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Kmart remains positive despite 4Q earnings drop

The retailer puts expansion plans on hold

TROY, MI -With margins under heavy pressure as it flushed out excess inventory and costs climbing sharply higher as it staffed up for longer hours over the Christmas holiday, fourth-quarter profits at Kmart Corp. dropped off by 39.6 percent, to $249 million from $412 million last year.

But even with the steep decline, the retailer still managed to beat Wall Street's diminished expectations, and new ceo Chuck Conaway said the giant chain continues to hit its targets as it attempts to turn around its flailing operations. Narrowly beating the street, Kmart earnings came in at 48 cents a share, topping a consensus forecast of 47 cents.

Sales in the all-important Christmas quarter rose by 4.8 percent, to $11.6 billion from $11.1 billion last year, and same-store sales advanced a solid 2.1 percent in spite of a sputtering retail environment.

Acting as a drag on profits, margins continued to tighten as the retailer worked down its stockpiles, narrowing by 60 basis points, to 21.6 percent from 22.2 percent a year ago. And costs climbed sharply higher as the retailer increased store labor hours to stay open late for the holidays and improve service levels.

"We finished the fiscal year with solid evidence that we are building momentum and making progress," said Conaway. "With our same-store sales increasing over the past four months, it is clear that the new Kmart is closing the gap with our competition, and in some cases moving ahead. With a heightened sense of urgency, we are properly focused on the massive structural and cultural transformation necessary to convert these gains into a strong and sustainable improvement in our financial performance."

Less than seven months under a new mandate for change and a new management team to make it happen, Kmart is hitting most of its goals, said Conaway, generating "significant strides in sales growth, merchandise in-stock position, customer satisfaction and other key measures."

Customers' approval ratings have increased to 55 percent from a low 40 percent, said Conaway, gaining on improved in-stock levels, "which have increased from 70 percent to 86 percent." Conaway added, "Our non-negotiables-no more than three in a check-out line, clean stores and clear aisles-also contributed."

In another big improvement, Conaway told investors on a conference call that the giant chain has finally brought its stockpiles under control. When he took the job last summer, he said, excess inventories were piled high in more than 150 miles of trailers, waiting to be stocked on store shelves. "We buy to sell through now. We have not had any seasonal carry-over since I've been in the business."

Building a platform for future sales and earnings growth, Conaway said the chain has invested $1.7 billion in new systems and programs to transform its supply chains."

And curbing expansion plans until the company builds its bottom line, Conaway said the chain will open only 14 SuperK stores, its biggest growth driver, and two full-line stores this year. "We will not destroy shareholder capital until we see returns."

KMART CORP.


Qtr. 1/31 (x000) 2001 2000 %CHG

Sales

$11,636,000

$11,105,000

4.8

Oper. income (EBIT)

472,000

709,000

-33.3

Net income

249,000

412,000

-39.6

Per share (diluted)

0.48

0.77

-37.7

Average gross margin

21.6%

22.2%

-

SG & A expenses

17.5%

15.8%

-

12 months

2001

2000

%CHG

Sales

37,028,000

35,925,000

3.1

Oper. income (EBIT)

(45,000)

1,300,000

-

Net income

(244,000)a

403,000

-

Per share (diluted)

(0.48)

0.81

-

Average gross margin

19.9%

21.8%

-

SG & A expenses

20.0%

18.1%

-


( ): Denotes loss

a-12-month results include an income-tax benefit of $134 million, compared with a tax provision the prior year of $337 million.

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