It isn't often that financial sleuth Howard Schilit turns bullish--especially on an outfit that has ousted its CEO and is trying to restructure. But Schilit is high on Kmart (KM), whose board dismissed chief Joseph Antonini in March and just hired Floyd Hall, former head of rival Target Stores. The Street has shunned Kmart, following two years of disappointing results. Shares are at 14, down from 21 in 1993. So what's turning Schilit on? He smells a turnaround.
True, Kmart continues to report losses from operations, but there have been "positive developments," says Schilit, an accounting professor at American University and president of the Center for Financial Research & Analysis. Upbeat factors include a rise in first-quarter sales of 8% overall and 9.4% for general merchandise.
Kmart's sales base "is jumping." This, Schilit believes, is an "early indicator of success in a turnaround."
Ordinarily, Schilit takes plunging margins as a sign of trouble. At Kmart, however, the drop--from 25.4% in 1994's first quarter to 22.2% in the quarter ended Apr. 30, 1995--was largely due to costs related to launching an advanced accounting system. He finds this investment in technology highly encouraging. Kmart has also resorted to aggressive price discounts to lure shoppers--a necessary step, Schilit notes, for long-term success.
Kmart suffered a precipitous drop in operational cash flow, from $1.13 billion in 1993 to a mere $76 million in 1994, forcing it to sell subsidiaries and other assets. But cash flow will rebound as sales pick up, says Schilit, and he views the sell-offs as part of a "sound strategy to return Kmart to core retailing."
Most of all, Schilit is full of praise for the "lack of financial shenanigans" and Kmart's "conservative accounting" --telling it like it is, he thinks.