PLANNED MAKEOVER DELAYED BY KMART
May 1, 2003 12:00 PM, Renée DeGross
Kmart was expected to get the green light to emerge from Chapter 11 bankruptcy protection May 5, but lime green logos aren't necessarily in the retailer's future. The company has announced that it can't afford to roll out its dramatic “store of the future” prototype, which includes green logos to replace the familiar red and blue signage, to its remaining 1,500 stores. Without the new format, however, analysts question how much better the chain can do against discount giants such as Wal-Mart than it did before bankruptcy.
The Troy, Mich.-based company began testing its stores of the future in White Lake, Mich., and Peoria, Ill., last year. The five test stores include brighter lighting, lower shelving, wider aisles and easier-to-shop layouts. Test stores stock 20 percent less overall merchandise and fewer groceries — a departure from Kmart's pre-bankruptcy strategy — which attempted to make the chain more Wal-Mart like.
Though sales at all but one of the test stores are “strongly up,” President and CEO Julian Day says a rollout will have to wait. “I don't plan on any further rollout until we have a very clear picture of where the return is on scarce capital dollars,” Day told reporters during a March 24 conference call. Day wouldn't say how much money the rollout would cost, or how much more expensive the test stores are than their traditional counterparts.
But Kmart will spend some money to update its tired stores. The chain expects to allocate from $350 million to $600 million annually over the next four years for store openings and cosmetic improvements, according to filings. Kmart, which closed 30 percent of its stores under bankruptcy protection, says it will open 70 new stores from 2004 to 2007. Without a more aggressive overhaul of stores, the main thing Kmart has to differentiate itself against Wal-Mart are its proprietary brands, including Martha Stewart, Thalia, and Joe Boxer. “Kmart can't ignore its store appearance,” says Richard Hastings, chief economist with Bernard Sands, a research firm. But Kmart's plan to spend money on stores and openings, “gives them a fighting chance,” he says.
Kmart has adopted other strategies during bankruptcy that analysts say may help, such as tailoring its assortments to specific neighborhoods. Preliminary financial information for the first quarter ended March 26 shows that sales are higher than expected — $4.06 billion in the first quarter, versus the $4.01 billion the company projected, projections, according to an SEC filing. Still, sales on a same-store basis are shrinking
Kmart has also lined up $2 billion in financing from two new investors — hedge fund ESL Investments Inc. and Third Avenue Trust — which have agreed to inject up to $353 million in exchange for a majority stake in the reorganized company. “Kmart's turnaround is one of the most aggressive and efficient ones we've seen,” Hastings says. “Kmart doesn't need to be perfect to survive.”
