Kmart rethinks emergence: July 2003 time frame may be premature - Statistical Data Included

DSN Retailing Today,  June 10, 2002  by Debbie Howell

Tags: K Mart

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TROY, MICH. -- Kmart's plan to exit bankruptcy by approximately this time next year is beginning to show signs of deterioration. Given the retailer's difficulty in improving sales, the investigation into its accounting practices, the lack of a bonafide restructuring plan and the recent approval of the creation of a shareholders committee, company executives are now publicly hedging when questioned about the emergence date, opting instead to stress the obstacles that stand in the way.

Newly hired president and coo Julian Day, for instance, told the Associated Press recently that despite pressure, Kmart needs to take time in developing a sound strategy--an echo of the sentiments voiced in late May by cfo Al Koch during a conference call with reporters.

Koch called a targeted July 2003 exit "doable, but aggressive" and mentioned early 2004 as a possible alternative. Responding to questions about continual declines in same store sales, Koch said improvement is expected later in the year.

"Going forward, our plan anticipates gradual recovery in same store sales and we hope by the end of the year we would post positive comp store sales," Koch said.

So far, Kmart's finances have worsened rather than improved. The company recently restated its results for three quarters of 2001 and reported a $2.42 billion annual loss. From February to April, the retailer lost another $1.47 billion, with $1.02 billion of that coming in the five-week period ended May 1.

Much of the April loss related to the one-time bankruptcy restructuring charges to close 283 stores, all of which were shuttered by June 2. The charges included $478 million for merchandise markdowns at liquidation sales, $270 million for markdowns to accelerate inventory reduction and $249 million in other reorganization expenses related mostly to the closure program.

Excluding results from 283 closed stores, same store sales in April were down 16.4%, a further decline than the 8.4% drop in March and 10.8% in February. Koch told reporters that three-fourths of the decline in April was due to lower store traffic and the remainder from a lower average transaction.

Analyst Eric Beder of Ladenburg Thalman said the numbers prove many customers have abandoned Kmart, with some perhaps equating bankruptcy to closing.

"Management needs to do something to provide confidence to customers that they're going to be around," Beder said. "I was surprised at the level of comp declines. I think there's a lot of uncertainty, and when a customer has the alternative of going to Wal-Mart or Target, they'll go to the other two."

Part of the effort to reassure customers that 1,800 stores will remain in business included a "Customer Appreciation Days" the first week of June. The weeklong promotion featured special savings on merchandise both in stores and online. A contest to win a life-size Britney Spears cardboard cutout from Pepsi kicked off the weeklong event, which also included store appearances by celebrities in certain key cities, such as Jaclyn Smith in Los Angeles, WWE wrestler Kurt Angle in Pittsburgh and the Grammy-winning Winans family in Atlanta and Charlotte, N.C.

"This event allows us the opportunity to not only demonstrate that the stores are still open, but invite people back to get a second look at Kmart and the improvements we've made," said spokesman Dave Karraker.

Karraker said associates spent the past few months cleaning up stores, parking lots and sidewalks; removing excess signage and tables; and scrubbing the floors and walls. Inventory in stores was reduced about 25% to minimize clutter and about half of the merchandise tables in drive aisles were removed.

"What customers recognize when they move through the store is it's cleaner, less cluttered and easier to maneuver," Karraker said.

Ulysses Yannas, an analyst with New York's Buckman, Buckman & Reid, was glad to hear Kmart was finally focusing on store-level execution. Management for years has given lip service to programs to improve store interiors and service.

"They always had programs to clean up the stores and especially the service. And we had neither," Yannas said. "I'd go to a store and see boxes left in the middle of the aisle and merchandise with no prices on it. You have to have a store manager that's willing to spend his day walking around the store making sure everything is in order."

Under former ceo Chuck Conaway, associates were supposedly motivated to improve service through monetary rewards tied to a store's customer service ranking. But rather than fixing up store interiors, emphasis was placed on other priorities, such as updating Kmart's supply chain and implementing an everyday low pricing strategy that many contend was a mistake.

A change in priorities and management style was apparent when Jim Adamson took over as ceo in March, replacing Conaway More power has been returned to store managers.

"In talking to some of the assistant managers, there seems to be a renewed sense of purpose. Jim Adamson has given more autonomy for store managers to be store managers, merchants and entrepreneurs who know their customers better than anybody at headquarters," said spokesman Jack Ferry.