PRIVATE LABEL PACES KMART’S NET GAINS

Byline: Thomas Cunningham

NEW YORK — Kmart said Monday its fourth-quarter earnings climbed 16.7 percent to $412 million, or 77 cents, from $353 million, or 65 cents, boosted by a strong performance from its private label business.
In a conference call Monday, Kmart told analysts it was optimistic about the outlook for its new BlueLight.com Web site and said it planned to add two distribution centers and upgrade terminals and scanners at its stores.
The profits for the quarter ended Jan. 26 were raised slightly because Kmart changed the way it accounted for layaway sales. On a pro-forma basis that presents the results for both periods using the old accounting method, Kmart’s earnings climbed 12.2 percent to $396 million, or 74 cents.
Kmart’s sales for the quarter climbed 6.8 percent to $11.11 billion from $10.4 billion. On a pro-forma basis the quarter’s sales climbed 5.3 percent to $10.57 billion. Same-store sales rose 3.7 percent.
The Troy, Mich., retailer’s per-share earnings were 5 cents ahead of Wall Street’s consensus estimate. Kmart was up 3/16 to close at 8 3/4 on the New York Stock Exchange Monday.
“Our progress continued in 1999 as we achieved our 15th consecutive quarter of improved earnings performance,” Floyd Hall, Kmart chairman, president and chief executive, said in a statement.
But despite the quarter’s better than expected results, Kmart continues to face tough competition from rival discounters Wal-Mart and Target, said Bob Buchanan, analyst at A.G. Edwards in St. Louis.
“A rising tide lifts all boats, even that of the high-cost provider,” Buchanan said. “Consumer spending was so strong in the fourth quarter that consumers weren’t as price-sensitive as they might have been, so Kmart could essentially get away with charging higher prices than Wal-Mart.”
In a recent survey conducted by A.G. Edwards, Kmart’s prices were, on average, 8.8 percent higher than Wal-Mart’s and 6.7 percent above Target’s, Buchanan said. The survey compared price differences among 143 items at three stores near St. Louis, he said.
Wayne Hood, analyst at Prudential Securities, said Kmart’s aggressive stock buyback program helped boost the retailer’s per-share results in the quarter. Kmart’s average diluted shares outstanding fell to 553.9 million in the quarter from 564.9 million a year earlier.
Gross margin in the quarter improved to 22.2 percent of sales from 21.9 percent a year earlier. Kmart avoided excessive markdowns in the quarter and also saw strong sales of its private label brands such as Martha Stewart, Thom McAn and Route 66, Hood noted. Kmart is cutting merchandise costs by sourcing overseas, helping to improve gross margin, he said, adding that overseas products accounted for 12 percent of Kmart’s merchandise on a cost basis, up from 11 percent in the year-ago fourth quarter.
“The strongest seller continued to be Martha Stewart,” Hood said. “They’re going to add [Martha Stewart] lawn and garden and housewares in the fall.”
Sales were strong for do-it-yourself items, outdoor sporting goods, consumer electronics and seasonal merchandise, Kmart told analysts. Apparel sales were hurt by warm weather in November, though men’s apparel showed some strength in December, Buchanan said.
Although Kmart’s total inventory ended the fourth quarter 7 percent higher than the prior year, measured on a comp-store basis, apparel inventories are flat with last year, Hood said.
“Most of that inventory is in home electronics and pharmacy items, so there is no a significant seasonal markdown risk,” Hood said. “They took the necessary action to clear [seasonal] inventories in January and they certainly had their share of seasonal markdowns then.”
The company also told analysts it planned to expand two of its four distribution centers since they were running close to capacity. Kmart is also considering adding another two centers, but likely will not make firm plans to do so until 2001, the company said.
Kmart did not say where the centers would be located or when they would be operational.
To improve efficiency, Kmart plans to add point-of-sale terminals in 300 high-performing stores and install new scanners in all its stores. Kmart told analysts it expected its capital expenditures to total about $1.2 billion for the year.
For the full year, Kmart’s earnings fell 22.2 percent to $403 million, or 81 cents, from $518 million, or $1.01.
However, excluding a $230 million after-tax charge related to the disposition of some Builders Square operating leases in 1999 and and a $13 million charge for an early retirement program in the previous year, Kmart’s pro-forma diluted earnings per share, using the old accounting method in both periods, climbed 19.4 percent to $1.23 from $1.03.
Kmart’s full-year sales picked up 6.7 percent to $35.93 billion from $33.67 billion. On a pro-forma basis, using the old accounting, sales gained 6.6 percent to $35.91 billion. Same-store sales climbed 4.8 percent.
During the year, Kmart’s sales per square foot reached a record $233, Hall said. “We further enhanced our merchandise assortments and expanded our popular exclusive brands such as Thom McAn, Route 66, Sesame Street and Martha Stewart Everyday home, baby and garden products,” he said. “With the introduction of BlueLight.com, which offers totally free Internet access, we also took important steps toward creating a state-of-the-art online offering of services and merchandise.”
Although performing well, the BlueLight Web site needs to strengthen its editorial content, Hood said. That should happen when a redesigned site launches later this year.
“I think BlueLight is exceeding expectations in terms of the number of people who have signed up for Internet access,” Hood said. “I’ll be very interested to see them relaunch in August. They’re not there yet with their content, but I would expect a significant improvement by then.”
The high-profile signing of Banana Republic chief executive Jeanne Jackson to run Wal-Mart.com has not rattled Kmart, Hood said.
“I think they’re happy with the management team they have there. Wal-Mart.com is a separate issue.”
Between June and the end of the year, Kmart repurchased 17 million of its shares for $200 million. The company has $800 million remaining under its earlier announced $1 billion stock buyback.
Kmart could face a tough 2000, Buchanan said. “It could be a difficult year for them. It’s hard for me to imagine that consumer spending will get any better than it is and it might even moderate somewhat. Meanwhile, Wal-Mart will continue to keep up the heat on the pricing front.”

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