Kmart Corporation

FOUNDED: 1899 as S.S. Kresge Company

Contact Information:

HEADQUARTERS: 3100 W. Big Beaver Rd.
Troy, MI 48084
PHONE: (248)643-1000
FAX: (248)643-5249
TOLL FREE: (800)635-6278
URL: http://www.Kmart.com

OVERVIEW

Alternately praised and ridiculed for its "blue-light" special offers, and oft-criticized for extremely generous salary and benefits to its top company officers, Kmart Corporation is a large discount retail chain in the United States. In 2002 the struggling corporation had numerous detractors, and The New York Times speculated whether the company would be bought out by an international conglomerate, miraculously find a way to redefine itself and stop its expanding losses, fold, or merely continue to flounder as Wal-Mart and Target collectively steal away Kmart's once-impressive market share. Kmart has never been able to quite shed its low-status image, although it has been actively trying to do so.

Just a few years ago, it looked as if the company had reversed its ill fortune. After reporting staggering losses in 1995 and 1996, Kmart returned to profitability in 1997, only to flounder badly in the 2000s. Its strategy of returning to the company's core business as a discount retailer and mass merchandise retailer seemed to be paying off for a brief time, but Wal-Mart's intense competition, and Kmart's inability to rekindle enough former customer loyalty, proved to be the company's financial undoing. In January 2002, Kmart Corporation filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code, claiming that it intends to rebound by 2003, a date that company officials and Kmart creditors soon acknowledged was likely unrealistic to meet. On March 9, 2002, then-Kmart Chairman Charles C. Conaway resigned under fire, drawing statewide headlines when it revealed his last estimated compensation package could be worth as high as $11 million.

The news that the company filed for bankruptcy was disappointing for investors who had hoped that Kmart had already rebounded from its economic woes of the 1990s after it decided in 1993 to sell all its non-core businesses and nearly all its international operations to focus on serving customers in the United States. Puerto Rico, Guam, and the U.S. Virgin Islands. Among the biggest changes customers noticed was the closing of all Penske Auto Centers located at 550 Kmart stores and their conversion to additional space for shopping items; the move led to 4,000 jobs lost by Penske employees. All told, analysts predicted that Kmart would close up to 600 of its least profitable stores in the early 2000s-a substantial chunk of the 2,114 stores that were open in January 2002. In March 2002, Kmart officials confirmed that at least 284 stores would be closed in an "orderly" fashion, but a nationwide network of about 1,000 employees formed an Internet site to express their grievances against Kmart management.

According to the annual Kmart Fact Book, "Kmart's primary target customer group is women between the ages of 25 and 45 years old, with children at home and with household incomes between $20,000 and $50,000 per year." To better serve its core customers and to attempt to lose a reputation for stocking "cheap" products, Kmart introduced new product lines such as the Martha Stewart Everyday and Sesame Street lines in 1997, while it implemented hundreds of initiatives aimed at improving customers' shopping experience and the overall performance of the company. By 2002 the company had expanded its partnerships with celebrity and name brand product lines; it attracted other name brands such as Hewlett Packard computer products and Black & Decker electrical tools for home workshops. The company did away with its automobile repair alliance with the Penske Corporation, instead concentrating on expanding grocery shopping operations and sales merchandising areas to attract Kmart customers. In March 2002 the company parted ways with Mark S. Schwartz, its president and chief operating officer for less than one year; a bankruptcy court ruled that Kmart could retain its working agreements with partners such as Martha Stewart Everyday, Jaclyn Smith apparel, Kathy Ireland exercise equipment and clothing line, JOE BOXER apparel, and Disney's line of children's and infant's clothing. To replace Schwartz, on March 11, 2002, Kmart hired its non-executive chairman of the Board of Directors, 53-year-old James B. Adamson, best known for restoring the reputation of Denny's after he assumed control as CEO of the parent company Advantica in 1995. After Adamson took control, more than one dozen top national executives with the companies were terminated and received unusually high severance packages of three years' pay (plus bonuses and some forgiven loans), and Julian C. Day was appointed President and Chief Operating Officer.

In the 1990s, Kmart converted many of its traditional stores into a new prototype called "Big Kmart." Big Kmart stores feature a new layout, an expanded consumable goods section, brighter lighting, wider aisles, and a bigger assortment of goods. In addition, the corporation's Super Kmart centers have about 12.5 million square feet of selling space and offer full-service shopping convenience from groceries to general merchandise. They are open 7-days-a-week, 24-hours-a-day.

COMPANY FINANCES

After reporting net losses of $571 million in 1995 and $220 million in 1996 on relatively flat sales of $31.7 and $31.4 billion, Kmart attempted a financial turnaround in 1997 with a net income of $249 million on sales of $32.2 billion. Successful product introductions, such as Martha Stewart Everyday home fashions and Sesame Street children's apparel, also contributed to the company's improved financial performance. In 1997 the stock was trading in the $10-$15 range, buoyed by the company's short-term return to profitability. The company's fourth quarter profits in 1997 were the best in five years, prompting analysts to begin recommending Kmart stock. However, the company's profits plummeted from 2001 to 2002 when stock closed at a low of __BODY__.60 in January, compared to a 2001 high of $13.55. In 2001 Kmart disclosed a second-quarter loss of $22 million and, over the course of the next year's meetings, the board of directors agreed to make wholesale changes in company leadership in 2002.

ANALYSTS' OPINIONS

Early in 2002, analyst Wayne Hood of Prudential Securities strongly urged dumping Kmart stock and rightly forecast almost-certain bankruptcy ahead for Kmart. Shortly, Kmart stock closed down 13 percent at $4.74. After Kmart hired a marketing firm to revamp its tattered image following Chapter 11 hearings, Matt Miller, a media analyst for The Daily Deal and one of Kmart's many harsh critics, wrote this: " Word this week that bankrupt Kmart Corp. is hiring Creative Artists Agency for a marketing makeover left us momentarily nonplussed. Isn't CAA a talent agency primarily for over-paid movie stars? Isn't Kmart a retail store primarily for underpaid workers?"

HISTORY

Sebastian S. Kresge founded the S.S. Kresge Company in 1899. It became one of the largest dime-store chains in the United States. The company opened the first Kmart discount department store in 1962 in Garden City, Michigan, a suburb of Detroit. In 1966 company sales topped the __BODY__ billion mark for the first time. There were 162 Kmart stores and 915 total stores in operation. In 1976 S.S. Kresge opened a record 271 Kmart stores in one year. The next year, 15 years after opening the first Kmart store, the company name was changed from S.S. Kresge Co. to Kmart Corporation.

In the late 1970s the company bought the Walden Book Company and in the 1980s bought Builders Square, a chain of home improvement stores. In 1981 the two-thousandth Kmart store was opened. By 1985 Kmart owned PayLess Drug Stores Northwest and Bargain Harold's Discount Outlets in Canada. Kmart also ventured into warehouse club retailing, opening PACE Warehouse with a company called Makro. In 1987 it sold most U.S. Kresge and Jupiter stores. Kmart bought The Sports Authority in 1990 and sold PACE Warehouse to Wal-Mart in 1994.

In the early 1990s, Wal-Mart bounded ahead of both Kmart and Sears as the leader in the industry. By 1991 Kmart's older and less attractive stores with slimmer merchandise shelves couldn't keep up with Wal-Mart's ultra-modern reputation. Kmart's sales and market share fell behind this mega-merchandiser.

Kmart fought on and bought a large portion of OfficeMax in 1991. In 1992 Kmart purchased 76 percent of Maj, a Czechoslovakian department store. It also announced plans to build 100 stores in Mexico with Grupo Liverpool. Also in that year, the company bought Borders, a chain of bookstores, but that venture proved ill advised. In 1994-1995, Kmart spun off OfficeMax and The Sports Authority as public companies through initial public offerings (IPOs) of stock. Proceeds to Kmart were __BODY__ billion for OfficeMax and $405 million for The Sports Authority. It also sold its interest in Coles Meyer in Australia. Facing falling profit margins, Kmart continued to sell its investments. In 1995 Borders Group became a publicly traded company through an IPO; proceeds to Kmart were $566 million.

Searching for a new strategy, Kmart brought in a new CEO, Floyd Hall (who stayed at the helm only to 2000), and a new management team and board of directors, either highly paid or overpaid depending on one's view, were put in place. More than 200 stores closed by the mid-1990s, and the company tried to restructure itself and focus on its core business, but stock prices fell even more. Rumors of bankruptcy swarmed Wall Street, but Kmart seemed to right itself for a time.

In 1996 and 1997 Kmart continued to divest itself of its non-core businesses and its international operations, including its Czech and Slovak stores. Thrifty/Payless was spun off as a public company in 1996. In 1997 Kmart sold its interest in Kmart Mexico and all of its Kmart Canada stores. Finally, it divested itself of Builders Square in 1997. In 1999 the company signed an agreement with Martha Stewart Retail to carry her line of products. Hoping to reclaim past glory, the Blue Light Special sales gimmick so popular in the 1980s was restored after a decade-long absence in 2001. Mark S. Schwartz, a former Wal-Mart executive, became the president and chief operating officer of Kmart in March 2001, but he stayed barely long enough to use his shopper discount at Christmas, getting the heave-ho in January 2002 when Kmart became the largest retail chain in history ever to file for Chapter 11, according to The New York Times. His replacement, James B. Adamson, has earned a reputation by turning around beleaguered companies. In 2002, with rumors swirling through the business community that Kmart was a company ripe for purchase by a conglomerate or rival retail chain, Adamson was charged with the responsibility of trying to find a way to keep the now slimmed-down 1,900-store chain in business first, then to restore it to profitability. Adamson in 2002 found few analysts who thought the bankrupt company could regain the shopper and investor confidence Kmart once enjoyed. If Adamson can not pull off a minor financial miracle, his last job as chief executive officer might be to extinguish Kmart's famed blue lights.

STRATEGY

Kmart was originally a general merchandise discount store. The company sputtered financially after it tried to diversify into a variety of specialty stores, from book stores to home improvement centers. However, even after Floyd Hall became head of the company in 1995, and Kmart refocused on its core business, it became readily apparent that rivals Wal-Mart and Target had fashioned too big a lead to catch. Kmart conducted a study to determine a profile for the target Kmart shopper: women between the ages of 25 and 45 years old, with children at home and with household incomes between $20,000 and $50,000 per year. Of the 180 million people that shop at Kmart each year, 57 percent are women and 43 percent are men. The core mart shopper visited the store an average of 4.3 times a month and made an average purchase of $40 each visit. These core shoppers accounted for 60 percent of total store revenues. In 2000, when Charles C. Conaway took the top Kmart position, he pushed to strengthen marketing efforts to serve mothers and their children, but failed when the store took too long to replenish out-of-stock items. In short, Conaway tried, but not without failing, and he was quickly replaced as CEO. The Kmart chain reported a $244 million net loss for the fiscal year ending Jan. 31, 2001.

According to Kmart's annual report, the company is focused "on improving our customers' shopping experience through stronger assortments, better stores, convenient service and quality products at great prices." The company's merchandising strategy was focused on three areas: frequently purchased goods, popular national brands, and high-quality private label offerings. Its strategy was to improve its assortment of dominant national brands and be aggressive in pricing them. It wanted to complement that with a strong line of private label products, which included the Martha Stewart Everyday line of home fashions, the Sesame Street collection for children, and Jaclyn Smith and Kathy Ireland apparel, as well as Penske Automotive products and more. In 2002 the company kept all of the above except for Penske which proved an unprofitable partnership.

Part of the company's strategy of improving its customers' shopping experience was to convert its older, gone-to-seed stores into Big Kmart stores, with brighter lighting, wider aisles, bigger assortments, and an expanded consumable goods section. Super Kmart centers now feature about 12.5 million square feet of selling space, a broad selection of general merchandise and apparel, and a full assortment of groceries. Super Kmart centers are open 24-hours-a-day, 7-days-a-week. The first Super Kmart center opened in 1991 and numbered nearly 100 by the end of 1997, a number that dipped in 2002 as the company dumped many of its least profitable store operations nationwide.

Another aspect of Kmart's real estate strategy was to develop a five-year plan for each of the company's top 30 metropolitan markets. Within each of those regions, made up of both urban and suburban areas, Kmart planned to expand its presence. The 2002 store closings, however, demonstrated certain patterns of regional sales weaknesses. Kmart closed 33 stores in Texas; 21 in Illinois; 18 in Michigan; 16 in both California and Florida; 14 in Georgia; and 10 in Ohio.

INFLUENCES

Kmart's poor financial performance and bankruptcy in 2002 was attributed to poor management and an inability to cut the huge sales advantage Wal-Mart and Target had built since the 1990s. Kmart's strategy in 2002 was yet to be announced by yet another CEO, James B. Adamson, but most analysts agreed that the company needed to learn from mistakes of the past or die. Stores had to keep better inventory, not sending customers away disappointed with rain checks tucked inside their purses or wallets. It must focus on providing its core shoppers with a better shopping experience and surprise them with brighter, cleaner stores and helpful clerks hovering somewhere in plain sight. It must continue to provide an assortment of general merchandise at discounted prices, but some analysts feel that the company must play its Martha Stewart trump card more often and a whole lot better to compete with Target and Wal-Mart.

The company is also influenced by the strong performance of other mass merchandisers, especially Wal-Mart, Target and to a lesser extent, Sears. It will compete with them in the area of general merchandise, attempting to offer a bigger and better assortment that is more aggressively priced than its competitors. It is unlikely that Kmart will again try to branch out into specialty stores, and it even has cut loose from its Penske in-store auto repair operations. However, as of 2002, the company continued to retain its in-store Kmart Pharmacy Centers to fill prescriptions, a holdover from Kmart's attempt to take business away from the large drugstore chains such as CVS.

In spite of reverses, Kmart remains an extremely high volume retail store. Its 2000 sales amounted to $37 billion and its earnings the same year were $244 million. But losses in the third quarter of 2001 compared to the same quarter of 2000 were problematic as net sales declined 2.2 percent from $8.2 billion to $8.0 billion.

CURRENT TRENDS

In the mid-to-late 1990s, Kmart divested its specialty stores and all of its international operations, and in 2002 the company continued its practice of shutting down unprofitable store operations across the United States. First and most important, the company must shed its bankruptcy status by 2003 as first announced, or no later than 2004 if it hopes to maintain what is left of fast-dwindling creditor, supplier, and customer confidence. Whatever strategies Adamson's new marketing team in 2002 chooses to adopt, Kmart must implement initiatives to draw customers into stores and heighten their positive experiences while shopping.

The company had a more aggressive Internet marketing program in the 2000s, selling low-cost goods and even $12,000+ luxury Toshiba televisions through a Bluelight.com Web site. In the 2000s it offered customers a special Kmart MasterCard with 0 percent interest for six months on Kmart-purchased merchandise. However, the company's best-known marketing strategy was its return to the Blue light special, "unannounced" in-store sales on merchandise, but this strategy clearly was insufficient to stop Kmart's downward spiral into bankruptcy court.

PRODUCTS

The company continues to tout its Martha Stewart Everyday line of home fashions, Black & Decker workshop electric tools, and Sesame Street and Disney lines of children's apparel. Other specialty lines the company prominently displays in its print and online advertising include DeLonghi, Nickelodeon, Panasonic, Philips, and Hewlett Packard.

CORPORATE CITIZENSHIP

Kmart has an impressive record of sponsorship, particularly in programs that support infant and child health such as the March of Dimes WalkAmerica. Kmart has participated faithfully and has consistently been the nation's leading team in this program since 1985, raising $33 million through 2001. Kmart alone raised $3.3 million for the March of Dimes in 2001. Kmart, since 1999, has been a major supporter of the American Red Cross and supplied store space and supplies to help life-saving and cleanup efforts in New York following the September 11, 2001 terrorist attacks.

Kmart also hosts holiday programs for the raising of funds at Christmas by encouraging the in-store fundraising efforts of the U.S. Marines and local law enforcement authorities.

A self-proclaimed supporter of K-12 education, Kmart in 2001-2002 began a new fund-raising opportunity for enrolled schools called the Kmart School Spirit Program. The program donated about $10 million to member schools during the 2001-2002 school year.

GLOBAL PRESENCE

As of 1998, Kmart stores were located only in the United States, Puerto Rico, Guam, and the U.S. Virgin Islands. The company divested itself of international holdings in Canada, Mexico, and Europe during the 1990s. The company clearly has positioned itself in the 2000s as an American-owned and run company that serves the interests of lower- and middle-income families. It also has strongly positioned itself as a corporate good citizen to back causes that aid in the fight against children's diseases.

EMPLOYMENT

With some 275,000 Kmart employees (called "associates" by the company) through 1999, Kmart was the sixth largest employer in the United States. That number dropped dramatically in the spring of 2002 as the company announced plans to let go of more than 20,000 employees in addition to earlier mass layoffs in the decade, With a renewed emphasis on customer service, Kmart has demonstrated that it is committed to attracting, retaining, and developing the most talented and highly motivated associates in retailing. Associates may work in a store, distribution center, or at Kmart's headquarters. They are hired and retained on the basis of high standards of performance. Kmart provides equal employment opportunities regardless of race, religion, color, national origin, sex, or disability. However, in 2002, a Web site devoted to the concerns of disgruntled Kmart employees boasted nearly 1,000 members, a sign that the company has a long way to go before employee confidence in management can be restored. Much of the employee anger was directed toward multi-million dollar settlements with top management officials in spite of their roll in leading the company to Chapter 11 bankruptcy status.

Bibliography

Brauer, Molly. "Kmart Earnings Point to Recovery." Detroit Free Press, 14 May 1998.

Gaffney, John. "Kmart's Marketing Miscues." Business2.0, 28 January 2002. Available at http://www.business2.com.

Hays, Constance L. " Is Kmart Out of Stock in Answers?" The New York Times, 17 March 2002.

"Kmart's Bright Idea." Businessweek Online, 9 April 2002. Available at http://www.businessweek.com.

"Kmart Cutting 22,000 Jobs." CNNMoney Online, 8 March 2002. Available at http://money.cnn.com.

Kmart Fact Book. Troy, MI: Kmart Corporation, 1999.

Kmart Home Page, 11 May 2002. Available at http://www.Kmart.com.

Miller, Matt. " Singing the Blue Light Special." The Daily Deal, 1 May 2002.

Preddy, Melissa, and David Howes. "Kmart Crafts a Comeback Team." The Detroit News, 2 February 1996.

Strom, Stephanie, and Leslie Kaufman. "Kmart Is On Verge of Filing a Claim for Bankruptcy." The New York Times, 22 January 2002.

For an annual report:

telephone: (248) 643-1040 or write: Investor Relations, Kmart Corp., 3100 W. Big Beaver Rd., Troy, MI 48084-3163

For additional industry research:

Investigate companies by their Standard Industrial Classification Codes, also known as SICs. Kmart Corporation's primary SICs are:

5261 Retail Nurseries And Garden Stores

5331 Variety Stores

5411 Grocery Stores

5651 Family Clothing Stores

5912 Drug Stores And Proprietary Stores

Also investigate companies by their North American Industry Classification System codes, also known as NAICS codes. Kmart Corporation's primary NAICS codes are:

444190 Other Building Material Dealers

444220 Nursery and Garden Centers

445110 Supermarkets and Other Grocery (except Convenience) Stores

446110 Pharmacies and Drug Stores

448140 Family Clothing Stores

452990 All Other General Merchandise Stores