Kmart focusing on strategies for growth; expansion abroad, improved results in specialty divisions should help 2nd quarter - includes related article on Kmart

Discount Store News, June 6, 1994 by Laura Liebeck

TROY, MICH. - Kmart's June 3 annual meeting was expected to be a stormy affair as chairman Joseph Antonini had to defend the company's long-range plans amid disappointing 1993 results and a sour financial start to 1994.

However, Antonini could point to positive results from the specialty division, the future potential of the chain's just-completed entry into Singapore (May 19) and Mexico (May 24), and the prospect of an uptick in sales and profits for the second quarter. He was also expected to emphasize operational changes at headquarters that could enhance the company's long-term performance.

In addition, Kmart shareholders voted on the company's plans to spin off between 20% and 30% of its four specialty chains - OfficeMax, The Sports Authority, Builders Square and Borders/Walden. Antonini hopes the spinoffs will enhance shareholder value. If the proposals, which have come under some vocal opposition, are approved, each specialty company would have its own stock listing.

Shareholders also decided on whether or not to increase the number of authorized shares of common stock from 1.5 billion to 3 billion; re-designate 1.5 billion shares of existing common stock as Kmart Group Common Stock; and authorize 1.5 billion shares of common to be available for designation in series representing each of the four specialty divisions.

However, retail observers expected Antonini to come under fire for the recent profits decline. Stock analysts and credit ratings agencies have been especially critical of Kmart in recent months, and most recently, the State of Wisconsin Investment Board and the pension funds of the Amalgamated Clothing and Textile Workers Union urged the Kmart board to completely sell off the specialty businesses and concentrate solely on the core discount stores.

Another blow to Kmart: retail analyst Patrick McCormack downgraded Kmart Preferred Equity Redemption Cumulative Stock to "neutral" from "accumulate."

Despite the company's financial difficulties, Antonini maintained a positive outlook at a recent retailing conference held May 2 and 3 by Salomon Brothers in New York.

Antonini admitted that Kmart has had problems that have inhibited growth. The remodeling program has been tougher to complete than anticipated, execution of planned strategies more challenging and inventory management techniques difficult to coordinate. (Kmart took an unplanned $720 million reduction in 1993 inventories.) However, he stressed that these are short-term obstacles.

Antonini told analysts, according to a Salomon Brothers report, that senior management has reassessed its priorities for 1994. He said slower-moving merchandise has been eliminated, paving the way for improved inventory turns and overall improved working capital position and that advances have been made to the company's systems.

Salomon Brothers also noted that Kmart has retained the services has retained the services of Anderson Consulting to help the retailer's management team redesign its store operations and overall merchandising process. "After developing a wide range of strategies to improve sales productivity and basic structural changes, the company plans to roll out these concepts chainwide in August," said the report.

New initiatives related to merchandising system were expected to roll out in late May and begin having a positive impact by the end of the year.

One example of a system change is Kmart's move into restocking shelves at night to save 8% on labor costs.

Antonini also reiterated the success of the renovation program, noting that new stores outperformed old ones by 35% in operating profit, 17% in sales, 12% in customer counts and 16% in the number of units sold.

He also stressed the importance of the supercenter program, noting that the company will have 70 to 75 Super Kmart Centers in operation by the end of this year. However, one analyst at the meeting told DSN that Kmart will slow the growth of Super K to 35 to 40 new units in 1995, down from the 50 to 55 expected this year.

Operating income for 13 weeks ended April 27 fell 33.7% for the U.S. discount stores (to $134 million), declined 33.2% for domestic and foreign discount stores (to $1 million) and dropped 26% for the entire company (to $145 million). Sales rose 3.3% for U.S. discount stores to $6 billion. However, comparable stores sales were off two-tenths of one percent for the same period. For the entire company, sales rose 6.2% for the period, to $7.8 billion, up 1.2% on a comp store basis.

The performance of the the company's specialty divisions proved to be the bright spot in Kmart's first quarter report.

As a division,s ales rose 21.7% to $1.58 billion over the same period in 1993. Comp store sales for the four specialty chains rose 8.1%. Their operating profit was $10 million, compared to a loss of $6 million a year ago.

Specialty division results were:

* The Sports Authority: operating income $2 million,double last year's first quarter performance; a 46.2% sales gain to $174 million; comp store sales up 9.5%;