Kmart store closings first step to recovery - Brief Article

DSN Retailing Today, March 25, 2002 by Debbie Howell

TROY, MICE. -- Kmart's decision to close 284 of its 2,114 stores may be the tip of the iceberg as the retailer develops a strategy to emerge from bankruptcy. A new strategic positioning, which chairman and ceo Jim Adamson recently said he wants to have in place by year-end, raises an interesting set of possibilities regarding Kmart's real estate strategy. Possible scenarios the company may consider include exiting regional markets with stiff competition, an urban-only focus or even abandonment of the supercenter business.

"I think this is the first step for Kmart in store closures and maybe the only step in the bankruptcy," said Jeff Stinson, an analyst with Cleveland-based Midwest Research. "As they come to a better conclusion on their strategy moving forward, what the competitive niche is that they're going to occupy, at that time I think we'll likely see another group of stores shut down."

Regardless of Kmart's strategy, many analysts were disappointed the number of closures wasn't higher. Some wanted as many as 700 units to close to make a significant financial impact and put the focus on profitable locations. Adamson told reporters during a March 11 conference call he believed the number was sufficient for now, even though he didn't dismiss the possibility of future closings. "Hopefully, with the right plan, we have very few store closings ahead of us. But no one knows the answer right now"

Kmart's store closing plan, announced March 8, was to be presented in a Chicago bankruptcy court last week. If approved, Kmart will begin conducting liquidation sales and expects to have the closings completed by summer. Kmart anticipates the closures will enhance its cash flow by $550 million this year and $45 million annually. Further, the move is expected to enhance earnings before interest, taxes and depreciation by $31 million a year.

The stores to close include 271 Kmart discount stores and 12 supercenters in 40 states and one unit in Puerto Rico. States with the largest number of closures are Texas, followed by Illinois, Michigan, California and Georgia. Five of the 12 supercenters to close are in Texas, a state that is one of Wal-Mart's strongholds with its largest number of supercenters.

By region, some of the highest proportions of Kmart closures are in the South, in particular Texas, Oklahoma, Mississippi, Louisiana, Georgia and Arkansas. In these markets, Kmart is closing between 20% and 38.9% of its stores. Illinois also had a significant proportion of closures, 21%, as did Maryland at 20.6%.

Along with the 284 stores comes the elimination of 22,000 jobs, or 8% of its employee base.

For food supplier Fleming, however, the store closures translate into the loss of $400 million in sales this year. And as Kmart works through its restructuring, Fleming expects its sales to be down $500 million at remaining Kmart stores. That drops Fleming's Kmart business from $4.5 billion to $3.6 billion.

Analyst Ullysses Yannas with New York-based Buckman, Buckman & Reid, estimated the 284 stores contributed about $3.8 billion in revenue and generated $140 in sales per square foot, far below Kmart's average of $233.

A separate analysis by Shelly Hale of Banc of America Securities estimated the stores, which make up 13% of Kmart's base, generated $3.5 billion, or 10% of Kmart's $36 billion in sales. In a March 8 research report, Hale said the stores averaged $12 million in sales, ranging from $6 million to $40 million. The average across all Kmart stores is $16.9 million, she wrote.

Although the list includes stores of all sizes in small towns and large cities, industry experts said many of the sites were older locations where new shopping patterns or competition had impacted sales dynamics. Other sites were too costly to operate, such as many of the former Venture and Caldor stores Kmart took over in 1998 and 1999. On the closure list were six former Caldor sites and 23 old Venture sites, Yannas said.

A survey of real estate experts in different parts of the country revealed some of the stores were close to new Wal-Mart Supercenters.

"In New Jersey; they're closing the stores that are close to the new Wal-Marts," said Richard Brunelli, president of R.J. Brunelli and Co. of Old Bridge, N.J. 'What Kmart is doing is keeping their urban stores. I believe they will be refocused on serving that demographic."

Roger Lenahan, with Cambridge Commercial Realty of Minneapolis that is affiliated with Core Realty Advisors, said many stores slated for closure in the Midwest are in small towns or areas no longer vibrant for retail. He believes Kmart's strength regionally lies in the Midwest and Northeast, as well as in urban areas where competitors Target and Wal-Mart have had difficulty making inroads. In California, for example, Kmart is only closing 9.8% of its 164 stores, in part because many of its units are in dense urban markets. Another advantage for Kmart in California is the lack of Wal-Mart supercenters to date.

According to Hale, Kmart operates 484 discount stores in inner cities versus only 190 and 202 respectively for Wal-Mart and Target. Of the three, Kmart has the largest share of urban stores at 55%. Nationally, only 628 or 29% of Kmart's stores have no competition in the same market with its discount rivals.