Kmart Says It Can Improve Its Profit Margin, Efficiency

In management’s latest effort to pitch Kmart Corp.’s revival prospects, Chief Executive Chuck Conaway told investors Monday that the discounter has big opportunities for profit margin improvement through reduced markdowns along with efficiencies derived from a more streamlined distribution system.

In a 90-minute meeting with investors and analysts, Conaway said Kmart has an opportunity to gain three to five percentage points in gross profit margin by just fixing its business.

Although Wall Street analysts applauded the company’s plans to modernize its distribution systems, which include overhauling its product delivery software, they expressed concern about the company’s prospects for a quick turnaround, given a souring economy and mounting pressures from rivals such as Wal-Mart Stores Inc.

“The company is not only facing a tough economy, but a tough response from its main competitors,” said Walter Loeb, head of Loeb Associates, a retail consulting firm.

“I think he is painting too rosy of a scenario,” said Bob Buchanan, an analyst at brokerage A.G. Edwards, noting that he has not seen any vestiges of a recovery so far.

Conaway told investors that the discounter’s same-store sales will be up in the low single digits for the third and fourth quarters.

Kmart, which already has cut prices on 38,000 items, or about 40% of its merchandise, said it has pulled back on its original goal of discounting up to 50,000 items this month, until it has evidence that the strategy is working.

Conaway said Kmart has narrowed the price gap with competitors on those newly discounted items from 9% to a range of 1% to 2%. But Buchanan, based on his own checks at stores, hasn’t seen the price gap narrow that significantly.

A streamlining of Kmart’s inefficient distribution centers has been eagerly awaited by Wall Street.

As announced last week, Kmart is replacing two aging distribution centers with two modern facilities and will be overhauling its product delivery software. Such efforts are intended to improve productivity and the flow of goods to nearly half of its stores.

Kmart already has made inroads in improving its efficiencies, Conaway said. The company expects to turn its inventory over 3.8 times this year, up from 3.6 times a year ago. Kmart has set a long-term goal for inventory turnover at 4.5 and 5 times.

“Last year, our distribution centers were just jammed,” Conaway said. “Now, we are pulling our seasonal purchases forward.”

Halloween merchandise, for example, was set in stores two weeks ago. Last year, Conaway noted, Halloween merchandise wasn’t in stores until a month later.

“We were always behind the season,” he said.

Shares of Kmart were up 12 cents, closing at $9.13 on the New York Stock Exchange.

The stock has rebounded 72% this year after collapsing in 1999 and 2000, when many investors feared the company was headed for financial ruin.