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Ready or not, Kmart makes its comeback

The retailer emerged from bankruptcy but is still missing key management.

Compiled from Times wires
Published May 7, 2003

NEW YORK - As Kmart Corp. emerged from bankruptcy Tuesday after almost 16 months of Chapter 11 protection from creditors, the discounter still needed to fill some key holes in its management, particularly at chief merchandising officer.

The lack of a cohesive merchandising strategy has long been a problem at Kmart, and analysts say finding top talent to fill that slot is key to Kmart's long-term survival.

The chief merchandising officer decides what the store is going to sell, giving it that signature that draws in shoppers and brings them back again and again.

Bill Underwood, executive vice president of sourcing and global operations, has performed those duties since last May, when Cecil Kearse left, the company said. Jack Ferry, company spokesman, said that a search is continuing but would not comment on its status.

The Troy, Mich., discounter is also on the hunt for a new chief financial officer to replace Al Koch, chairman of Alix Partners, a turnaround management firm, who came on board in March 2002 to help with the reorganization.

Late Tuesday, Kmart named Edward S. Lampert, chairman and chief executive officer of ESL Investments, as chairman. Lampert's investment firm is converting $2-billion in financial claims against Kmart into stock and will own 49 percent of the company.

"Eddie Lampert has a stellar reputation for building long-term value, based on solid business fundamentals," Kmart president and chief executive Julian Day said in a statement. "With Eddie's guidance, I am confident that the company is poised for a profitable and successful future."

But Burt Flickinger, managing partner at the consulting firm Strategic Resource Group, is wary of Kmart's fate.

"Kmart needs to dramatically overhaul management in the areas of buying, store operations and sourcing," he said.

To lure top talent as it seeks to regain market share, Kmart has said it has set aside 10 percent of the shares it is issuing as it emerges from bankruptcy to use for compensation.

Still, industry sources think that Kmart may have a problem filling the remaining management gaps because, given the tough economy, people may be less inclined to want to jump to a company whose future is uncertain.

The company, which filed for Chapter 11 bankruptcy in January 2002, plans for this fiscal year to be a transition year for Kmart, with a profit not projected until 2004. The company lost $3.22-billion in fiscal 2002.

"It's going to be difficult attracting talent unless (Kmart) comes up with a philosophy of what it wants Kmart to be," said Elaine Hughes, who runs E.A. Hughes & Co., a New York recruiting company with expertise in retailing. It isn't involved in any of the searches at Kmart.

Day was named president after the company's bankruptcy last year and added the chief executive title in January, replacing James B. Adamson, who serves as non-executive chairman through the end of Kmart's Chapter 11 case.

While Kmart's two chief rivals - Wal-Mart Stores Inc., known for having the lowest prices, and cheap chic Target Corp. - have clear-cut strategies, Kmart hasn't exactly articulated how it will stand out from the crowd, though it now has 600 fewer stores - about 1,500 in all - and a $2-billion loan to help it compete.

Kmart has only said it aims to be "the store of the neighborhood" and it wants to strengthen its relationship with Hispanics and blacks, as well as develop its urban stores. It also hopes to attract more consumers by further developing exclusive brands like Martha Stewart and Joe Boxer.

Executive recruiters say that finding a seasoned chief merchandising officer will perhaps be the trickiest of all hires because there is such a dearth of good ones as the retail industry has relied on financial gurus, as opposed to merchandising experts, in order to satisfy Wall Street.

Still, that Kmart hasn't found one by now is "indicative that it is still sitting in the shadows," said Harry Bernard, a partner at Colton Bernard Inc., an apparel consulting company in San Francisco.

Chief merchandising officers oversee the buying and development of merchandise. They decide the merchandising direction of a company. They decide which brands to focus on and how much floor space to give them.

Bernard said Kmart needs someone with a vision like Millard S. Drexler, former chairman and chief executive of Gap who is now at the helm of J. Crew Inc.

"Kmart needs someone with a lot of weight. This is a monstrous entity," Bernard said. "It has to be recreated to develop a reason why consumers should come to the stores."

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