New boss puts Kmart in checkout

Wednesday, July 26th 2000, 12:00 am
By: News On 6

Former CVS president Charles Conaway, now head of Kmart, will close 72 stores, including one in Rhode Island, and get rid of inventory to keep pace with its rivals.

In his first major move since moving from CVS Corp. to head Kmart Corp., Charles Conaway will close 72 of Kmart's less-profitable stores, including a store in Middletown.

The closings will affect 5,000 employees in 28 states. The move is designed to help Kmart, the nation's third-largest retailer, catch up with industry giant WalMart and other rivals, such as Target.

Kmart, of Troy, Mich., also said yesterday it will cut inventory at many stores by putting merchandise on sale.

Conaway, Kmart's new chairman and chief executive officer, was previously president of CVS. Since leaving the Woonsocket-based drug store chain to take over Kmart from retiring chairman Floyd Hall on May 31, Conaway has spent much of his time touring Kmart stores.

He is considered an expert in inventory control.

Kmart said it will put piles of merchandise filling its warehouses on sale and invest in more-efficient inventory control in an effort to improve earnings.

Kmart turned over its inventory 4.1 times last year, less than Wal-Mart's 7.0 times and Target's 6.3.

"Controlling your inventory is so important in this business and it's something they've fallen short at," said Timothy Ghriskey, a senior portfolio manager at Dreyfus Corp., which has owned shares in Kmart.

The company will take pretax charges of $290 million for inventory clearance sales throughout the chain, and $75 million for the replacement of computer systems that are under development.

Kmart said most of the stores being closed are marginally profitable but don't justify additional investment because of factors including location and suitability for expansion.

They include 66 traditional Kmarts and 6 Super Kmarts, most of which will close by Nov. 1.

The Middletown store is located at 288 East Main Rd., in the Main Shopping Plaza. Kmart spokesman Steve Pagnani said hourly workers at the affected stores will lose their jobs, but are being advised to apply to other Kmart locations. Managers are being transferred.

The 5,000 workers affected by the store closings represent about 2 percent of Kmart's 278,000 employees.

None of the other Kmart stores in Rhode Island, Massachusetts or Connecticut will be affected by yesterday's announcement, according to a list released by Kmart.

Analyst Patrick O'Keefe, of Conway, MacKenzie and Dunleavy said the store closings are the next logical step in the retailer's long-term restructuring plans.

"It's part of the cleansing process. You want to take charges early, up front. It's a lot easier to get bad news out once. It's another thing to have continued disappointing earnings quarter after quarter in drips and drabs," O'Keefe said. "Clean out unprofitable stores and products . . . Investors would be disappointed if Kmart didn't have this kind of news."

After the closings, Kmart will have about 2,093 stores.

"You go into a Kmart and they're dirty stores, they're out of stock and it takes a long time to check out," said Jeffrey Edelman, an analyst at PaineWebber Inc., who rates Kmart shares "neutral." "I would expect more initiatives in the not-to-distant future to move them on the right path."

As a result of the restructuring, the retailer will take a one-time charge of $740 million during its second quarter. Those earnings are scheduled to be released Aug. 10.

Kmart also said earnings in the fiscal second quarter in this year will decline from a year earlier. Excluding the charge, profit in the quarter ending this month will fall in the range of 4 cents to 7 cents a share from 26 cents a year ago. The average forecast of analysts polled by First Call/Thomson Financial was 16 cents.

While Kmart is considered more financially sound than it was in the mid-1990s, it has struggled to compete with Bentonville, Ark.-based Wal-Mart and Minneapolis-based Target.

"Kmart is years behind its two competitors," said Brian James, an analyst at Loomis, Sayles & Co., which owns shares in retailers. "There are a lot more than 72 stores that will eventually have to go."

Kmart's stock price is down more than 54 percent in the last 52 weeks, from its high of $15.25 June 28, 1999.

Shares in Kmart (KM:NYSE) closed yesterday at $6.875, off 18.75 cents a share.

Kmart's shares aren't as highly valued by investors as some of its competitors. Kmart trades at 6 times its earnings, while Target trades at 23 times earnings. Wal-Mart has a price-to-earnings ratio of 44.

Kmart is in the midst of an ambitious year-long plan to build its presence on the Internet as well as renovate and open new stores. Kmart earned $403 million on revenue of $35.9 billion in fiscal 1999.

At a shareholders' meeting in mid-May, Kmart said it would spend $340 million to open 20 new Big Kmart stores, expand 12 to 15 existing stores and add five new Super Kmarts -- 24-hour centers that combine traditional Kmart discount stores with full grocery operations.

Kmart said yesterday it will invest $460 million this year to upgrade its information systems, and $210 million to improve its distribution and logistics network.

Initiatives include installing new scanners in all stores, new registers in the company's 300 highest-volume stores, and new systems to help Kmart's merchants monitor and manage inventory.

With Associated Press and Bloomberg News reports