Kmart's Closing Some Doors [News] July 25, 2000

Kmart's Closing Some Doors

Beleaguered discount retailer Kmart announced today that it's closing 72 stores. The company also said that earnings for Q2 and the entire fiscal year will be negatively impacted. For the company's new CEO, this is the first step in a long path towards righting the retailer. Investors thinking the stock's a steal here might want to hold off, though, until they see more improvement.

By LouAnn Lofton (TMF Lou2)
July 25, 2000

Shoppers at certain Kmart (NYSE: KM) stores should have no trouble finding copious "Blue Light Specials" over the next several months. Kmart, the number three discount retailer in the U.S. behind Wal-Mart (NYSE: WMT) and Target (NYSE: TGT), announced today that it will close 72 stores.

The closures will be completed mostly by November, and inventory in those stores will be marked down to clearance and liquidation prices in order to move it. Get your severely on-sale Martha Stewart bed linens now!

The new CEO's first big move
This is the first big step towards improved financial performance taken by Kmart's new chairman and CEO Charles Conaway, who came to the company six weeks ago from CVS (NYSE: CVS). Conaway faces the daunting task of turning around a huge, underperforming retailer in a very competitive environment.

The company said that most of the stores tagged for closure are marginally profitable, but not enough to justify the company's continued capital investments in them. Kmart also attributed some of its problems to "a non-competitive customer experience."

Around 5,000 employees will be affected, though Kmart's suggesting that they apply for jobs at other existing stores. The closures represent 3.3 % of Kmart's total number of stores in operation. The company will shut down 66 traditional Kmarts and 6 of the all-night mega-variety Super Kmarts.

Earnings will be hurt
Associated with today's announcement, not surprisingly, is the news that the store closings will negatively affect earnings for both the second quarter and for the company's entire fiscal year. Kmart will take a one-time charge of $740 million per-tax. It expects Q2 earnings to come in before the charge at somewhere between $0.04 and $0.07. The First Call/Thompson Financial consensus estimate for Kmart's second quarter is $0.16. The company anticipates that earnings for the entire year to be below expectations as well.

Stock's suffering along with operations
Investors haven't been buying what Kmart's been selling for some time. The stock's down more than 50% from the company's 52-week high of $15 11/16 and is now trading at around $7 a share. In the past couple of months, the stock's nearly reached lows it touched back in 1996. Most retail stocks have had a rough year, but Kmart's operations have been struggling along with its stock price.

As Fool writer Brian Lund said in March, the company is taking "baby steps" toward becoming more profitable. The company's inventory management has been sketchy, and sales have slowed as shoppers have chosen Target and Wal-Mart over Kmart. The company at least acknowledges its difficulties with keeping customers in its stores and today's news, though painful, will hopefully play out positively for the company long-term.

A "Blue Light Special"?
Today's news from Kmart is just another chapter in a long book telling the tale of the company's move back towards successful operations. If the "Kmart Comeback" is to be a novel, today's news might amount to little more than the prologue. Though Conaway's moves will have some near-term earnings impact, closing a small handful of stores and facing up to the chain's deficient customer experience is just a small step that highlights the magnitude of Conaway's task.

Investors who think that the stock, at current prices, represents a "Blue Light Special" in its own right might want to hold off and wait to see some improved operations before shopping. As the company itself admits, that could take a while.

Your Turn:
What do you think? Is Kmart going to be the turnaround kid? Other Fools want to know. Post your thoughts on the Kmart discussion board.

Suggested Links:

  • Kmart Inches Forward, News, 3/6/2000
  • Kmart Snares Chief From CVS, Fool Plate Special, 5/31/2000
  • Company Press Release
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