Byline: Evan Clark

NEW YORK — Kmart Corp.’s almost 40 percent drop in fourth-quarter profits topped Wall Street’s expectations by a penny, but told the tale of a discounter still facing a long road to recovery.
Net income fell to $249 million, or 48 cents a diluted share, 39.6 percent below year-ago income of $412 million, or 77 cents. The Street was looking for Kmart to post earnings of 47 cents a share.
Sales for the period ended Jan. 31 rose 4.8 percent, to $11.64 billion compared to $11.11 billion a year ago. Comparable-store sales for the quarter were up 2.1 percent.
Investors took the news in stride and traded the company’s stock down 6 cents to close at $9.09 on the New York Stock Exchange Tuesday.
In August, Kmart laid out new strategic imperatives which focus on improving execution, creating a customer-centric culture and pursuing sales and marketing opportunities which differentiate the company.
On a conference call Tuesday, Chuck Conaway, chairman and chief executive, reported that, while Kmart still has “a long way to go,” the broad-based discounter “is a dramatically different competitor than it was 215 days ago.”
One of Conaway’s first priorities is bringing Kmart up to par with its competitors, which he defined as Wal-Mart, Target and Mervyns stores. “It is clear that the new Kmart is closing the gap with our competition, and in some cases moving ahead,” Conaway said in a statement.
“With a heightened sense of urgency, we are properly focused on the massive structural and cultural transformation necessary to convert these gains into a strong and sustainable improvement in our financial performance,” he continued.
Also vital to Conaway’s cause is enhancing customer satisfaction. One step toward this goal was improving the company’s in-stock position, which was increased to 86 percent from 79 percent in October. Price changes also have improved markedly, he said, with 100 percent completed within 48 hours.
These initiatives, along with other efforts, have pulled Conaway’s newly instituted guide to customer satisfaction, the Super Service Index, up to 55 percent from 40 percent in recent months. The company’s goal is to reach 70 percent on the index which measures the percentage of customers which rate their overall shopping experience as excellent.
Robert Buchanan, an analyst at A.G. Edwards & Sons, said in a research note that steps taken so far — such as pruning inventory, improving in-stock positions and speeding up checkout — have indeed been positive.
However, he noted, “Despite management’s euphoria we see no cause for celebration.” He added, “With Kmart’s systems still inadequate from what we can determine, its moves to court the consumer and drive the top line amid an ebb tide in consumer spending is a most labor-intensive and costly exercise.”
For the year, the Troy, Mich.-based discounter posted a loss of $244 million, or 48 cents a diluted share. This compares to a profit of $403 million, or 81 cents, in fiscal 2000. Excluding a $728 million charge earlier in fiscal 2001 for a series of strategic actions, the firm said its net income for the year was $219 million, or 47 cents a diluted share, a 45.7 percent drop from the previous year. Fiscal 2000 also included a $230 million, or 41 cent, charge for discontinued operations.
Sales for the year rose 3.1 percent to $37 billion from $35.9 billion.
For 2001, Conaway said Kmart will focus on improving the supply chain, marketing effectiveness, fixing its food business, reducing selling, general and administrative expenses and improving its poorest performing stores. The ceo said he would personally be visiting the chain’s 250 weakest stores during the year.
“We are now standing to be truly competitive from a top-line standpoint,” said the ceo. “We must look to make significant progress in expanding our operating margins and increasing asset productivity.”