Kmart working hard to sell its story - includes related articles

Discount Store News, May 6, 1996 by Laura Liebeck

TROY, MICH. -- Like the fictional boxer from the "Rocky" movies, Kmart came out swinging in April.

The burst of energy probably had a lot to do with getting its financial house in order--with the $3.7 billion credit line organized by Chemical Bank (slated to close in early June)--but involved a number of get-tough positions for the chain largely seen as on the ropes of survival until recently.

Last month:

* Kmart hired Kroll Associates, a New York-based private investigation firm, to look at the chain's operations, specifically the inner workings of the retailer's real estate department. Earlier this year, a former Kmart real estate executive was accused of fraud and accepting kickbacks. Since then, Kmart restructured its real estate department and dismissed six employees.

* The chain filed suit in federal district court in Houston against a real estate agent for breach of contract related to assorted real estate dealings in Texas. Kmart is seeking unspecified punitive damages and more than $1 million in commissions related to the accused broker.

* Kmart asked vendors and associates to sign a business practices standards agreement as part of the company's code of conduct. Kmart has long required employees to sign such vouchers, but it is now asking that vendors participate in the program by agreeing not to offer special inducements to employees in exchange for their business.

In addition, top-level executives have been meeting more regularly and more openly with Wall Street firms, retail analysts and the media about their plans for 1996, recapping 1995 in tough language that has been both long on explanation and short on excuses.

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During a Salomon Brothers teleconference late last month, Bob Burton, director of institutional relations, said that Kmart will strike a blow on competitive pricing and get tough with data integrity and inventory replenishment, plus more aggressively attack national holidays and long weekends in its advertising programs. Speaking to analysts with treasurer Mike Viola, Burton reiterated much of what Warren Flick, president of U.S. Kmart Stores, told analysts in early April, but added that "Kmart is in the early stages of a turn-around. We see the financial timetable as short in nature. The operating activities have a two- to three-year time frame as we return the focus of the business to the customer."

In his presentation, Burton said that Kmart will roll out 100 to 150 Pantry departments this year at a cost of $30 million each. The Pantry, now in the markets of Fort Wayne, Ind., and Charlotte, N.C., features approximately 8,000 sq. ft. of space dedicated to consumables and commodities such as underwear, light bulbs, soda and laundry detergent. The strategy behind the concept is to drive shoppers into the store more frequently than they currently visit--now at 15 times per year compared to 30 times for Wal-Mart--eventually increasing Kmart's sales per-square-foot ratio and gross margins.

Having half of the shopping frequency of Wal-Mart "means Kmart has managed to take the core customers and encourage them to shop elsewhere for not providing the right atmosphere," said Burton. "We believe we can make substantial gains in getting them to return this year." He reiterated that Kmart is working to emphasize its offerings in national brands, streamline its private label brand selection to a tighter, more visible group of labels like Jaclyn Smith and Kathy Ireland and re-focus the company's ad circulars.

Burton noted that in stores with the Pantry program, sales increased 20% over units without the setup. There is an increase in gross margin of less than 20%, he added without being specific, due to the nature of the products sold.

In addition, Burton said that Kmart will open 10 to 12 new Super Kmart Centers this year, down from the 18 to 20 units the chain announced a few months ago. He also noted that this year Kmart will expand its supercenter test to include more smaller-sized units, including a new 120,000-sq.-ft. store for smaller markets. Burton called the smaller prototype more "complementary to traditional Kmart discount stores." Last year, Kmart debuted two 140,000-sq.-ft. stores, mirroring Wal-Mart's efforts toward smaller supercenter prototypes.

With all of the changes and corrections in its merchandising programs, merchandising staff and financial instruments, Kmart expects to improve its market performance in 1996 by increasing its comp store sales by the mid single digits, top $200 per sq. ft. in sales, reduce selling, general and administrative costs by $200 million to $300 million and pick up 100 basis points in gross margin.

During the meeting, Burton also said that Kmart will close fewer than 50 stores this year, 15 of them in May. Despite calls from many analysts to close more stores, Burton emphasized that stores will be closed when and where the chain "is bleeding cash," but Kmart will leave open the neutral ones.

Kmart remains committed to unloading its non-conforming assets. Recently, it closed on the sale of its 13 Czech and Slovak stores, netting the company $117.5 million. Kmart is also expecting to pocket more than $100 million from last month's initial public offering of Thrifty Payless, a drugstore company in which it held a major interest, the result of its spin-off of Payless Drug Stores NW nearly three years ago. Kmart has also stated that it does want to sell Builders Square, but still no suitable buyers have been found. Builders Square, with 168 stores in 21 states, announced that it is reorganizing itself into a home decorating chain.