O.K.mart now it's time for results - It's Now or Never Supplement - Company Profile

Discount Store News, Dec 9, 1996 by Tony Lisanti

The day of reckoning for the nation's third largest retailer has arrived.

After a decade of changes that veered from diversfication in the mid-1980s to renewal of the core business in the early '90s, Kmart Corp. is engulfed in yet another period of change, one representing the toughest challenge in the discounter's 35-year history.

Once the darling of discounting and for years one of the country's most profitable retailers, Kmart in its latest turnaround effort must yield immediate results to satisfy its patient but restless shareholders. The retailer must regain the stature, prominence and profitability of yesteryear or face the threat of extinction.

There are, very simply, few promises left to make and little preaching left to do. After escaping from one serious threat of bankruptcy last year, Kmart is looking to 1997 with the confidence of a seasoned veteran ready to shatter old records. Although in recent seasons it has performed more like a struggling underdog that just can't catch a break, Kmart believes that it is now ready to become a "fierce competitor." Kmart is also confident that it has formulated a winning attitude and that its message of urgency is being well-received as it trickles down through the organization.

The time is now for Kmart to begin to show some signs of improvement. Most of what could be done to tighten operations has been implemented, and few other changes at this stage will have a significant impact. Clearly, 1997 is the year for Kmart to show positive results, and it all boils down to execution, execution, execution.

Chairman, ceo and president Floyd Hall, now 18 months into his regime, has certainly demonstrated his commitment, as well as the ability, to re-engineer Kmart. If successful, he may someday be heralded as a retailing turnaround genius alongside competitor Arthur Martinez, ceo of Sears.

Hall has done more to force change at Kmart since he took over in June 1995 than any other executive since Kmart opened its first discount store in 1962. He has implemented more than 100 action plans across all disciplines designed to reorganize the house, as well as clean house.

Among the major changes: * Divested more than $4 billion is noncore assets. * Implemented more than $500 million in cost reductions. * Revamped the board of directors. * Eliminated more than $700 million in old inventory. * Negotiated a three-year $3.7 billion bank loan. * Closed 263 stores over the past 24 months. * Realigned the field management structure. * Created and then enlarged a mystery shopper program. * Consolidated Canadian operations.

Perhaps most importantly, Hall has been effective in one critical area that the previous regime virtually ignored and was often criticized for - the ability to recruit top people. Hall has completely renovated the executive ranks, recruiting more than 30 seasoned retailers, including Warren Flick, who clearly is the person responsible for execution, for making it all come together.

Said Hall, "By having control of the entire pipeline, Warren will be better able to make the judgments and understand where the system is breaking down and where it's working exceptionally well."

But those moves are only half the battle. The focus now is on driving revenue growth, which Hall identified as the single most critical factor to signal that the turnaround is working.

"The single measuring stick is sales even more so than earnings," Hall said. "There are a lot of ways you can deliver significant short-term earnings, but the only way you can sustain them is to drive the top line."

But building market share and increasing sales per square foot won't be easy for Kmart considering the sales trends among the Big Three discounters over the past five years. Kmart lags behind Wal-Mart and Target in cumulative sales gains for its discount stores. From 1991 through 1996 (projected): * Kmart has added $7.891 billion in sales, growing from $24.499 billion to $32.396 billion. * Target added $8.789 billion in sales, growing from $9.041 billion to $17.830 billion. * And Wal@mart added a whopping $25.926 billion to its U.S. stores, growing from $31.342 billion to $57.268 billion.

In 1991 Kmart was expected to reach the $35 billion sales mark by 1995, but in reality it reached only $30.429 billion. Conservatively, over the next five years, Kmart could reach $40 billion in sales for its discount stores, adding almost $8 billion.

"I don't think market share will come at the expense of Wal-Mart or Target," said Hall. "It will come from the specialty store industry and the department store segment, which is expected to grow at about 1%."

That's a tall order. Having lost share over the years in several markets to Wal-Mart and Target, it would seem logical that Kmart would have to regain some market share directly from the discount segment to make the turnaround. Kmart executives insist it isn't so.

Said executive vice president, strategic planning and finance administration Marv Rich, "What makes this company so attractive from an investment standpoint is that we don't have to beat up on our competitors to win. All we have to do is fix ourselves."