Poor Results Spur Kmart to Step Up Overhaul : Retail: The giant discounter will finance the plan by selling stakes in four specialty chains. It hopes to regain ground lost to Wal-Mart.
Embarking on a New Year’s self-improvement program of grand proportions, Kmart Corp., the nation’s second-largest retailer, said Wednesday that it will accelerate its chain-wide overhaul by relocating and refurbishing hundreds of stores, closing dozens of others and selling pieces of its book, home improvement, sports and office supply retail chains.
Behind the moves--particularly the focus on sprucing up the Kmart discount store made famous by the “blue-light special”--is more than a quest to improve sagging profits, which Kmart said Wednesday will be lower than expected. Kmart’s announcements also reflect the cutthroat retail environment that has forced retailers to rethink not just prices, but the nuts and bolts of presenting merchandise to value-conscious consumers.
Kmart has in recent years found itself squeezed between Wal-Mart, which has lower prices, and the likes of Sears and J.C. Penney, which have aggressively and successfully remodeled stores and improved their merchandise mix. Kmart’s new store “modernization” plan comes three years after the company announced an initial refurbishing program that has resulted in improved apparel sales at remodeled stores.
“It’s the same reason that people like to get rid of old shoes, old cars, old clothes and old houses,” said Doug Hope, publisher of Display & Design Ideas, an Atlanta-based monthly design publication for retailers. “An old, tired-looking store doesn’t do as well as a new or remodeled store. . . . Kmart’s stores look bad and aren’t performing well.”
Remodeling a store generally yields a 30% increase in sales, Hope said. Kmart said its “new look” stores have outperformed its older stores, with 17% higher sales and 12% higher customer counts.
“Kmart is obviously admitting they had a terrible year,” said Alan Millstein, editor of Fashion Network Report, a monthly newsletter for retailers. “They’re taking aggressive steps. Whether the consumer responds remains to be seen.”
Kmart said it will concentrate on its central business of discount retailing and raise cash for its expanded $3.2-billion remodeling program by selling stock, ranging between 20% and 30%, in four of its specialty retail units: the Builders Square home improvement chain, the Officemax office supply chain, the Sports Authority sporting goods chain and a new combined book business composed of Kmart’s separate Waldenbooks and Borders chains.
The company said it will have relocated 800 stores by the end of 1996--500 more than originally planned in 1990--because many stores are too old or too small to remodel. Altogether, the company said, it will have remodeled 670 stores and expanded 700 outlets by 1996, totaling more than half its nearly 2,500 locations in the United States.
In addition, Kmart said it will open 177 stores in new markets and will close 75 other stores by 1996, on top of about 75 closed since 1990. It said it does not anticipate laying off workers.
The company has not yet determined which stores will be moved. But during a news conference at Kmart headquarters in Troy, Mich., Chairman and Chief Executive Joseph Antonini said the company plans to look for new store sites in the same vicinity as the affected stores.
To cover costs of the modernization program and other non-recurring charges, Kmart will take a pretax charge of $1.3 billion, or $850 million after taxes, against 1993 earnings. That does not include $450 million in after-tax charges that Kmart already planned to take. They are related to the 1993 sales of its PACE Membership Warehouse and Payless Drug Stores Northwest subsidiaries.
“By focusing on five strong businesses and enhancing our financial flexibility, Kmart Corp. will be positioned for improved strategic and financial performance in the highly competitive retail markets of the 1990s,” Antonini said.
The stakes are high, and Kmart’s hand, based on the all-important Christmas selling season, apparently is weak.
Antonini said same-store sales--revenue at stores open at least 12 months--rose 3% in December but that earnings for the month declined by an unspecified amount because of price cutting. What’s more, he said, Kmart expects earnings for the fourth quarter and full year ending Jan. 26 to be well below last year’s levels.
Wall Street analysts had expected Kmart to earn about $1.80 a share this fiscal year, according to estimates compiled by Zacks Investment Research.
Wall Street was unimpressed by the announcements. Kmart’s stock fell 50 cents to $21 on the New York Stock Exchange. In addition, the Standard & Poor’s Corp. and Moody’s Investors Service rating agencies said they may downgrade Kmart’s debt ratings.
