesday, Antonini said in a statement, “Unfortunately, various external factors have made it increasingly difficult for our organization to focus on the tasks at hand. Therefore, in agreement with the board, I am relinquishing my job as president and ceo.”
He held the ceo post since 1987.
He could not be reached for further comment. While the company said the details of Antonini’s severance package have not been determined, some sources speculated he will receive a payment in the neighborhood of $10 million to $15 million.
Kmart named Anthony N. Palizzi, 52, executive vice president and general counsel, as interim president. Ronald J. Floto, 52, executive vice president and president of Super Kmart Centers, was named interim chairman of the management executive committee. Donald Perkins continues as chairman.
Kmart also said a search for Antonini’s successor has begun, though sources noted that Kmart had previously interviewed several high-profile retailers for a chief operating officer slot, which would have reported to Antonini and possibly succeeded him.
Though some ceo candidates may have been interviewed, filling the top job at Kmart will be difficult. The job requires someone who can handle a giant chain and grapple with serious merchandising problems and strategic issues. Kmart has repeatedly suffered from weak stock positions, while many of its stores are still in poor shape, particularly smaller units in the 60,000-square-foot range.
Sources said Kmart is likely to consider Michael Bozic, ceo of Hills Department Stores and a former Sears president. “They tried to make a deal with Bozic before, but no one would take a job at Kmart while Antonini was there,” said a source. “He’s done a good job turning around Hills. He’s a good generalist.”
However, Bozic is linked with Sears’ poor performance through much of the Eighties and early Nineties and is criticized for some strategic decisions, such as everyday low pricing, which flopped at Sears but seems to be working at Hills.
There was also speculation that Bill Fields, executive vice president of Wal-Mart and president and ceo of Wal-Mart Stores division, could be a candidate, though a Wal-Mart spokeswoman said, “We have had no indication that he is leaving.”
Other names being mentioned: Warren Feldberg, ceo of Marshalls; Ken Macke, former Dayton Hudson Corp. chairman, and Marc Balmuth, president of Caldor. These executives could not be reached.
Some observers felt Kmart would also check out candidates in the department store sector, following a recent pattern at various discounters. Roger Farah, former Macy president, is now chairman and ceo of Woolworth. Mark Cohen, former Lazarus ceo, is ceo of Bradlees.
A Kmart spokeswoman said the company will move swiftly to find a new ceo, but it is unlikely an executive will be in place in time for the May 23 annual meeting.
A new ceo could cause upheavals in the executive team that Antonini built over the last eight months, as he tried to calm investors and shore up management. He recruited top executives from outside the discount store industry, including Kenneth W. Watson, a former executive of Little Switzerland shops, who is executive vice president of marketing and product development; Marvin P. Rich, from Wellpoint Health Networks, who is executive vice president of strategic planning, finance and administration, and Charles Chinni, formerly head of Macy’s East home merchandising, now Kmart’s top merchant.
The lone Kmart veteran on the team is Donald W. Keeble, executive vice president of operations.
None are viewed as potential successors to Antonini.
Robert Luehrs, president of Chic/HIS, said that in meetings Tuesday with Kmart merchants, the sense was that while Antonini had been enduring daily pressures from Wall Street and Kmart’s board, he was moving as fast as possible to turn the company around.
“Everyone knew he was on the block,” said Luehrs. “But it still came as a shock when he resigned. I think middle management is disappointed and very sad. He set the company in the right direction, but he was under tremendous pressure. He didn’t have enough time, and I think anyone who replaces him isn’t going to do any better.
Wall Street applauded the decision to find a new ceo, driving shares of Kmart up 1 point to 13 Tuesday on the New York Stock Exchange, with 5.9 million shares traded compared with the average daily turnover of 1.7 million.
Jeffrey Edelman, an analyst at C.J. Lawrence, said, “I just think there was so much going on in terms of pressure and they just said enough’s enough.”
Most expect the new ceo to come from the outside, noting that a major problem for Antonini in his turnaround effort was that he was an insider.
“I think being a Kmart insider, he may not have been willing to make some of the more difficult personnel decisions,” said Bryant. “That’s understandable. It’s hard to go around firing people you grew up in the company with.”
Walter Loeb, at Loeb Associates, said Antonini’s leadership had become “much more ineffective recently,” partly due to nonstop scrutiny by the media and shareholders.
“The constant attention hurt his perception both inside the company and outside, and everybody sort of expected the shoe to drop. It made his leadership more difficult,” Loeb said.
However, analysts for the most part pointed out that Antonini embraced a daunting task in turning Kmart around.
“I think he inherited a very difficult situation and he accomplished a lot,” said Bryant. “He helped to build a variety of specialty store businesses, remodeled a huge number of stores, and he inherited a company that was already well behind Wal-Mart in the curve.”
Loeb said Antonini “had done a lot of good things for the company through the years” but was constrained by Kmart’s heavy debt burden and “the lack of momentum at the discount division and the lack of support to get it going.”
In 1994, Kmart’s net earnings after the special items were $296 million against a loss of $974 million in 1993. The year-ago loss included a $1.35 billion charge for a massive store restructuring program and losses of $521,000 on the disposal of discontinued operations. Sales slid 7.3 percent to $34 billion from $36.7 billion and same-store sales inched up 2 percent.
Analysts expect the company to earn 9 cents in the first quarter against a depressed 4 cents a year earlier and look for margins to start improving in the second half. Margins eroded to 23.6 percent of sales last year from 25 percent in 1993 as consumers focused on low-margin merchandise and promotional items.
For fiscal 1995, analysts expect Kmart to earn about $1.15 to $1.30 against the severely depressed 63 cents in 1994.
Analysts said it’s too early to judge new management’s impact on the company and suspect more store closings and cost-cutting programs will be initiated. Analysts also said Kmart’s rich annual dividend of 96 cents a share will be cut or eliminated if results continue to deteriorate.
“If there’s any turnaround it will be a couple of years before we know about it,” said Barry Bryant, analyst at Ladenburg, Thalmann & Co.
The slowdown in women’s apparel sales hasn’t helped Kmart.
In the year ended Jan. 25, Kmart said operating earnings for its core discount store business fell 47.9 percent to $528 million. Discount store sales rose 5.4 percent to $29.6 billion, but same-store sales increased only 1.5 percent.
At the same time, Kmart continued to lose market share to its major rivals, Wal-Mart and Target, in 1994.
According to Tactical Retail Solutions, Wal-Mart raised its share of all sales by discount stores to an estimated 41.6 percent in 1994 from 20.1 percent in 1987, while Target increased its share to an estimated 10 percent from 8.3 percent over the same period. At the same time, Kmart’s market share fell from an estimated 34.5 percent in 1987 to 22.7 percent in 1994, according to Tactical.
In women’s apparel between 1989 and 1994, Kmart’s market share fell to 23.9 percent from 26.9 percent, according to Tactical. Wal-Mart overtook Kmart during that five-year period, raising its women’s apparel market share from 17.5 percent to 28.1 percent. Target’s share of the women’s apparel market increased to 9.7 percent from 8.8 percent over the same period.
“It was impossible for Joe to recognize when people he had hand-selected for positions failed,” a former employee said. “He could not act.”
The executive also said Kmart is hampered by an abundance of unproductive merchandise despite ongoing attempts to prune the selection, and its assortment has failed to keep up with the needs of discount shoppers.
“Buyers would never edit the assortment,” the former executive said. “Assortment editing has probably shown up in every merchandising strategic statement since 1987, and I know through the end of 1994 there were more basic items in the assortment than there were in 1987.”
Inventory management was a major problem for Kmart last year, according to one Wall Street analyst. He said Kmart sought to trim about 3 percent from its entire inventory early last year, and instead ended up cutting inventory by about 12 percent and leaving many stores out of stock on certain items.
“They were basically out of stock for the first half of the year,” the analyst said.
In the statement announcing Antonini’s resignation, Perkins said the board was “driven by only one perspective, and that is taking action to improve Kmart’s operating performance.”
He added, “It is critical at this time, however, that we minimize distractions and focus on moving forward. Even as we search for a new ceo, the team in place will focus on adding new talent in key departments; fixing our systems; ensuring that our stores are stocked correctly; building store traffic and shopping frequency, and achieving further cost reductions.”
Reportedly, there were also concerns about Antonini’s leadership. “He’s a control-oriented manager, not a leader who inspires. He realized too late the tough shape his core business was in and embarked on a diversification program, which was very interesting” by rolling out Sports Authority, Waldenbooks and other specialty units, the source said. “To his credit, he recognized that category killers were becoming more and more important. But those properties had no relevance to the core business; they became a distraction.” “Kmart needs someone who has an understanding of the discount and off-price environment and at the same time has strategic vision,” said Carl Carro, managing director of Executive Search Consultants. “The company needs an individual bold enough to decide where the company needs to be in three years, but no one within the ranks has the confidence, stature and the vision to move the organizaiton in the right direction. This company needs major surgery.”
The controversy over Antonini reportedly came to a head Monday afternoon, when he and Donald Perkins met, and Antonini decided to resign. The two then informed the other board members in a telephone conference call of his decision.
Some observers speculated Tuesday that Kmart’s board began pushing harder for Antonini’s resignation to head off a replay of last year’s raucous annual meeting. At the meeting, Antonini was rebuffed by large institutional investors in his plan to sell shares tied to the performance of Kmart’s specialty chains. He was forced to offer a revised plan two weeks later.
On Tuesday, some shareholders said they were relieved by Antonini’s resignation. A spokesman for the California Public Employees Retirement System said the pension fund believes the move “was long overdue.” Kmart was one of nine U.S. companies CALPERS labeled as “underperforming” earlier this year.
“We view the events as positive for the prospects of Kmart, and we hope the board will take a fresh approach when it convenes its search for a new ceo,” he said. CALPERS holds about 2.8 million shares of Kmart, or less than 1 percent of the discounter.
One Wall Street analyst speculated that a New York Times article last week, which characterized Kmart’s 10-member board as divided over whether to seek a new ceo, intensified the pressure on Antonini to resign. Following the article, Kmart issued a statement that was hardly a ringing endorsement of Antonini.
“The board is pleased with the progress being made and the talent of the new team that has been assembled by Joe Antonini,” the statement said. “The board is fully aware of the concerns which have been expressed about Kmart’s ceo. They continue to review the performance of Kmart’s executive team.”
However, there was also intense local coverage in the Troy market, and some sources believed Antonini was concerned about the impact of negative publicity on his family.
Antonini began his retail career with Kresge as a management trainee in 1964. He became district manager of the Eastern region in 1973 and director of eastern region store operations in 1982.
He was named president and chief operating officer of Kmart Corp. in 1986 and added the chairman and ceo titles in 1987.
Among his major accomplishments was the launch of a $3.5 billion store renewal program, which some believe came too late; development of the Super Kmart Center format; expansion to Mexico, Singapore and the Czeck Republic, and during his tenure as president of Kmart’s apparel division, he launched the private label Jaclyn Smith collection.
As part of the refurbishing effort, Kmart has remodeled or expanded about 80 percent of the 2,350 U.S. Kmart stores.
The success of Jaclyn Smith’s apparel business at Kmart, which has an estimated annual volume of $150 million, prompted Wal-Mart to introduce a celebrity line of its own earlier this year with Kathie Lee Gifford as the spokeswoman.
Antonini’s severage package is on the agenda for the board’s meeting next month, the spokeswoman said.
“He did a very good job for many, many years, Kmart still has a strong franchise, but it is time for a change. The last couple of years have been tough,” said Hal Reiter, president of Herbert Mines Associates.