MORE WOES AT KMART: HEAVY MARKDOWNS BATTER BOTTOM LINE
Byline: Thomas J. Ryan
NEW YORK — Price cutting slashed deep into Kmart Corp.’s fourth-quarter operating profits, leaving the struggling discounter and its new executive team with a turnaround task that’s becoming more daunting as time passes. On Monday, Kmart said fourth-quarter operating profits at its core discount store operation collapsed 85.9 percent to $43 million from $304 million. Operating profits plummeted 47.9 percent to $528 million from $1.01 billion for the year.
Net earnings from retail operations totaled 27 cents per share, compared with 53 cents in the year-ago quarter. This marked the eighth consecutive quarter Kmart’s earnings have declined.
Battered by heavy markdowns, the discounter’s gross margins also fell in the quarter, dropping to 20.8 percent of sales from 23.4 percent. Discount store sales rose 7.9 percent to $9.2 billion, with same-store sales up 3.6 percent in the quarter.
“There’s certainly no evidence that anything is changing,” Ed Weller, analyst at Robertson Stephens, said.
Kmart said the mix of apparel and hard lines was “more heavily weighted” toward promotional and lower-margined merchandise, and below-plan sales made it harder to absorb fixed costs.
“Due to the extremely price-competitive retail environment, sales of seasonal apparel merchandise lines, especially outerwear, were weak, resulting in heavier-than-planned promotional markdowns,” Kmart said in a statement.
In active trading Monday, shares of Kmart fell 7/8 to 12 7/8 on the New York Stock Exchange.
“We are disappointed with 1994 earnings,” Joseph Antonini, Kmart’s chief executive officer and president, said in a statement.
“We enter 1995 with a strong commitment to reduce costs and improve our financial performance. Our U.S. Kmart executive team is accelerating the process of identifying and implementing initiatives to strengthen our business,” he said.
As noted, Kmart this month formed a five-member “platform team” to oversee its turnaround efforts. The team reports to Antonini, who under intense shareholder pressure, relinquished the chairman title in January to Donald Perkins, an outside director.
Charles Chinni, who headed home merchandising at Macy’s East, was named Kmart’s top merchant this month and is the newest addition to the team. He began work at the discounter Monday.
Other members of the team include Marvin P. Rich, executive vice president of strategic planning, finance and administration; Kenneth W. Watson, executive vice president of marketing and product development; Ronald J. Floto, corporate executive vice president and president of Super Kmart Centers, and Donald W. Keeble, executive vice president, operations.
All the team members, except Keeble, are new to the firm.
Reportedly, Kmart’s board put out a search for a successor to Antonini, and interviewed some top retail executives, including Roger Farah, who is now Woolworth’s ceo. Kmart officials last week would not confirm that a search was ever under way. Industry observers speculated that the creation of the executive management team signified that Kmart’s board had decided to retain Antonini as ceo and president for the foreseeable future, at least through 1995. Antonini has been under fire for the discounter’s lackluster performance over the past two years. Antonini said Monday the new executive team already is addressing “merchandising, operational execution and financial policies” and the company should be able to provide details on its progress by mid-spring.
One of its chief concerns will be the company’s shrinking market share. In addition to Wal-Mart Stores’ aggressive expansion, Kmart has felt increasing pressure from Target, a division of Dayton Hudson, and regional discounters.
Kmart’s share of the discount store sales has eroded from 34.5 percent in 1987 to 22.7 percent in 1994. Over the same time period, Wal-Mart has doubled its market share from 20.1 percent to 41.6 percent, according to Isaac Lagnado, publisher of Tactical Retail Monitor.