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Kmart must cut stores, carve niche

Andrea Lillo, Staff Staff -- Home Textiles Today, January 28, 2002

New York — Most retail analysts believe the job ahead for Kmart is clear: take advantage of the filing to chop down the store base. What's less clear is what type of position Kmart should carve out for itself in the difficult middle ground between Wal-Mart's bareknuckled low-price policy and Target's snappy, better-quality image.

While Kmart's plan to shutter an as-yet-unspecified number of under-performing stores spells more bad news for vendors, the closings promise to free up hundreds of millions of dollars in market share for rival retailers.

In home textiles terms, even what many analysts consider to be a minimal number of closures — about 350 units — would leave up for grabs more than a quarter of million dollars in business, according to HTT estimates. And if Kmart decides to follow the most aggressive number of stores closings — which some analysts peg at around 700 units — more than half of billion dollars in home textiles sales would shake loose for rivals.

With 2,114 stores currently operating, analysts varied on what the number of store closings should be, though they all agreed it should be a significant one.

"They have many weak stores and this is the time to walk away from them," said Walter Loeb, of Loeb Associates, adding that he thinks Kmart should shutter about 19 percent, or 400 stores. The resulting company that emerges may be unlike the discounting giant it is today, he added, perhaps becoming more of a regional chain store instead.

Shelly Hale, analyst, Banc of America, said that she'd like to see more store closings than less, which for her would ideally be 700 stores, though Kmart probably won't close that many, she said. However, "for the company to survive, it needs to deliver 4 percent on operating margins," she said.

About 10 percent to 15 percent of most chains consist of underperforming stores, said Britt Beemer, America's Research Group. Kmart probably falls closer to the 15 percent end, he said, and should probably close about 300 stores. Kmart should also do more administrative cost cutting, he said, since it has a higher overhead structure than other retailers. However, the stores are already thinly staffed, he said, and can't afford anymore cuts.

The magical store-closing figure for Eric Beder, analyst, Ladenburg Thalman, falls between 300 to 400 stores.

David Campbell, retail analyst at Davenport & Co., who doesn't cover Kmart but the retail industry in general, also would like to see Kmart close a significant number of stores. "Their real estate is old; they have to upgrade it and renovate."

Several analysts also believe that Kmart needs to figure out who its target audience should be. Hale questioned Kmart's claim to be "the authority for moms," saying that Kmart has never provided data supporting that. "It may be wishful thinking on their part, though the reality may be different. Their core customer may be the entire family, or perhaps not in the suburbs but the inner cities. But they should base this decision on data." Kmart does have loyal, core customers, and it needs to focus on them, she said.

One of Kmart's advantages, Beemer added, is its urban market base. Forty percent of its stores sit in urban areas, he said, a market where other retailers like Wal-Mart don't want to go.

More importantly, Beemer said, is for Kmart to find out what it stands for to the customer. It can become the discount home store of the United States, and may need to rely on Martha Stewart more. It also "needs to amputate its weak limbs," he said, citing auto parts as an example, since there are "auto part stores on every corner of America," instead of trying to be good in all categories.

Loeb thinks it will take two years or more before Kmart exits Chapter 11. He also suggested that management needs an effective merchant in place now that Mark Schwartz, the former president and coo, has left the company.

The one analyst conspicuously not weighing in on the Kmart filing last week was Prudential Securities analyst Wayne Hood, whose Jan. 2 research note suggesting a possible Kmart bankruptcy filing has been viewed by many as the flash point that resulted in the rapid collapse of Kmart's stock.

Hood has dropped coverage of Kmart, according to the securities firm, and will make no further comments about the company.

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