RETAIL ANALYST EXPLAINS WHY HE NOW BELIEVES IN KMART

Byline: Sidney Rutberg

NEW YORK — Kmart Inc., which has been struggling to return to profitable growth, may have turned the corner.
At least that’s the view of Jeffrey B. Edelman, retail analyst for C.J. Lawrence, who last week issued a “buy” recommendation on the company’s stock, currently near historic lows.
Edelman cited the company’s recent addition of outside management, and he expects new merchandising people to come on board soon.
“In the past,” Edelman said in an interview, “Kmart has operated on the KISS principle (Keep It Simple, Stupid). It tended to do things in the same way, but just try to do it a little better. Now I think it has begun to move forward.”
He noted the board has recruited outside professional management to get away from the Kmart way of doing things. The company is addressing the problems of expense reduction, insufficient stock levels and weak customer service. He noted that 19 percent of Kmart shoppers walk out without buying anything, often because the stores are out of stock. “This is about twice the ratio of Wal-Mart,” Edelman said.
Its spinoff of specialty retail operations, such as Sports Authority, has provided the company with needed cash. The expected IPO of Borders Group and proceeds from monetizing its Thrifty PayLess Drug Holdings position could bring in another $700 million in cash.
In his report recommending purchase of Kmart stock, which closed Friday at 13 3/8 on the New York Stock Exchange, Edelman said that Kmart has been disappointing over the past 12 months as earnings estimates were reduced, but it “could be at a turning point.”
He noted corporate restructuring has gone along as anticipated, “but discount store execution left a lot to be desired.”
He added that Kmart’s move to the larger store format was the right decision, “but it was executed poorly,” noting that he would expect “further management additions from the outside to improve execution.” Earnings estimates for the fourth quarter have been shaved, he said, because he expects lower margins. However, “the company will enter the new year clean.”
Edelman’s latest estimate for the fourth quarter is 43 cents a share, against 53 cents earned a year earlier. For the full year, his estimate is 75 cents against $1.15. But for 1995, he sees gradual improvement in earnings, quarter by quarter, with 75 cents estimated for the fourth quarter and $1.35 for the year.
He further points out that at the current annual dividend rate of 96 cents a share, the stock yields nearly 7 percent. However, he noted that a dividend meeting is scheduled for Jan. 24, and “the stock has been acting as though there will be a dividend cut.” He added, however, that he was not making any predictions on the dividend.
— Fairchild News Service

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