A Ghoulish Trick
Kmart
By Bob Bobala (TMF Bobala)
October 24, 2000
Trading at $5 3/4 as of October 24, 2000
If you're looking for a good scare this Halloween, look no further than your nearest Kmart (NYSE: KM). With 2,163 Kmart retail outlets in the United States, chances are there's one in your neighborhood, and admission is free. So, save the fee you'd pay at one of those local haunted houses. Terror really can come cheap -- right at about $6 per share for Kmart shareowners.
Kmart's precipitous fall from retailer heaven just goes to show that my kid sister and I were right. Despite our mother's pleas and our family's fiscal realities, when growing up as peer-pressured, middle-class punks, we refused to step into a Kmart for fear of ruining our hip images. We saw the writing on the wall.
Of course, these days cheap goods beat out image every time. My wife and I were pumped to find a Kmart not too far from our new place a while back. Apparently it was not one of the newly remodeled "Big" Kmarts, because the one time we visited it looked like a bomb had just detonated. Many shelves were empty and merchandise was strewn all over the place. There seemed to be more lollygagging employees than customers. In fact, when I called for directions, the woman I spoke to put the phone down, forgot about me, and gabbed with a coworker while I fired up MapQuest to figure out how to get there.
Even strategic partnerships with the jazzy Martha Stewart Living Omnimedia (NYSE: MSO), former Charlie's Angel Jaclyn Smith, and former Sports Illustrated swimsuit vixen Kathy Ireland could not recharge this place. Seriously, go to a Kmart on Halloween and see if you're not walking among the living dead.
Contrast that to retail king Wal-Mart (NYSE: WMT), which is lit up bright as Las Vegas at 11:00 p.m. -- and as crowded as it is on a Saturday afternoon. Or take competitor Target (NYSE: TGT). My wife and I have never had a bad experience there. The entire store we shop at is stocked well and maintained impeccably. As my wife likes to continually prove, Target's customers -- and there are a lot of them -- are always right. (She's dubbed the "Returns Goddess" because she's always bringing stuff back -- even after months -- and no one at Target ever squawks.)
As lousy as my anecdotal experience has been, Kmart has actually been improving in recent years. A major renovation effort has been underway, and the Big K has seen year-over-year sales growth increase from an anemic 2.3% in 1997, to 4.6% in 1998, to 6.7% on $32.2 billion in sales last year (though the company had sales growth of only 1.9% over the first half of 2000). OK, Cisco Systems (Nasdaq: CSCO) it is not. But this isn't one of those perilous tech stocks. This is a discount retailer whose roots took shape in S.S. Kresge's first five-and-dime in Detroit more than a hundred years ago. Could there be hope?
Well, there's always hope -- hasn't Bob Hope been pushing the company's "Big Kmart" concept since its inception in 1996? Big Kmart: Bigger, Better, more Beautiful -- but apparently not more profitable. Net profit margins over the past three years have ranged from 0.7% to 1.5%, and back to 1.2% last year.
And there's the rub. Why would you buy a retailer with 1% profit margins that sells $32 billion worth of stuff, when you could buy another one that makes 3% on $165 billion in sales? That's what Wal-Mart is doing. It is the beast come 'round to eat Kmart's lunch, and it's been doing it for a long time now. Those who think Kmart represents a value play with a significant margin of safety should take a hard look at the numbers. Here are a few of them just from last year:
1999 Kmart Wal-Mart
Sales Growth 6.7% 19.9%
Net Income $0.4 $5.4
Net Margins 1.2% 3.3%
Cash & Equiv $0.3 $1.9
Total Debt $2.8 $22.1
(Note: All dollars in billions)
Wal-Mart is clearly the Godzilla stomping on Kmart's chihuahua. About the only metric Kmart does a little better on is cash relative to debt. Kmart carries 8.2x more debt than cash on its balance sheet, Wal-Mart 11.6x. (Man, bricks-and-mortar retail is expensive. You can see why Amazon.com (Nasdaq: AMZN) is still taking its shot on the Internet.) But that's the kind of credit line you can get when you rake in $165 billion in sales, turn better than a 3% profit on it, and push sales growth toward 20%.
Can Kmart compete with that? I think not -- not anytime soon anyway. With a market cap of $200+ billion, the Wal-Mart juggernaut may slow under its own weight, but Kmart (worth about $3 billion today) is not likely to take advantage of that in the near future. With any luck, it can right its own ship in the coming years, but I'm not willing to bet on it sailing very far.
One thing, though, you can get some cool Halloween stuff at its Internet project, BlueLight.com. That's at least something. Enjoy, and have a great Halloween!
A Trick or Treat represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question, or representative of anyone or anything other than that specific Fool's thoughts.
Next Scary Story: The Road to Retirement »
RSS Headlines
Fool UK
