Fool.com: Kmart: Super "K" or Scarlet Letter? (News) November 4, 1999

Kmart: Super "K" or Scarlet Letter?

By Dave Marino-Nachison (TMF Braden)
November 4, 1999

Although investors in discount retail chain Kmart (NYSE: KM) are hoping that the holiday selling season will bring light to their respective trees/menorahs/kinaras/whatever, early indications heading into turkey time aren't upbeat.

This morning, the company turned in October sales numbers badly lagging its key competitors in same-store sales growth numbers. Kmart "comps" rose 3.7%, the company said, and total sales rose 6.3% for the month to $2.52 billion. Home-related and seasonal items drove the sales growth.

But a difficult retail environment and increased promotions will likely constrain the bottom line for the third quarter. "We currently anticipate that earnings for the quarter will improve only slightly over last year," said Chairman and CEO Floyd Hall. Wall Street is currently looking for EPS of a dime for the quarter, up from $0.08 last year.

Over at Wal-Mart's (NYSE: WMT) core stores (excluding Sam's Club) and Dayton Hudson's (NYSE: DH) Target chain, October comps rose 6.5% and 5.4%, respectively.

Of course, that's only one data point in looking at Kmart, and there's plenty more to chew on. Let's gather up another: 39-week same-store sales at Kmart, Wal-Mart stores, and Target moved ahead 5.2%, 8.3%, and 7.2%, respectively. Not great for the Kteam.

Although it certainly helps to know where an investment stands among its competition, companies and stocks should be evaluated on their own merit.

Kmart's merits? If you follow the company's timeline, it's about five months out of the turnaround phase and into the growth phase. At its mid-May annual stockholders' meeting, the company said it was ready to start generating free cash flow and using some of that to buy back company shares, which have declined even more since then.

That probably had something to do with the fact that although Kmart did deliver second-quarter income from continuing operations of $0.27 per share -- slightly better than expected -- the company ended up with negative free cash and no shares repurchased.

Kmart still has a way to go to prove to investors that it's back on the growth track. To its credit, it has launched a series of encouraging initiatives, such as store remodelings, conversions to the Big Kmart format, selective acquisitions, improving service, and moving into the online space. However, today's news doesn't appear to have provided investors with any real indication that the corner has been completely turned.

Related Links:

Kmart Web Site
Kmart Message Board

Feedback about News & Commentary? Please send mail to news@fool.com.