Attention, Shoppers: Kmart Is Fighting Back

Hooksett, N. H., seems an unlikely setting for a clash ef titans. But as the site of the first Wal-Mart store in New England, this Manchester suburb dotted with discount stores and factory outlets has become just that.

A sign at the Kmart discount store half a mile down the road offers to match all of Wal-Mart's prices. But many shoppers crowding the Wal-Mart recently already seemed like loyalists, even though Kmart Corp. has dominated discount shopping in the Northeast for years. Harry and Anna Kraft, retirees from North Reading, Mass., live near a Kmart in Saugus, Mass., but they have made the 45-minute trek north to Wal-Mart three times. "We price things, and it's worth driving up here," says Anna Kraft. "We used to shop at Kmart, and we'd wait for hours in line. Sometimes we'd get so disgusted we'd leave the stuff and go."

GOOD NEWS. Joseph E. Antonini, Kmart's chief executive officer since 1987, doesn't know the Krafts, but he knows what they're talking about. "We haven't listened to our customers enough," he says. "They want quick checkouts, wider aisles."

What Joe Antonini wants is a turnaround of Kmart, the company he has worked for since 1963. And despite Wal-Mart's ominous move into his turf, Antonini is creating the first good news for the $32 billion retailer in some time. In one of the industry's most woeful years, Kmart's earnings for the first six months rose 9%, to $270.3 million, on sales of $16.2 billion. Sales in stores open more than a year were up 2.9% in August. Analyst David Gilson of IDS Financial Services, a big Kmart investor, figures same-store sales will increase 4.5% for the year. Kmart's stock has risen 83%, to 42, from a low of 23 in 1990, although it's still no higher than it was four years ago.

At the core of Antonini's efforts is a $2.5 billion effortto modernize 2,200 Kmart stores. So far, he has overhauled 416 stores, including wider aisles, better lighting, clearer signs, and improved inventory control. Analyst Steven Kernkraut of Bear, Stearns & Co. figures the new stores are logging $40 to $50 more in sales per square foot than the unrenovated stores' rate of $160.

Just as important, Kmart shareholders credit Antonini's efforts with reviving their sagging faith in the retailer. "If Kmart hadn't done this new store concept, it would have been a few short years before they were out of the ball game," says Marion Dixon, senior portfolio manager at Delaware Management Co., which owns the largest Kmart stake, at 7.5 million shares. Dixon says of the unfixed stores: "You wouldn't bring your worst enemy there."

That's ironic, given that Kmart once dazzled investors in the late 1960s with stores that featured discount prices and spacious layouts for the times. But in the 1980s, Kmart's senior managers largely neglected the core discount stores and instead diverted cash flow into buying Waldenbooks, Pay Less Drug Stores, the Builders Square home repair chain, and PACE Membership Warehouse. Meanwhile, Wal-Mart, Dayton Hudson's Target group, and the independent Venture chain all built new stores and offered lower prices.

PETITE SIZES. Now, to haul Kmart up to its rivals' levels in efficiency, Antonini is testing such devices as ShopperTrak, a maze of ceiling censors that indicate where customers are congregating. The jovial Antonini visits eight to 10 Kmarts a week and stops in at Wal-Mart and Target "all the time." He constantly scrutinizes the merchandise for new ideas. One idea he had is a line of petite-size apparel for women that is selling briskly. He has also allotted more space to such high-margin products as cosmetics, jewelry, and children's clothing and lowered prices on thousands of Kmart's more popular items.

Kmart has also boosted its marketing to spiff up its image. New TV ads star Antonini a la Iacocca, greeting customers and schmoozing with salespeople. He has also been edging a bit upscale with some celebrity tie-ins. A fashion line sold under the name of ex-Charlie's Angel Jaclyn Smith is selling at the rate of more than $100 million a year. But one such effort, a kitchen and dining line by Martha Stewart, doyenne of Connecticut-style gracious living, has been cut back to moderately priced linens and towels.

Meanwhile, Antonini is hedging his bets. The specialty stores Kmart acquired in the 1980s contributed 11% of profits in 1990 and are expected to provide 25% by 1995. They're being headed by new recruit George R. Mrkonic, a 39-year-old Harvard MBA and past president of Herman's Sporting Goods Inc. Under his guidance, Antonini says, Sports Authority Inc., a chain of 30 giant sports-equipment stores, turned a profit in August for the first time since its 1990 acquisition. The most spectacular growth, however, should come from the PACE Warehouse Clubs, which Kmart bought in 1989. Bear Stearns's Kernkraut expects PACE's sales to grow from $2.3 billion in 1990 to $3.8 billion by the end of this year.

PRIME REAL ESTATE. It's an impressive burst of activity from a retailer many were ready to write off. The question is: How much better can it get? The company is still far from garnering the average of $215 to $225 in sales per square foot that Antonini wants by 1995. And by then, Kmart will be feeling the full brunt of Wal-Mart. The hugely successful Arkansas-based retailer has mostly stuck to rural areas of the South and Midwest. By decade's end, however, Wal-Mart will be fully established in California and the Northeast, core Kmart strongholds.

To many, there is little doubt who the better competitor is. "I don't think Kmart can ever match the management training and enthusiasm you see in the ranks at Wal-Mart," says Gilson of IDS, which also owns over 9 million shares of Wal-Mart's stock. "It's tough to be better than God."

But Gilson remains bullish on Kmart, maintaining that there's enough room in the market for at least three discounters. And Kmart has something Wal-Mart largely doesn't have yet: Prime urban real estate. "What people forget about Kmart is that they have such dominance in terms of locations," says Carol Farmer, a retail consultant in Boca Raton, Fla. "There are still millions of Americans who have greater access to a Kmart than a Wal-Mart." Given the juggernaut Kmart faces in Wal-Mart, this decade won't be easy. But Antonini has given his company a fighting chance.

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