Kmart dumps Pace Clubs; stresses core businesses

Discount Store News, Nov 15, 1993 by Laura Liebeck

TROY, Mich. -- Kmart's long-stated desire to enhance shareholder value and extract equity from some of its subsidiaries to finance discount store and supercenter growth is finally at hand.

By early in the new year, Kmart will be rid of its money-losing Pace Membership Warehouse clubs. PayLess Drug Stores NW will probably be sold off and Kmart may even be in the process of selling equity stakes in several of its other subsidiaries to gain ready cash for discount store renovation and supercenter expansion.

The first sale will be the 113-unit Pace Membership clubs to Wal-Mart, which should be completed in January. Wal-Mart agreed earlier this month to purchase 91 Pace club units, all the chain's inventory and its membership lists. Kmart said it will realize a net $300 million from the sale and will take a fourth quarter charge against pretax earnings of $450 million.

Although it was widely reported in the consumer press that the sale of PayLess Drug Stores to Leonard Green and Partners, parent to Thrifty Drugs, was completed for $1 billion--at the same time as the Pace sale to Wal-Mart--at press Kmat was still denying such a sale took place.

Galls to PayLess and Leonard Green and Partners were not returned.

When PayLess is officially sold, probably by the end of this month, Kmart will be in the throes of a major corporate restructuring that includes the sale of some subsidiaries and up to a 25% stake in others. The result will be a greater emphasis on the company's discount stores and supercenters.

All this is being done by Kmart to tap its own resources in an effort to satisfy skittish shareholders and provide much-needed cash to complete the $3.5 billion chainwide renovation of its discount department stores plus fund the expansion of its widely acclaimed Super Kmart Centers.

In the case of Pace, probably the most important aspect of the sale is the relief Kmart will feel on the bottom line from the money-losing operation. Pace lost $63 million in the first half of 1993. And Pace president Tom Grimm told DSN that year-end numbers look terrible for the beleaguered chain. Grimm said he had hoped for a bright fourth quarter, but with the sale announcement, that probably won't occur.

The effort to sell Pace, or 91 of the 132 units both open and pending, apparently came as a surprise to Pace management. On the day Kmart announced the sale Pace sent out media packages announcing a new marketing and advertising campaign aimed at attracting individual members to the club.

The ad program is still going forward. Grimm said selling Pace, he still has a company to run and he will move forward with the ad campaign.

"We're still operating the company and I'll do everything I can to push sales," said Grimm. "We're working to successfully land this ship for Wal-Mart in January."

Although Kmart is selling Pace, Grimm told DSN that the Pace team will try to keep the 41 buildings in operation. "We are in discussions with people and doing everything we can to let another operator run them," he said.

Priorr to the sale announcement, rumor circulated about a management led buyout of Pace, but Grimm denied it. Such an endeavor would be "impossible," he said.

Grimm declined to indentify suitors for the remaining Pace units or divulge his plans.

Kmat spokeswoman Mary Lorencz said that Kmart will use the remaining 41 Pace locations for other company formats--declining to be specific--sell the leases or close the units.

Neither Kmart, Pace or Wal-Mart have identified specific sites that are to be sold. But Bernard Sosnick, a retail analyst with Oppenheimer & Co., New York, identified the numbers of stores per state that were not sold to Wal-Mart, all of which are located too close to an existing Sam's Club to be viable locations for Wal-Mart. They are: Arizona (1), California (1), Colorado (2), Connecticut (2), Florida (6), Georgia (3), Illinois (1), Iowa (1), Kentucky (2), Massachusetts (1), Maryland (1), Michigan (3), Nebraska (1), North Carolina (4), New Jersey (4), New York (1), Oregon (1), Pennsylvania (1), Puerto Rico (2), Texas (2) and Virginia (1).

According to Grimm, several of the Pace units being sold to Wal-Mart are in Kmart power centers. Among them are Port Huron, Dearborn and Utica, Mich., and Anchorage, Alaska. In fact, the new Anchorage Pace, which just opened, lies directly across the street from a brand new Wal-Mart.

For the warehouse club industry, Sosnick feels the Pace sale to Sam's Club is good. "This is the beginning of the beginning," sais Sosnick. "We now have two players; it'll be a much more rational industry, more profitable with less cannibalization."