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Kmart general overview
Kmart has been in the news plenty lately with their
soaring stock prices despite slumping sales on the retail
floor. True, the chain
can’t deny that much of its current success is based on a
sharp business plan more than it is about stunning apparel, but
with a new design team in place in New York City, things are changing
on the retail floor. The men’s and boy’s department
is already showing signs of a turn around in philosophy. The junior
and girl’s departments are still somewhat bare but if the
rest of the store is any indication, that will change too. The
current tie in of Route 66 to the WB’s favorite shows and
stars is generating plenty of buzz; let’s hope that the merchandise
and the deliveries keep up with the demand for trendy, casual,
timely and affordable clothes that are an alternative to Target’s
edgier looks and Wal-mart’s low low prices. take a look at
some of the latest news on Kmart as well as in depth analyses of
each department at Kmart!
Kmart Posts Profitable 2Q Despite Revenue
Drop
Troy-based Kmart Holding Corp. reported its third straight
profitable quarter, even though its revenue declined more
than 15 percent. For the second quarter ending July 28,
Kmart (Nasdaq: KMRT) reported net income of $155 million
or $1.54 a share on revenue of $4.8 billion. That compares
with a net loss of $5 million or 6 cents on revenue of
$5.6 billion for the same period last year. Kmart’s
gross margin, as a percentage of sales, increased to 26
percent, compared with 22 percent for the same period last
year. Kmart also reported a 15 percent drop in sales at
stores open at least a year, which is often viewed as the
best way to measure a retailer’s strength.
However, Richard Hastings, vice president and retail
analyst with New York City-based Bernard Sands, said in
a report that he isn’t concerned about Kmart’s
drop in revenue and same-store sales because of how the
company is managing its costs. Also, Hastings said the
drop in sales is due in part to a reduction in advertising
spending and to major changes in the retailer’s apparel
lines. Such large merchandise shifts often cause sales
declines, Hastings said.
For the first six months of the year, Kmart reported
net income of $248 million or $2.47 a share on revenue
of $9.4 billion. That compares with a net loss of $862
million on revenue of $11.8 billion for the same period
last year. Kmart did not release comparable earnings-per-share
numbers for the first six months of 2003 because the company
was still in Chapter 11 bankruptcy for a portion of that
time.
How to Label Kmart is Not a Simple
Task for Wary Investors
Speculators in retailer Kmart Holding Corp. have had a
marvelous 15-month ride: The discounter’s stock has
quintupled since its Chapter 11 bankruptcy ended in May
of 2003. Kmart shares on Monday topped off their rally
by leaping $11.15, or 17 percent, to $76.05 — helping
boost the overall stock market — as the long-languishing
merchandiser reported a second-fiscal-quarter profit of
$155 million, or $1.54 a share, compared with a small loss
in the year-before quarter.
Though its stock is flying, it’s far too early to
declare a comeback for the company, once the biggest U.S.
retailer but now an also-ran to Wal-Mart Stores Inc. and
Target Corp. in the discount business. Kmart’s quarterly
profit came because the company shrunk itself, saving money
by dumping its poorest stores. Kmart’s sales in the
most recent quarter declined 15 percent to $4.79 billion.
Happy Kmart investors not only should be wondering if the
company can truly revive itself, but whether it will actually
survive in the discount trade. Kmart is now in the hands
of Edward Lampert, 42, head of ESL Investment Inc. in Greenwich,
Conn., who acquired a 52.6 percent stake in the company
for about $755 million. Lampert is a money manager and
former risk arbitrage player at Goldman Sachs Group Inc.,
not a merchandiser. The chief executive of Kmart is Julian
Day, once chief operating officer of retail rival Sears,
Roebuck & Co. Given Lampert’s background, he
might be as likely to liquidate Kmart as keep it in the
competition. Kmart got rid of 599 stores while in bankruptcy
and on July 28 had 1,503 outlets. Lampert plans to get
out of as many as 73 additional stores through the sale
and assignment of leases to Sears and Home Depot Inc.,
the home improvement retailer. The Sears agreement could
bring in as much as $621 million, the Home Depot deal as
much as $289 million. That would add nicely to Kmart’s
cash holdings, which rose to $2.63 billion from $2.09 billion
in the 26 weeks ended July 28.
Lampert may be trying to prune Kmart to save it. But once
he jettisons the worst outlets, the improvement will come
harder. Kmart can’t declare a comeback unless it
starts to increase sales again. Instead of seeking growth,
Lampert might decide that the company is worth more dead
than alive and keep on liquidating. Competitors would love
that; even a poorly run rival can steal business. Kmart
may have another option. Lampert, a money manager remember,
has the right to invest the retailer’s spare cash
in other securities. He might opt to reduce Kmart to a
group of stores designed to generate cash that he can invest
in other distressed companies like Kmart.
For the moment, Lampert sees opportunity in retail. He
also controls about 15 percent of Sears and has stakes
in AutoNation Inc., the car dealer, and AutoZone Inc.,
the car parts company. And, as a fan of multi-billionaire
investor Warren Buffett, he might copy the Berkshire Hathaway
Inc. chief and let his investments run. Lampert probably
would have trouble finding a buyer for Kmart, in any case.
Still, with his
Kmart holdings now worth about $4 billion, Lampert may
not want to keep betting that much on the retailer’s
ability to get back among the leaders.
Kmart is Rich in Cash and Real Estate
but Not in Sales
Now that Kmart has posted its third profitable quarter
in a row and announced that it has an extra $2.6 billion
in cash to spend, the eternal question remains: Just what
is Kmart's future as a retailer?
With Edward S. Lampert, founder of the investment company
ESL Partners, steering the retailer since he became chairman,
Kmart now looks like a true retail oddity: simultaneously
losing ground with the American shopper and generating
cash like a slot machine.The company reported a 15 percent
decline in sales for the most recent quarter, but the stock
price has climbed this year from a low of $22.41 in January
to close at $76.89 yesterday.
Kmart's big investors, behind Mr. Lampert, include Goldman
Sachs and TIAA-CREF, as well as various hedge funds like
Atticus Capital Management. All of them, presumably, have
seen some sort of writing on the wall and liked, or at
least agreed with, what they saw. The chief attraction
seems to be Kmart's real estate, fund managers invested
in the company said. With most of its 1,400 stores leased
at an average cost of $2 a square foot, compared with $3
for Wal-Mart Stores and $20 for Home Depot, according to
a recent Deutsche Bank report, Kmart's portfolio looks
like a gold mine to investors regardless of what happens
to the sales inside those stores.
Kmart has already announced plans to sell as many as 54
stores to Sears, Roebuck & Company for $621 million,
as well as 13 to 19 others to Home Depot for as much as
$288.5 million. (The Home Depot deal originally involved
as many as 24 stores, but the number was reduced this month.) " These
are proven, established locations, so the diligence process
is a lot quicker for someone buying one of these leases," said
one fund analyst, citing his company's policy. "There's
no zoning hurdle," and other issues like neighborhood
opposition that might slow the opening of a new store have
long been settled.
Gary M. Giblen, director of research at C. L. King & Associates
in Manhattan, contends that even drawn and quartered, Kmart
may not be worth as much as its share price suggests. He
said he believed that its stores, many of them in strip
malls and urban areas, could bring far less than the $15.2
million average per store that the Home Depot deal commanded. " In
most parts of the country, it's cheaper to build," he
said, "and why would you want to inherit a bad location?"
Another factor that bullish investors say they like is
the merchandising at Kmart. The chain's longtime focus
on increasing or at least stabilizing sales levels in existing
stores is being abandoned. Instead, Kmart managers are
being told to trim costs but keep core customers. One fund
manager said he expected the recent decline in sales to
improve by the fourth quarter of this year, in part because
Kmart has brought in new kinds of apparel and made deals,
like one with the WB Network regarding its fall television
lineup, to promote its products.
The company is also more demanding of its vendors. One
former Kmart supplier said the company was charging them
for deliveries that arrive more than one day ahead of schedule
or one day late. In the past, this former supplier said,
the window was more like five days before penalties were
imposed.
Still, some watching events unfold at what is the nation's
third-largest discounter are convinced that Kmart represents
a bad enterprise posing for the moment as a great stock. "Kmart
is not being run that much as a retailer," said Mr.
Giblen, pointing out that the chief executive, Julian C.
Day, was a chief financial officer at Sears, Roebuck and
Safeway. "The C.E.O. is a financial engineering guy,
and they are really running it as a company to be restructured."
Kmart's $2.6 billion in cash also raises a red flag for
Mr. Giblen, who compared the chain to smaller rivals, now
extinct, like Bradlees, Ames and Caldor. He says he thinks
one-time benefits - the sale of pre-bankruptcy inventory
in Kmart's warehouses along with closed stores, as well
as the hardball tactics with suppliers - are behind the
cash buildup and he says he does not believe that Kmart
can sustain that. " Besides, the lower- to middle-income
customer is tapped out," he said, " and Kmart
is really the low-end customer."
Mr. Giblen says he thinks that some Kmart investors may
be unaware of how fast a discounter's story can end. "A
retailer can look good on paper, but completely fall apart
faster than anybody can imagine," he said. "If
the sales go down, the expense structure is fixed with
rent and payroll, so the thing can implode very quickly." He
predicted that the $2.6 billion in cash could be used to
buy back Kmart stock, which, at the current levels, would
be highly profitable for investors who got in during Kmart's
darkest days.
Kmart would not provide an executive to comment on the
situation, and a spokesman cited "the new company
policy" by way of explanation. Manufacturers who supply
goods to Kmart and were left empty-handed when the company
filed for bankruptcy were promised shares as well. And
while some of them have received them, others have not
and that may have helped bolster the share price as well,
Mr. Giblen said.
Even fund managers who are holding the stock long term
say the lack of specific direction from Kmart can be baffling. "That's
been the modus operandi there for a while," one said.
Whether the cash built up will become a special dividend
for investors is one possibility; a stock buyback or another
kind of investment are other possibilities as well.
The Lampert era at Kmart has brought its share of obvious
changes. The company has also made some high-profile merchandising
changes, like creating a design office for Lisa Schultz,
its chief creative officer, not in Troy, Mich., where the
rest of Kmart is based, but in Manhattan's trendy Chelsea
neighborhood. "The company deserves a lot of credit
because the people they brought in to do in-house apparel
for women and girls are doing a terrific job," said
Burt Flickinger III, a retail consultant. But even so, "inventory
levels are light, and that just offsets the sales declines
they are experiencing on Martha Stewart," he added. "At
the end of every month, you're still not offsetting the
losses that you have."
Vendors Join Forces to Fight Kmart's
Claims for Money
Seven months after Kmart Holding Corp. filed lawsuits
to take back $174 million in payments made to key vendors
during its bankruptcy, the Troy retailer has settled with
just a handful of them in a case that could go to the U.S.
Supreme Court. Kmart of Troy has settled with 179 vendors
out of 1,189 it sued in January and collected $12 million
through July 28, according to a filing with the U.S. Securities
and Exchange Commission earlier this week. But large vendors
with millions at risk have not settled with the nation's
third-largest retailer. Many have teamed up to share legal
bills and can afford to wait out either a decision in bankruptcy
court in Chicago or a review by the Supreme Court. "It's
the most discussed (bankruptcy) case in the country," said
Barbara Rom, a partner in the bankruptcy and restructuring
group of Pepper Hamilton LLP of Detroit. "I think
the Supreme Court is likely to hear it. It changes the
complexion of bankruptcy cases." The vendors have
requests pending before U.S. Bankruptcy Judge Susan Pierson
Sonderby in Chicago to dismiss Kmart's claims for the money.
A hearing is set for December in the lawsuit involving
Handleman Co. of Troy. The payments to these so-called
critical vendors were approved by Sonderby days after Kmart's
Jan. 22, 2002, Chapter 11 filing. The payments, which totaled
$327 million, went to 2,330 vendors including Kmart's food
distributor, egg and dairy suppliers, newspapers, including
the Detroit Free Press, and others involved in the retailer's
advertising program.
Vendors who didn't receive the special payments contend
the payment system was unfair. In April 2003, U.S. District
Judge John Grady in Chicago ruled that the payments to
some vendors over others were not allowed in the bankruptcy
code. His decision surprised many in the bankruptcy arena
as such critical vendor payments had become common in corporate
restructurings nationwide. Grady's decision was upheld
in February 2004 by the 7th U.S. Circuit Court of Appeals
in Chicago. Now that the courts have ruled that the critical
payment practice discriminated against some vendors, Kmart
wants its money back. The payments, however, are not likely
to have a major impact on the $23-billion retailer's finances.
Rom said the payments were rarely allowed 10 years ago.
In the Kmart case, she said many of the vendors were paid
on the assumption that they would have refused to do more
business with Kmart without the money. She said "there
is a high likelihood" that Kmart will recoup the payments
from vendors still actively in business. Kmart declined
comment.
Kmart had argued in favor of the payments, saying its
business would be hurt if key vendors stopped supplying
its stores. But the appeals court chided Kmart and Sonderby,
saying the retailer offered no proof to support the argument.
The court also ruled that paying certain vendors and not
others was discriminatory. About 45,000 other unsecured
creditors were given approximately 10 cents on the dollar,
paid mostly in Kmart Holding stock as part of Kmart's plan
of reorganization approved in May 2003. Kmart Holding stock
since then has nearly quadrupled. Vendors paid with newly
issued Kmart Holding stock could recoup about 60 cents
for each dollar they were owed at current share prices,
Rom said. Kmart shares closed down 34 cents to $76.55 on
Friday. "It's one of the few cases where people got
stock and it really was worth something," Rom said.
Handleman is fighting in court to keep the $49 million
it received after Kmart's January 2002 bankruptcy filing.
Kmart has until next month to respond to Handleman's motion
to dismiss the lawsuit. Handleman spokesman Greg Mize declined
comment on the legal battle, but said "Kmart is a
valued customer and has been a valued customer for years." The
music distributor said in a June 30, 2003, statement that
it should not have to return the money because it gave
up other avenues to recoup what it was owed when Kmart
designated it a critical vendor.
A group of 14 newspaper companies including Knight Ridder,
owner of the Free Press, the Washington Post Co. and the
Hearst Corp, also is asking Sonderby to dismiss Kmart's
lawsuit to collect about $30 million from them. The case
began when one creditor, Capital Factors of Boca Raton,
Fla., challenged the payments since its clients did not
receive them. Capital Factors held about $20 million in
unsecured claims against the retailer. Toddler and infant department overview
The I/T department looked like it was in transition
to a new way of doing business. There were two rounders
by the house tag Wonder Kids that were on trend for cut,
color and theme! The grouping featured a cozy pink based
plaid mini skirt, an embroidered twill jumper in dusty
pink or tan and a few tops to tie in. The table top program
also looked cleaned up and featured a 2 for $9 price point
for basic tops. Route 66 was not very evident but the Wonder
Kids did offer a denim grouping in girls and a twill/ plaid
group for boys. The layette wall featured safe stripe and
solid pieces in blue, pink and yellow with green combos.
The rounders were reserved for terry, poly and cotton sleepers,
creepers
and sleeping gowns for newborns.
Opportunities in the infant's
and toddler's department
The I/T department was quite bare but a few of the
groupings and ideas on the floor made sense and seemed
to indicate a new direction for the store. We have been
talking about how the entire Infant and Toddler market
is moving towards more mature styling even in the smallest
sizes. It is that thinking that we would like to see applied
to the trends and silhouettes used in the department going
forward. In terms of items that we would love to see here,
for girls we see ponchos, layered tees (done as separate
layers so that mom can wash the top layer or mix it with
another layered look), vests in transitional fabrics to
wear on crisp autumn afternoons, simple denim pants, skirts
and a jacket that can be worn with anything and not just
as part of a grouping, fun or licensed rain coats and a
light weight crochet sweater, cardy or vest. For boys we
would like to see basic but well laundered or even tinted
denim jeans, a jacket and perhaps a vest, sweater vests,
cozy knit shirts perhaps with woven trims, layered knit
tops and maybe a
transitional vest in nylon.
A look into the department:
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