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NEW YORK — Kmart, post-bankruptcy and with weak stores, stale merchandise and blue-light specials snuffed out, now faces the toughest part of its recovery: getting consumers through the doors.

Reversing deep sales declines is key to Kmart’s long-term survival and perpetuating profits, and the door to the future is at 111 Eighth Avenue here, where the retailer quickly established design group offices for proprietary apparel and home merchandise.

This story first appeared in the July 12, 2004 issue of WWD. Subscribe Today.

Carving out a stronger niche for its own brands is an uphill battle for Kmart, considering the hunt for exclusive merchandise has become rampant across all retail formats, from department stores like Bloomingdale’s, J.C. Penney and Saks Fifth Avenue to mass chains like Wal-Mart, Target and Kohl’s.

Kmart’s design office, opened last March, is led by former Gap executive Lisa Schultz, Kmart’s senior vice president and chief creative officer, who works closely with John Goodman, Kmart’s senior vice president and chief apparel and home officer. Goodman, also a former Gap executive, is based out of Kmart’s Troy, Mich., headquarters.

In exclusive interviews, they explained they’re re-engineering Kmart’s proprietary fashion and home businesses, applying what they learned from specialty retailing to the mass channel, and that the upcoming fall season marks a turning point.

“We have really revamped the entire assortment,” said Goodman, who joined Kmart in January and formerly ran Gap Inc.’s outlet operation and earlier was a Bloomingdale’s women’s buyer. “Every brand was looked at from the point of view of age appeal, design and styling.”

According to market sources, Kmart fashion — women’s, men’s, kids, accessories and jewelry combined — is a $5 billion-plus business that has lost momentum and volume, at least $2 billion worth, due to the bankruptcy, store closings, years of not having fashion direction or point of view and trying to sell scratchy, low-grade merchandise.

Kmart, currently about a $20 billion business in total, posted profits of $93 million in the first quarter of fiscal 2004 and $276 million in the fourth quarter of fiscal 2003, but the profits primarily stemmed from overhead reductions and cleaner inventories, not from selling more merchandise. The company has been plagued by double-digit sales declines.

Schultz, who was executive vice president of product development and design at Gap for 14 years, said that when she joined Kmart last September, “I noticed a lot of obvious things that could be done — like how to merchandise the lines. There was a ton of stuff, with no vision and no point of view.”

Sloppy merchandising made things worse. “Not everything was ugly. It just took a really savvy shopper to find the great stuff,” Schultz said.

“I wanted this challenge. I felt I knew what to do. I’m not afraid to bring great design to the people. I am very practical. I feel like I understand what the customer wants. I’m not afraid to put something better in the store, like a great leather skirt. Kmart had some of that before, but we’re putting more emphasis there. It felt very clear to me what we would do to change Kmart into a better retailer.”

The focus is on revamping Kmart’s most important proprietary apparel lines for fall, including Route 66, Attention, Thalia, Basic Additions and Jaclyn Smith. Goodman and Schultz said the proprietary brands are what give Kmart a reason for being and a mark of distinction among apparel discounters.

Most important, they’re taking a vertical approach to product development that’s new for Kmart, though similar to the way Gap, Limited Brands and other specialty chains have been operating for years. That involves sourcing and designing in-house, bypassing the domestic market for both design and production. Merchants function more like general managers, rather than selecting goods as they did in the past, to exert tighter control over the designs, pricing and quality controls. Apparel gets manufactured abroad, as it’s a cheaper and more profitable way to bring goods to the stores, according to the Kmart officials.

“By going direct, we can give more value to the customer,” Goodman said. “We’ve got the process in place, established the rules and true directions, and we have kept to our strategy. Everything is done with profits in mind. We don’t want to sell ‘stuff’ anymore.”

Kmart has made other major changes in its apparel program, among them:

  • Accelerating the flow of goods onto its selling floors, but keeping the presentation more streamlined. New merchandise has begun flowing in every six weeks, instead of every five months as in the past. Gap also operates on a six-week flow, Goodman said.
  • Emphasizing key items and showcasing them on walls and table displays. Outfits and mix-and-match products will also be stressed, and next to key items will be fashion items.
  • Providing “true differentiation between the brands,” Goodman said. In-house brands will have clearer messages and sharper points of view, and are being separated by greater space and distinct signage for more of a “shop-in-shop experience,” though Kmart is not going so far as to give each brand its own fixturing and unique environments.
  • Less “stuff,” meaning merchandise that meant little to shoppers, such as the JBXR contemporary line, which got phased out, as did Joe Boxer apparel, though Joe Boxer intimate apparel and men’s boxers are still sold.

“Instead of 10 styles on an arm of T-stand rack, there will be two styles per arm,” Goodman said.

Specifically for fall, Schultz said, Basic Additions has improved quality and will emphasize men’s oxfords, classic white shirts, slim-fits, pull-on khakis, white Ts, and easy fits. In a presentation to WWD, Schultz showed off an assortment reflecting more youthful and contemporary styling, stretch and better-quality fabrics.

Route 66, a denim-based collection, will have premium washes, more proportioned fits, low-rise styles and overall a young feeling, but with a broad appeal. “You won’t have to be a teenager to wear the product.” Schultz said.

Thalia will be “more contemporary, more sophisticated, and not a line just for Latin girls,” Schultz said. “It’s great-fitting jeans, tight, lower rise, sexier, and body-conscious,” and has been infused with current youthful fashion, such as ponchos and iconic leather jackets.

Attention, a more contemporary, career-oriented line, will showcase stretch separates for the 25- to 40-year-old set. “It will feel more modern than anything else in the store,” Schultz said.

And Jaclyn Smith will appeal to women 35 and older and feel like “a better sportswear collection from a department store. It didn’t look sophisticated before,” Schultz said. Goodman said Jaclyn Smith has been updated, with higher-quality silk and redefined fits, and better will be differentiated from Attention.

The fashion fixes are happening amid Kmart store closings and sell-offs, as well as speculation that Kmart’s chairman and majority stockholder, Ed Lampert, could decide to liquidate the entire business. However, by selling 54 locations to Sears and another 24 to Home Depot, representing a total of $1 billion for just 5 percent of the current store base of 1,420 stores, Lampert is believed to have already almost recouped his initial investment. It’s been an asset play so far, rather than a drive to rev up revenues.

Nevertheless, the Kmart fashion executives stated that their efforts at reviving the apparel program are far more than just quick fixes designed to carry Kmart forward for just a few more seasons. They are efforts to solidify Kmart’s niche that have the support of Lampert. He interviewed them both for their jobs, and has apparently shown keen interest in what’s happening at the design group, even as he continues to shrink Kmart’s real estate.

“He was here for a three-hour spring presentation,” said Schultz. “He is very involved.”

At 111 Eighth Ave., the team is still growing, and the head count is expected to reach 50. They’re squeezed into a raw, 5,000-square-foot space filled with racks of samples from different sources, CAD systems, and bulletin boards with swatches, merchandise and sketches tacked on. The staff shops the markets and goes all over the world to find trends, and then sketches are done and samples are put together. Before, Kmart buyers would shop the market and use domestic vendors to style and produce goods. Now Kmart designs its fashions in-house, bypassing the domestic vendor.

“This is the beginning, not the end,” Schultz added. “We are just getting in the game here. I feel there is room for Kmart” to compete against Wal-Mart and Target and other mass merchants.

“We’re looking at all the great retailers,” for inspiration on how to remake Kmart merchandise, Goodman said, though he added, “A lot of what I learned at the Gap, I’ve put into this model. Women’s is one of our biggest opportunities. Baby is an opportunity. We want to fix every business, but apparel is the first we set out to fix. It will be followed by soft home and bedding.”

There’s a big push to get as much apparel in order by July 22, when a back-to-school advertising campaign on the WB network commences. Physical changes are already evident at some Kmart stores, which will help better merchandise the apparel. At the unit in Bridgehampton, on Long Island, for example, Martha Stewart Everyday home products have been moved in front, women’s products are just to the left and the new lower-priced Levi Strauss Signature jeans, also sold at Wal-Mart and Target, are being tested on a couple of racks. Also, consumables have been moved to the rear of the store, instead of in front, and new large blue signs make categories easier to find. Recently, there was a greeter at the door distributing maps of the new floor plan, all of which reflects a new team for visual display that Kmart has established. There’s also a new sourcing team. Both teams are based at the Troy headquarters.

Typically, at Kmart stores, about a third of the apparel space is for women’s, and about 10 percent of the store is for apparel overall.

“Kmart must improve sales to generate a profitable performance ongoing. I see no other way,” said Walter Loeb of Loeb Associates. He credited Kmart’s recent profitability to “cleaner inventory post-bankruptcy,” meaning more in-stock and a narrower inventory position, and relatively few markdowns as a result.

But if the merchandise continues not to sell, then more markdowns will be necessitated, affecting profits. Cost cutting has also helped cut profits. He said that while sales have been weak, Martha Stewart products and consumables are still draws.

“My vision for Kmart would be to focus on home furnishings and leisurewear, retain consumables as a traffic builder and eliminate certain categories, including automotive and paints,” Loeb said.

With fashion, the ubiquitousness of Wal-Mart and Target — as well as increased competition from such emerging specialty retailers as Hennes & Mauritz and Forever 21 — will make it challenging for Kmart to attain fashion acceptance, Loeb said.

“Kmart fashion developed an image of being rather conservative and dowdy, and for taking a less-integrated approach. There hasn’t been a singular point of view. It’s been fragmented, and has risen and fallen on the basis on the individual buyers,” observed Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates.

“Having design direction in-house helps to integrate and pull together a point of view, whatever that might be, and there could be a refreshing new point of view that comes out of a Gap mentality — perhaps livelier, more contemporary and more casual. Kmart can develop a character in the apparel division that philosophically suggests what Martha Stewart has done for Kmart. The Martha Stewart spirit can be mirrored on the apparel side. There could be a relationship.”

And one that would take some time to flourish. “This kind of change takes at least two years,” Aronson said.