K mart shoppers knew that something was up the other day when they spotted a group of men and women, dressed in conservative, dark business suits, trooping through the Torrance store. They were hardly typical K mart shoppers, but just then the store's speaker system announced: "The Merrill Lynch bus is ready to leave now."
The Torrance store is not a typical K mart. It's the most extensive example of the retailer's "new direction" to break away from typical K mart stores of the 1960s. Even K mart officials themselves proudly boast of the considerably improved ambiance at Torrance and other remodeled stores, with brighter colors, better merchandise selection and improved organization.
Among Best Gains
The new format, which K mart executives were showing off to stock market analysts last week, has proven very successful for the nation's second-largest retailer. Thanks to a gradual and cautious upgrading program since 1980, K mart officials now believe that they have improved the chain's quality image without sacrificing its discount image or its profitability. About 300 of its 2,050 stores have been remodeled in the past five years.
In addition, K mart has put together an ambitious acquisition and diversification plan. Since last summer, it has acquired Home Centers of America, which it has since renamed Builders Square, for $90 million; Waldenbooks for $295 million, and Bishops Buffets, a cafeteria chain, for an undisclosed amount. Earlier this month, it agreed to buy Pay Less Drug Stores Northwest Inc. of Wilsonville, Ore., for about $500 million.
Despite that expensive shopping spree, K mart has posted one of the best sales and profit gains among retailers through the third quarter of 1984. For the nine months ended Oct. 24, sales were up 9.8% and profits were up 20.1%, despite increased interest expense due to heavier inventories and the purchase of both Waldenbooks and Builders Square in the third quarter.
And K mart is banking on continued growth this year and next, as it upgrades more existing K mart stores. In addition, the chain will add 25 new K mart stores in 1985, 20 Builders Square, 70 Waldenbooks, 25 new cafeterias and 20 new outlets to its Designer Depot off-price chain.
Samuel G. Leftwich, who was recently promoted to vice chairman from president, said: "These new ventures will contribute a little over 3% of our 1984 sales and about the same amount of our profits. This ratio is expected to grow in the future and by 1990 could be 15% or more with acquisitions now in place or announced. The combination of improved merchandising in K mart stores plus these newer ventures should provide a double-digit growth rate for the company over the next several years."
'Where Do We Go Now?'
But, notes Steven Ashley, an analyst with Milwaukee-based Blunt Ellis & Loewi: "The question is can they control this growth?"
"Right now, K mart is doing very well," he said. "Management has done an excellent job. But the concern on Wall Street is, Where do we go now? Management has (shown) vision by making acquisitions, and they have (the acquisitions) as a source of future growth. But can these subsidiaries grow quickly enough to keep the sales growth?"
In order to meet that challenge, K mart recently announced a series of management changes to cope with its changing business. Leftwich said the recently acquired companies will be allowed to operate autonomously with their existing management. Its specific goals for its subsidiaries are:
- Builders Square, which operates 15 stores, will add more than 100 stores by the end of 1990. In five years, sales from Builders Square stores will greatly exceed $1 billion, according to Leftwich.
- Waldenbooks, which currently operates about 900 outlets nationwide, expects sales to double to $1 billion by the end of the decade. K mart is currently testing four discount Reader's Market outlets in Connecticut.
- In the food-away-from-home business begun with the 1980 acquisition of Furr's Cafeteria, K mart expects sales overall to be in excess of $250 million by the end of this year. Last year, four Furr's Cafeterias were opened in San Diego, Oceanside, Hemet and Corona. "Assuming no other acquisitions, we will do over half a billion dollars in five years," Leftwich said.
K mart did not project expectations for Designer Depot, which operates 52 stores, including three in La Mirada, Oceanside and Santa Ana. Leftwich said the Pay Less acquisition is proceeding as scheduled.
Asked about other acquisition prospects, he would only say: "We're just about looking all the time." He said K mart would not pursue unfriendly acquisitions, noting that the company had approached two unnamed prospects but backed off after the firms indicated that they were not interested.
Meanwhile, K mart continues the upgrading of its own stores. Leftwich said sales improved during 1984 as more stores were converted to the new merchandising format. Comparable store sales (stores open for 12 months or more) increased in the first quarter by 4.5%; in the second quarter by 6.7%, and by 12.4% in the third quarter. In November, the figure was up 12.5% and 12.3% in December. "So far, in January, we are running about 10% ahead for comparable stores," he said.
K mart is also experimenting with financial services at a number of its stores. It began in 1984, when K mart offered insurance at 101 stores. At 31 of these locations, Standard Federal Savings & Loan of Michigan processed certificates of deposits and money market deposits.
In addition, last August, San Francisco-based First Nationwide Savings began offering certificates of deposit, money market accounts and individual retirement accounts at 10 San Diego area K mart stores. K mart currently offers financial services in California, Michigan and Texas.
K mart expects to double the number of insurance outlets in 1985 and also increase the number and type of other financial services offered. These will include full bank service, stock brokerage, real estate sales and consumer loans. It will expand into the states of Georgia, Nevada, Michigan, Indiana and New Jersey.