Time to ask the unaskable at Kmart - is K Mart Corp.'s renewal plan working? - Editorial

Discount Store News, Feb 1, 1993 by Tony Lisanti

On the eve of the third anniversary since Kmart officially unveiled its $3 billion renovation program, the "unaskable" question is beginning to surface. And what better time than in this special issue (see page 29) of DSN with the theme "Power Merchandising," which analyzes Kmart's store of the future--unveiled last November in Auburn Hills, Mich.--to search for some answers.

Financial analysts, observers, media and other executives are posing the question. I have asked the question. And I'm sure Kmart executives and directors are asking the same question. Even Kmart's vice president of marketing Mike Wellman posed the question during a presentation titled "Turning Around the Kmart Image" at the National Retail Federation's annual convention two weeks ago.

The question, as simply stated by Wellman, is: "Is renewal working?"

First of all let's recap the key reason why the question has become so timely. Despite a better than average Christmas for the retail industry, comp store sales for Kmart's U.S. discount stores rose only 2.3% for the five-week period ended Dec. 30, 1992 and only 1.7% for the 48-week period. By comparison, comp store sales for Wal-Mart and Target in December rose 10% and 8%, respectively.

Furthermore, Moody's is now reviewing Kmart's longterm debt and preferred stock ratings for possible downgrade (see story page 1). Moody's statd that Kmart's capital expenditure program to upgrade systems and stores is not generating the returns that the rating agency anticipated.

Indeed, with about 50% of all Kmart discount stores converted to the updated look at year-end, many industry analysts and observers have had higher expectations.

Stated a Dean Witter research report in response to Moody's move, "We are also disappointed that the [modernization] program has not yet resulted in better growth, but with the stock down, much of this concern has been discounted." The Dean Witter report stated that "comp store growth will accelerate from 1.6% in 1992 to 3% in 1993." Other analysts have similar projections for comp store growth in 1993.

Wellman answered his own question with two key points that should maintain optimism for future gorwth. He said unequivocally that "customers feel better about shopping at Kmart." Wellman also said that the focus at Kmart is on profitability.

The results of an exclusive consumer research study conducted at Auburn Hills by Leo J. Shapiro & Associates for DSN support Wellman's claim. The study revealed that shoppers like the new store, see an improvement and will spend more money at the new Kmart during the next 12 months.

With regard to profitability, Kmart expects net income for 1992 to exceed the record earnings of $859 million in 1991. Four quarter results will be reported on March 2.

So why all the sudden concern and criticism? Impatience. The financial community wants immediate results.

But still, is renewal working? I believe the answer is yes. However, it will take longr than expected. Kmart has made tremendous progress. Antonini and his lieutenants, as he sometimes affectionately has referred to his executive team, deserve credit for many dramatic changes in philosophy, merchandising, operations and corporate culture. The turnaround has been slower than many expected, but without it Kmart would be in serious trouble.

Kmart Corporation is well-positioned to grow and prosper as a global retailer into the new millennium. But its core discount store segment must perform better.

Furthermore, renewal takes time. And like Antonini, President Clinton will now learn that very quickly, too.