Revolt? What Revolt?

You would think Kmart Corp. Chief Executive Joseph E. Antonini would be scrambling feverishly to draft a new strategic plan. On June 3, after all, shareholders rebuffed a key management-sponsored restructuring proposal in one of the most astonishing investor rebellions in corporate history.

But no. As he sits on the edge of his chair for an interview at Kmart's headquarters in Troy, Mich., Antonini appears nervous and almost theatrically upbeat, but hardly repentant. He is sticking to his plan--the one rejected by investors--to sell small chunks of the No.2 retailer's specialty stores. "Maybe there was a protest and maybe there was a misunderstanding of that particular [proposal]," he says. "There are other ways to do [it]."

That's not exactly what dissident shareholders had in mind. "We wanted to force this company to rethink their direction," says Jim Severance, portfolio manager for the State of Wisconsin Investment Board, which led the opposition that left Antonini's plan 23 million votes shy of a majority. Severance has urged Kmart to dump its specialty stores, such as OfficeMax and Builders Square Inc., and focus instead on the slumping core discount business. "Either you replace the strategy or the strategist," he says.

Indeed, Antonini faces severe pressure to turn Kmart around--whether he acknowledges it or not. Says a source close to Kmart's board of directors: "I hope we can save Joe, but it's a tough job he's got." After posting record sales and profits in 1992, the huge retailer has stumbled badly. Last year, Kmart lost $328 million, before extraordinary items, on sales of $34 billion (chart). Profits declined 69%, to $18 million, in this year's first quarter. The poor earnings have put in jeopardy a crucial $3.5 billion store-renovation program.

DOOR-SLAMMER. All that and a plummeting share price have inspired investors' ire. Wisconsin's Investment Board hired a proxy solicitor to gather support, and other prominent investors, such as the College Retirement Equities Fund, publicly joined the revolt. On the eve of the annual meeting, nervous Kmart officials began calling big shareholders, asking them to reverse their votes. In the end, though, 108.6 million shares were cast against the management, including many of the 19 million shares held by employees. Another 28% of the 416 million total didn't vote at all. "It was worse than we predicted," concedes John Wilcox, chairman of Georgeson & Co., Kmart's proxy solicitor.

Will the vote spark change? One source close to the board termed the result "a wake-up call," and spoke of the need to recruit new executives from outside the company. Others, at least publicly, appear more complacent: The vote was just "a communications problem," says director Donald S. Perkins, former chairman of Jewel Cos.

It's more than that. The shareholders' no vote shut the door on a stock sale that could have raised up to $900 million. As a result, Kmart could be desperately short of cash by late this year. Antonini plans to spend $1.3 billion in 1994 to expand and spiff up dowdy old stores. If he proceeds, figures Maureen M. McGrath, an analyst at Smith Barney Shearson Inc., this year's cash flow will be $111 million below expenses; next year, she says, the crunch "becomes critical."

Antonini believes he can cover the shortfall by increasing sales and cutting costs. Kmart recently began restocking the shelves in its 2,400 discount stores after- hours. In test stores, that hiked sales between 2% and 3%. Similar changes should help lift profits $600 million to $800 million over the next 24 months, he says.

If those efforts fall short, however, Antonini faces several bitter options. Cutting the dividend for the first time in 32 years would be like pouring gasoline on shareholders' smoldering discontent. Borrowing money would be extremely expensive, given the company's BBB-plus credit rating. He could raise $3 billion by selling Kmart's specialty stores outright, figures Michael B. Exstein, an analyst with Kidder, Peabody & Co. However, that would repudiate a decade-long diversification strategy.

Kmart directors will chew over the options when they next meet on June 21. As they mull a decisive change of course, they would be wise to keep an eye on Wal-Mart and Target, which are poised to overrun Kmart's remaining strongholds. If Kmart continues to flounder, there'll be less and less for shareholders to fight over.

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