Kmart overhaul stems earnings woes

Don Hogsett, August 27, 2001

Cutting prices on thousands of items to shore up business in a straitened economic environment, Kmart recorded a 1 percent decline in second-quarter sales and a sharply narrowed loss of $95 million, compared with a year-ago deficit of $448 million.

Faced with a weakening economic outlook and forced to stay competitive, the giant retailer lowered the price of 20,000 items in its stores as part of its BlueLight Always program, putting downward pressure on overall sales, which slipped by 0.9 percent, to $8.9 billion from $9.0 billion last year. On the upside, same-store sales eked out a gain of 1.0 percent despite the pricing deflation.

In the midst of a radical overhaul of operations, the retailer narrowed its losses by almost 80 percent, to $95 million from $448 million last year. Included in this year's deficit is a $92 million pre-tax charge to buy the 40 percent of it didn't already own. Excluding the one-time item, the retailer posted a smaller loss of $20 million, in line with Wall Street expectations, and an improvement of almost 97 percent from a year-before loss before charges of $621 million.

But Wall Street, concerned about the possible impact of price deflation on future sales and earnings, knocked the retailer's stock down by 7.3%, or 88 cents a share, to $11.22 from $12.10 a share.

Average gross margin, excluding non-comparable items, improved by 30 basis points, to 20.8 percent from 20.5 percent a year ago, mostly due to a reduction in merchandise shrinkage.

Operating costs, before non-comparable items, climbed by 80 basis points, to 20.0 percent from 19.2 percent a year ago, as increased store labor costs more than offset savings from lower advertising costs.

"We are pleased with our results as we continue our strategies to transform Kmart," said ceo Chuck Conaway, architect of the retailer's latest turnaround strategy. "As planned, we completed our conversion of our entire store base to the Fleming distribution network and reset over 90 percent of our store base during the quarter."

During the second quarter, Kmart opened one supercenter and closed a discount store. As of Aug. 1, Kmart operated 2,113 stores, down from 2,165 a year ago.

Kmart Corp.

Qtr. 8/1 (x000) 2001 2000 % CHG
a-Second-quarter results include a $92 million charge for; an income-tax benefit of $25 million, compared with a year-ago tax benefit of $250 million; and a $12 million dividend on convertible preferred shares vs. $12 million last year.
b-Six-month results include a $115 million charge for' a $31 million income-tax benefit. Vs. last year's benefit of $232 million; and a $23 million preferred stock dividend, unchanged form last year.
Sales $8,917,000 $8,998,000 -0.9
Oper. income (EBIT) 72,000 (621,000)
Net income (95,000)a (448,000)a
Per share (diluted) (0.19) (0.93)
Average gross margin 20.8% 16.4%
SG&A expenses 20.0% 23.3%
Six months
Sales 17,255,000 17,193,000 0.4
Oper. income (EBIT) 158,000 (501,000)
Net income (120,000) (426,000)
Per share (diluted) (0.24) (0.87)
Average gross margin 20.8% 18.5%
SG&A expenses 19.9% 21.4%

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