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Kmart announces it will close 284 money-losing stores

Kmart Corp. today said it will shutter 284 under-performing stores and slash 22,000 jobs as part of its Chapter 11 reorganization plan.

The Troy, Mich.-based retailer, which will take a charge of up to $1.3 billion as a result of the move, said the store closings will provide an influx of about $550 million in 2002 and about $45 million after that. It expects its annual EBITDA to go up by about $31 million.

Analysts said the real challenge for Kmart, which has been hit hard by tough competition from Wal-Mart, Target and other discounters, is to revamp its marketing strategy and win back the affection of consumers. The chain also must beef up its inefficient operations and distribution systems, they said.

"I don’t think store closures get you all the way there as far as turning this business around," said Jeff Stinson, retail analyst with Midwest Research. "It’s got to be finding a new niche within which to operate this business so that you don’t compete head-to-head with Wal-Mart. You need to position this brand differently in consumers’ minds. That’s going to take a couple of years."

Kmart will close 271 Kmart discount stores and 12 Kmart Supercenters in 40 states, as well as one Kmart in Puerto Rico. Many analysts had predicted Kmart would close between 500 and 700 stores, and some still expect more stores to get the axe. "Although the company doesn’t think so, I would expect more store closures as we move through the bankruptcy," Stinson said.

John Melaniphy III, a retail consultant with Chicago-based Melaniphy & Associates Inc., agreed. "It’s likely that this is just the first wave, just a way to get the worst-performing stores out of the way," Melaniphy said.

According to Kmart, the closings will happen on a store-by-store basis because each location must sell off its inventory before closing. Kmart estimated that a total of about $1 billion in inventory will be liquidated from the stores.

The Bankruptcy Court of the Northern District of Illinois must also give its approval at a hearing March 20 before Kmart can proceed with the plan.

Employees who will lose their jobs are being notified today and will receive benefits, Kmart said.

Strategic challenges

"The decision to close these under-performing stores, which do not meet our financial requirements going forward, is an integral part of the company's reorganization effort," Kmart CEO Charles Conaway said in a statement. "We are confident that doing so will provide the company with a healthier, more productive store base."

Although the store closings are a step in the right direction, analysts note that Kmart faces tremendous challenges — and some tough decisions. "It’s survival of the fittest and their competition is fierce," Melaniphy said. "Kmart has to cater to their consumer and to develop customer profiles: Who is their most frequent customer? They have to find out and cater to that customer as best they can."

A key part of the retailer’s strategy is to boost the total number of customer visits at its stores by focusing on the SuperKmart concept, which incorporates a grocery component. "People are at the grocery store at least once a week or more, so Kmart will try to make that shopping trip also a trip for general merchandise, for additional purchases and cross shopping," Melaniphy said.

But there’s a potential problem with that approach: Wal-Mart aims to expand by about 50 million sq. ft. in 2002 alone, and much of that expansion will be dedicated to supercenter concepts. Should Kmart really try to compete head-to-head with Wal-Mart?

"It could be a suicide mission, trying to take Wal-Mart head-on with the supercenters," Melaniphy said, adding that Target is also experimenting with supercenter concepts.

On the plus side, however, Kmart is strong in increasingly active urban markets where Wal-Mart and Target have struggled to gain a foothold, Melaniphy said. Kmart might do well by focusing on those stores.

In afternoon trading on the New York Stock Exchange, Kmart shares rose 6 cents, or just under 5%, to $1.30. Kmart shares reached a 52-week high in August 2001 of $13.55.

Costs and benefits

Kmart, a $37 billion company that operates some 2,100 stores, posted a list of the stores to be closed .

Among the states hardest hit by the announcement are Texas, which will lose 33 Kmarts; Michigan, which will lose 18; California, which will lose 16; and Florida, which will lose 15.

According to Salomon Smith Barney, shopping center companies with the most to lose include Malan Realty Investors, which earns 26% of its rents from Kmart leases; Agree Realty, which earns 24% of its rents from Kmart; and Kimco Realty, which earns 13.3%.

"With all this space coming on the market it does create a real negative impact on a lot of people because a lot of people have centers with Kmart in them," said Gary Glick, a partner with Los Angeles-based Cox, Castle & Nicholson LLP. "But at the same time it creates great opportunity for other developers who are creative and can make use of that space or for other retailers that can solidify their market share within certain areas."

(Q&A with prominent shopping center attorney Gary Glick.)

-- Joel Groover

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