Kmart faces do-or-die season as comps drop, losses mount

DSN Retailing Today, Nov 25, 2002 by Debbie Howell

TROY, MICH. -- Management's promise of a Kmart turnaround and emergence from bankruptcy could be a pipe dream if this holiday season takes a turn for the worse and deals the embattled retailer a brutal blow. In fact, those who couldn't imagine a year ago that this discount industry pioneer would be driven into bankruptcy are now pondering a more ominous question: Could Kmart disappear? Liquidation has already been suggested if the retailer's sales don't revive soon, despite its efforts this past year to win back shoppers, close underperforming stores and cut costs.

With losses growing to $2.13 billion through the first seven months of this year, Kmart is already on track to surpass last year's record $2.42 billion shortfall. Meanwhile, comparable-store sales have yet to show signs of improvement. Comp were down 8.8% in the first quarter, 11% in the second and averaged 9.4% down for August and September.

Whether wishful thinking or stubborn determination, ceo Jim Adamson insists Kmart is headed for recovery. In bankruptcy since Jan. 22, Kmart intends to file a reorganization plan in February and emerge from bankruptcy in July, Adamson said. As of late September, Kmart had $1.5 billion left under its $2 billion debtor-in-possession financing, which the retailer contends is sufficient to get through the holiday season and beyond.

"I am as confident as ever that this company can emerge as a strong and viable competitor with a clearly defined niche in the retail sector," Adamson told reporters in an Oct. 21 conference call.

Kmart is working to win back shoppers through aggressive promotional sales, efforts to improve in-stocks and enhancements to the shopping experience, Adamson said. A test program at 90 stores in the Detroit and Chicago markets permitting store managers more discretion in ordering and emphasizing in-stocks has resulted in positive comps, he said, with that program now rolling out to all 1,800-plus Emart stores. Chain-wide, however, Adamson said it could be mid-2003 before comps turn positive. Kmart is also testing a new store layout, complete with wider aisles, new Logo and green color scheme.

Though Kmart remains mum on the subject of store closures, another round is expected in January. Kmart shuttered 283 underperforming stores this year and now a list published by the Atlanta Business Chronicle claims 567 more stores will close. Kmart executives have denied such a list exists, though retail experts interviewed all forecast more closures.

"Right after the first of the year I think they're going to close more stores. The bigger surprise would be if it didn't happen," said George Whalin, president and ceo of Retail Management Consultants.

Whalin estimated 300 closures as a more likely scenario, while one analyst predicted between 200 and 300 and another "no more than 200." Eric Beder, an analyst with Ladenburg Thalman, expects to see more closures in Southern states where Wal-Mart has a strong presence, along with California due to the large number of stores in that market.

Ulysses Yannas, an analyst with Buckman, Buckman & Reid of New York, may be the only retail expert confident of Kmart's survival. Yannas said even if Kmart's fourth quarter is horrible, with comps down in the mid-single digits, the retailer has enough cash to get through 2003 and exit bankruptcy if it progresses on initiatives to cut costs and revive sales.

"I personally believe it will be a better Christmas than most people think," said Yannas. "I don't think they'll have a lousy Christmas and I don't think they'll be liquidating."

Yannas said he does believe, however, that Kmart may decide to exit the supercenter business, due to complications with executing a supply chain involving fresh food along with trouble competing against industry leader Wal-Mart. Kmart now operates 117 supercenters, many of which Yannas said could either close or be converted to regular Kmarts.

Based on Kmart's financials, Beder said he doubts Kmart is being realistic in its timetable. He called a July exit from bankruptcy "very, very aggressive" and not likely without stronger movement toward profitability or improving comps, neither of which have occurred. If fourth quarter sales bomb, survival or quick emergence could be out, Beder suggested.

"If they don't have a strong Christmas, it becomes very tough," Beder said. "They will have to be much more aggressive in closing stores."

Whalin took even a dimmer view of Kmart's viability, adding that he felt all along liquidation was a possibility. As for the retailer's plan to exit bankruptcy in July, he minced no words:

"They're living in a dream world. They're not going to have the Christmas they thought they were going to have because the economy is causing difficulty. They still haven't solved their problems and aren't where they should be," Whalin said. "They're still hemorrhaging cash."

If Adamson proves the retail experts wrong, he most certainly would be considered the turnaround wizard of retailing. After all, several former ceos have tried their hand at reinventing Kmart, with little success, and in the meantime the revolving door of management and new ideas as to a Kmart strategy does little to build a strong, continuous foundation. For years, Kmart has been losing share to stronger competitors Wal-Mart and Target through failure to enact a differentiated strategy that retains loyal shoppers.