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Archive for Sunday, May 4, 2003

Analysts question Kmart survival

Retailer will need year to adjust, experts say

May 4, 2003

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— As Kmart Corp. emerges from bankruptcy court protection, its future rests on whether the discount retailer can persuade customers to shop at its stores instead of Wal-Mart and Target.

Kmart expects to exit from the biggest retail bankruptcy in U.S. history this week with 600 fewer stores, new leadership and a $2 billion loan. It has a key financial backer in investor Edward Lampert, whose company is converting $2 billion in financial claims against Kmart into stock.

What's most critical to Kmart's survival is whether it has a strategy that will bring the retailer the customers and revenue it needs.

"It won't be enough to perform modestly well. The modest performers are doomed to fail," said Martin Zohn, a Los Angeles bankruptcy specialist with the law firm Proskauer Rose. "If they continue to lose money, they'll find themselves back in Chapter 11 again."

Lawrence already has felt the pain of Kmart's financial troubles. The company closed its lone Lawrence store in April as part of its reorganization plan. But the stakes remain high for Lawrence because Kmart operates a distribution center at 2400 Kresge Road that employs approximately 400 people.

Analysts not hopeful

Some analysts believe the odds aren't on the side of Kmart, which entered bankruptcy Jan. 22, 2002, after a poor holiday selling season and a long reputation for having cluttered stores and items out of stock. It faces a weak economy and tougher competition as Wal-Mart Stores Inc. adds stores and Target Corp. strengthens its appeal to style-conscious consumers.

Retail watchers say Kmart won't be able to escape the fate of Montgomery Ward, Ames, Bradlee's and Caldor, chains that came out of bankruptcy only to liquidate, unless it gives people a compelling reason to shop in its 1,500 remaining stores -- and keep coming back.

"They're going to have to change customer shopping patterns to steal customers who are now going to other stores, and convince them they have to get to a Kmart," said Darrell Rigby, who heads Bain & Co.'s worldwide retail practice.

Quick fix unlikely

Merchandise is displayed at the Kmart in White Lake, Mich. The
future of Kmart Corp. hinges on whether the retailer can persuade
customers to shop at its stores instead of their local Wal-Marts
and Targets. The Troy, Mich.-based firm will do so with a $2
billion loan, 600 fewer stores and new leadership.

Merchandise is displayed at the Kmart in White Lake, Mich. The future of Kmart Corp. hinges on whether the retailer can persuade customers to shop at its stores instead of their local Wal-Marts and Targets. The Troy, Mich.-based firm will do so with a $2 billion loan, 600 fewer stores and new leadership.

Exactly what Kmart will and should look like is up for debate. Some retailing and bankruptcy experts say they haven't seen signs of a clear direction that sets Kmart apart enough to be profitable and competitive in the long term.

"The Chapter 11 provided a time for the company's management to test the market to find a new niche, a new reason for being. Management failed miserably," Zohn said. "They have a little more time based upon the cash they have. But they better come up with a good idea quickly."

But some bankruptcy and retail experts, noting that Kmart has passed through Chapter 11 fairly quickly, say it's unfair to expect the company to have initiated a new retailing plan while under the tight rules of bankruptcy.

"Whenever a company goes through something like this it's extremely distracting to management," said Nancy Aversa, analyst for the retail sector at Victory Capital Management. "This is definitely a positive that they're going to put this behind."

Righting a company after bankruptcy isn't a quick fix and people shouldn't expect it to be, she said, adding, "You've got to give them at least a year."

This year is expected to be a transition year for Kmart, with a profit not projected until 2004, under the plan of reorganization approved April 21 by a federal bankruptcy judge. The company reported a loss of $3.22 billion for fiscal 2002.

The retailer, long known for its blue light special marketing tool, said people will shop at its stores because of its exclusive brands, such as Martha Stewart Everyday and Joe Boxer, and because it has everyday items at competitive prices. The Joe Boxer line generated sales of $300 million last year.

Some observers wonder if that will be sufficient.

"You need to have merchandise that customers are going to come out of their way to come to you for," said Jordan Kaplan, professor of managerial science at Long Island University. "Some have promise. I don't know that Joe Boxer is enough to carry (Kmart) through."

Heather Rozzano, shopping recently at a Kmart in Brighton, Mich., said she comes to Kmart when she needs something in particular, but she prefers the style of items at Target, which in this town is across the street.

"I don't usually come here unless they have a good price," said Rozzano, of Whitmore Lake, Mich., who came specifically for a car seat. "Sometimes they have good prices."

Better management

In hopes of improving Kmart's merchandise, the company has rebuilt its corporate structure to streamline purchasing and ensure that stores are stocked with popular items. Only 15 employees are now authorized to give final approval to orders, down from 220.

At the same time, store managers now have more power to decide what items their stores should carry, an idea Kmart calls the "store of the neighborhood." Kmart spokesman Jack Ferry said the concept is working well.

Lampert, chairman and chief executive of ESL Investments, which will own 49 percent of the new Kmart, said Kmart will choose retailing strategies that make good economic sense and help establish loyal customers.

"I think if you go in there, you're going to find they have what you're looking for and they're going to have it at pretty good prices," he said.

Many retail analysts said Kmart's problems over the years were due in part to seat-of-the-pants management. Lampert said his company's investment and involvement in Kmart will provide more direction.

"I do think that it is an important aspect when you have people involved at a board level that have a lot to lose," said Lampert, who also will serve on the new Kmart board of directors. "We've come into this situation with our eyes wide open."

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