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Kmart banks on a happy holiday

The next few weeks could signal the revitalization, or demise, of the struggling retail giant that has experienced a troubled year of reorganization.

By MARK ALBRIGHT, Times Staff Writer
© St. Petersburg Times
published December 1, 2002

"I've been a Kmart shopper forever," the Seminole retiree said. "They're getting better. You can tell their people are trying harder. Maybe they realize the inevitable is just around the corner."

From now until Christmas is crunch time for the troubled discount store giant. A disastrous holiday season last year forced Kmart to file on Jan. 22 for the biggest Chapter 11 reorganization in retailing history. Top management was ousted as Kmart officials spent the rest of the year scrambling to recover from a disastrous overhaul that was supposed to make the home of the Blue Light Special competitive again.

Instead the company closed 283 stores, axed 22,000 workers and sold three of its six corporate jets. Kmart also ditched a new pricing strategy, reverting to the old one that uses heavily promoted deals on about 200 items a week to keep crowds coming.

Kmart recently promised to produce a five-year business plan by Feb. 24 that will envision the company emerging from bankruptcy by next summer.

Now, anxious bankers and creditors say, this holiday season had better show signs of a recovery. "They're supposedly repositioned to be more competitive. This is our first real barometer of what the consumer thinks," said Charles Tatelbaum, a Naples attorney who represents several Kmart suppliers.

Kmart has made progress beyond adding Wal-Mart-style greeters at the door. Investments in back-of-the-store logistics are beginning to eliminate one of the chain's biggest shortcomings: empty shelves on key merchandise. Among stores open more than a year, the double-digit sales declines of the first two quarters of 2002 have improved to single-digit declines of 4 to 7 percent through this fall.

Yet if Kmart's holiday sales performance ends up short of last year's, creditors will argue all winter over how dramatically the company must be downsized again.

"We're encouraged about Christmas. We've got the customer traffic back, but our biggest fear is the overall economy," said Ron Hutchison, Kmart Corp.'s chief restructuring officer.

The company also hopes it can whittle down debtor claims of $75-billion to less than $7-billion with the help of a bankruptcy judge.

Even if Kmart emerges from bankruptcy, the company faces a lot of cost-cutting and change. "Right now we have to concentrate on improving our profitability," Hutchison said.

There are other distractions. Regulators and a U.S. Attorney are probing tens of millions of dollars in loans that were forgiven last winter to keep top managers -- who left anyway. Investigators are also checking anonymous tips of accounting irregularities. Kmart already had to restate 2001 earnings that had been inflated by $500-million in questionable accounting practices.

Current Kmart chairman and chief executive James Abramson, who won praise for reviving the Denny's restaurant chain in 1997, is trying to pick up the pieces. But he faces scrutiny as an outside director who served on Kmart's audit committee during the period now under question.

Most stockholders have bailed from shares that a year ago were trading at about $6.50 a share. Usually stocks of companies in bankruptcy are worthless. Even though the New York Stock Exchange notified Kmart its stock will be delisted if it trades below $1 for four consecutive months, shares are still being traded. They closed Wednesday at 68 cents.

Kmart suppliers have not been as quick to desert. As trade creditors, they are paid off first. So they're likely to lose only the bills Kmart ran up on them before its bankruptcy filing. Most are not expected to be that hard-nosed about getting all their money back.

That's because many suppliers fear trying to sell their products in a world where Wal-Mart, a famously tough negotiator, has one less major competitor. The shrunken Kmart may drop to the 11th biggest retailer this year, down from seventh place in 2001. But it is headed for sales of more than $30-billion in 2002, which is still big enough to rival J.C. Penney Co.

"Far more suppliers need Kmart and the exposure for their products than the other way around," said Kurt Barnard, an Upper Montclair, N.J., economist who publishes Barnard's Retail Trend Report.

Although store inventory has been built up to the same level as last Christmas, Kmart is more aggressively promoting the holidays this season. The company added a second weekly circular to its newspaper advertising in a beefed-up $20-million holiday campaign.

To connect with teens and 20-somethings, Kmart has been touting its hip Joe Boxer apparel line. To draw in women, Kmart is counting on Martha Stewart's brand to come through even in the decorating diva's time of personal crisis. The Martha Stewart Everyday home decor products account for $1.5-billion of Kmart's annual sales. Kmart added more than 1,000 new Martha Stewart holiday products as a centerpiece of the chain's holiday ads.

Marketing experts don't think Stewart's entanglement in the Imclone insider-trading scandal will hurt at the cash register. "To the Kmart customer, it's more about 'Do the candles smell great?' and 'Do the pillows match the wallpaper?' " said Candace Collett, a partner in WSL Strategic Retailing, a New York consulting company. "Martha has all that stuff at a good value."

Nonetheless, Kmart chose to keep Stewart's face out of the company's holiday TV spots. Originally she was to be talking from inside a festive snow globe. Instead, the ad agency substituted a Santa Claus. "We decided to focus on the products," spokesman Jack Ferry said. "But it is her voice."

So far sales of Martha Stewart's line at Kmart are running behind last November. But they are outperforming the chain as a whole.

"The problem is if you walk a store, even Martha Stewart, their best stuff, can be found somewhere else," said Howard Davidowitz, a New York retail consultant who sees Kmart surviving at least another year before facing liquidation. "Kmart has to stand for something beside being the closest store to its customer's home."

Through it all, Kmart's huge collection of stores has been an advantage. It could close up to 600 of its 1,832 stores nationally and still have more than rival Target, which has 1,170.

But Kmart sees its stores in many older, urban locations as an opportunity where competition is thin. Asian, Hispanic and Africa-American customers accounted for 39 percent of Kmart sales in 2001 despite being 31 percent of the population.

This year store managers in inner city stores are getting autonomy to customize their stores to the neighborhood. That's why one St. Petersburg Kmart sports a black Santa Claus mannequin in a trim-a-tree display. Kmart is expanding a program that gives store managers a choice of stocking up to 200 items that sell best in minority neighborhoods. At test stores in Chicago and Detroit, the added selection increased sales by as much as 12 percent compared with stores that carried the standard inventory. After recently introducing a Spanish-language lifestyle magazine called La Vida, Kmart plans to debut an apparel line for the Hispanic market next year.

The multicultural strategy will be part of Kmart's real estate decisionmaking in Florida. Entrenched in most big markets long before Target and Wal-Mart became national chains, Kmart has far more stores in older, densely populated neighborhoods than its big rivals. Except in the developed suburbs, Target and Wal-Mart have had a rough time finding 20 acres or more for their huge combination grocery-discount store supercenters.

Kmart considers 12 of its chain's 25 stores in the Tampa Bay area urban locations. Shoppers in these neighborhoods must drive miles away to shop at a competitor in more suburban shopping centers.

In south Pinellas County, for example, Kmart has six stores. Target has three. Wal-Mart has two (including one supercenter) because neighborhood groups stopped plans for more. In contrast, in fast-growing Pasco County, Wal-Mart recently unveiled plans for its fifth supercenter. It will be the fourth supercenter the chain built in a 20-mile stretch of U.S. 19 in the past decade.

While industry rumors suggest Kmart could close as many as 567 stores, the company says there is no such list. Decisions will be made after the holiday results are in.

"We'll be looking at individual store profitability, markets we should totally exit and new competition in the same neighborhood that might limit our profitability," Kmart's Hutchison said. "We don't intend to keep a store open that would not be profitable two years from now."

Because Kmart can break leases without penalty while it's in bankruptcy, officials want to use the clout while they can.

Kmart has just kicked off the discussion. It is asking all of its landlords for rent reductions of up to 30 percent but offering no guarantee their stores will stay open.

"We believe that as we get healthier," Hutchison said, "everybody has to participate."

-- Mark Albright can be reached at or (727) 893-8252.

The next few weeks could signal the revitalization, or demise, of the struggling retail giant that has experienced a troubled year of reorganization.

Target's too trendy for Vi Konopka's taste. She feels uneasy at Wal-Marts that are often jammed with shoppers and merchandise stacked almost to the ceiling.

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