Kmart Sees Disappointing Quarter

April 26, 1994|By Jay Hancock | Jay Hancock,Sun Staff Writer

Kmart Corp. surprised Wall Street yesterday with more evidence that it is struggling in the discount-store wars, revealing that its profit for this quarter will be sharply less than expected.

The nation's second-biggest retailer said strength in its specialty divisions won't be enough to make up for poor sales in its flagship Kmart discount-store unit. As a result, profit from continuing operations for the three months that end tomorrow will be "well below" the 12 cents a share earned in last year's first quarter, Kmart said.

Kmart's stock dropped after the announcement, ending the day at $17 a share, down $1.

The disclosure "caught a lot of people by surprise," said N. Richard Nelson Jr., a stock analyst with Chicago investment firm Duff & Phelps Inc.

Kmart portrayed the latest bad news as another dose of bitter medicine to be endured by shareholders as the price of future financial health.

Chairman and Chief Executive Officer Joseph E. Antonini blamed the disappointing sales on a merchandise overhaul that has swept 10,000 slow-selling items from the Kmart division's shelves and cut the value of goods in stores and warehouses by more than $700 million, or 10 percent.

The changes hurt revenue by confusing shoppers and causing some items to be unavailable. But Kmart hopes it'll boost results later by sharpening its merchandise mix and freeing capital that had been tied up in inventory.

Corporate analysts, however, believe there's much more to Kmart's poor results than a short-term strategic adjustment.

Wal-Mart Stores Inc. and Target Stores, the No. 1 and No. 3 discounters, continue to expand and steal Kmart shoppers. And Kmart's modernization of most of its 2,600 U.S. stores, expected to be complete in 1996, may not help as much as expected, because the outlets are smaller than competitors' stores, analysts said.

"I just think the competition is getting tougher and tougher, and they're having a difficult time," said Linda R. Morris, a stock analyst with investment firm PNC Financial Corp. in Philadelphia. "They should have renovated their stores four or five years ago."

Mr. Nelson, of Duff & Phelps, questioned whether Kmart's attempt to get the right goods on its shelves will work.

"I think the company is groping," he said. "I think the merchandise operation is in turmoil right now."

Underscoring Kmart's difficulties is the fact that other retailers have been reporting substantially improved results this year. Kmart can't blame its problems on a bad economy anymore.

For example, Sears, Roebuck and Co., Wal-Mart Stores Inc., Target and Hecht's parent May Co. all reported double-digit percentage increases in March store-for-store sales, considered a crucial gauge of retail health. Wal-Mart's same-store sales boomed 15 percent.

Kmart, by contrast, had same-store sales growth of just 4.5 percent.

Mr. Nelson yesterday cut his quarterly earnings estimate for Kmart from 12 cents a share to 0-to-5 cents a share and his estimate for the year from $1.85 to $1.60. Ms. Morris expects the company will earn between 4 and 6 cents a share for the quarter and about $1.50 for the year, down from an earlier estimate of $1.80.

Yesterday's announcement was the latest in a string of disappointing disclosures from Kmart's Troy, Mich., headquarters.

For the fiscal year that ended Jan. 26, the company lost $974 million on revenue of $34.16 billion. The loss was caused by almost $1.5 billion in charges associated with the shutdown, moving or renovation of hundreds of Kmart stores and the sale of the company's Pace Warehouse Club and Payless Drug Store units.

But retail experts said results would have been lackluster even without the writedowns.

The company does have some bright spots. Its Sports Authority and OfficeMax "category killer" operations are doing well. And analysts expect a fine-tuning of Kmart's Waldenbooks chain to pay off.

But the company may have ignored its flagship stores too long, they said.

"Maybe the focus was on the specialty store division, and now they're turning back to the discount stores," Ms. Morris said. "The question is, is it too late?"

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