KMART LOOKS TO GROW FOOD BUSINESS

CHRISTINA VEIDERS

TROY, Mich. -- Chuck Conaway, chairman and chief executive office of Kmart Corp., said he is "big-time bullish" on grocery, drug and other high-frequency items during the company's second quarter conference call here last week.

By year-end, Kmart expects to increase its supercenter base by 20% over last year to 124 stores out of a total of 2,116 stores.

By the third quarter, Kmart will have completed the remerchandising of its pantry format in supercenters, Conaway said. The remerchandising efforts consist of cutting the stockkeeping units down by 20% and focusing on highly visible turn items like cereal, snacks and juices. The company is focusing on freeing up space to devote to off-shelf promotions. According to Conaway, up to 9% to 10% is being devoted to off-shelf promotions of big tonnage items sold at low prices through the BlueLight Wall of Values at these stores.

The mass merchandiser completed its distribution conversion to Dallas-based Fleming's supply network in a record 143 days, Conaway reported. To support Kmart's food and consumables business, which consists of over 12,000 SKUs, Fleming added two new distribution centers during the period.

"We are unaware of any food distribution conversion that's ever been done of this magnitude," Conaway said. "The alliance gives us lower costs to acquire and serve through lower logistics and transportation costs. This ensures that our price, assortment and service will be competitive in our food business."

Kmart's main hurdle is reaching in-stock positions by year's end. Conaway said the company is now at an 80.4% in-stock position with an inbound service level of over 90%. "We are in great shape to hit our goals and Fleming has really responded," he said.

Facing a false advertising price lawsuit filed by its competitor, Target, Minneapolis, last week in a federal district court in Minneapolis, Conaway said he was happy with the "Dare to Compare" campaign, which uses in-store signage to compare Kmart's prices with those of other competitors.

"It is one [portion] of a multifaceted, targeted effort to move pricing perception with research. Our market share shows we are moving rapidly. You're going to see more emphasis on pricing and the lawsuit will have nothing to do with our sales earnings. If our talking about pricing is an issue now, it will become a lot more of an issue from the competitive standpoint coming up," said Conaway.

For the 13-week quarter ended Aug. 1, Kmart's net sales were $8.9 billion, a decrease of 0.9% from $8.9 billion for the 13-week period ended July 26, 2000. As previously reported, same-store sales increased 1% in the second quarter of fiscal 2001. The company reported a net loss of $95 million, or 19 cents per share, vs. a net loss of $448 million, or 93 cents per share, for the 13-week period ended July 26, 2000. Excluding the charge for BlueLight.com, the company's net loss was $22 million, or 4 cents per share, for the second quarter of 2001.

Gross margin for the second quarter of 2001 was 20.8% of sales, compared to 20.5% last year, excluding noncomparable items. The increase in gross margin is due to a solid performance in reducing merchandise shrinkage, which offsets the price reductions attributable to the BlueLight Always program, said the company. Selling, general and administrative expense, as a percentage of sales, was 20% in the second quarter of 2001 vs. 19.2% in the same quarter in 2000 excluding noncomparable items.

Separately, Target also reported earnings increases last week and said it will broaden its assortment of convenience foods in a growing number of traditional discount stores to include an expanded offering in refrigerated and frozen products such as pizza, ice cream and frozen dinners.

During the second quarter, which ended Aug. 4, 2001, it opened 34 new stores, including 20 discount stores and 14 Super Target supercenter stores, bringing total-store count to 1,019 in 46 states. In response to an analyst's question, Target executives said they were on track and pleased with their food business at supercenters -- even though just half of the supercenters are considered mature stores at this point. The focus is on top-line growth, improving the gross margin through improvement in spoilage and shrinkage, said the company.

The company also reported it was expanding its offering of premium products under the Archer Farms brand and that it has added an open price-point label for consumable items called Market Pantry.

The company said they are focusing on competitive pricing on nationally branded produce, dairy and dry grocery items and will continue to integrate Super Target into the Target systems to increase overall efficiency and consistency.

Second-quarter net income rose 5% to $271 million, or 30 cents a diluted share, compared to $258 million, or 28 cents, a year ago.

Total revenues in the quarter increased 8.5% to $8.9 billion from $8.2 billion in 2000. Same-store sales for the corporation increased 2% in the second quarter 2001.

The firm's gross margin as a percent of sales decreased to 31.9% from 32.2% year-over-year, reflecting a decline in the Target division's margin. The company said in a conference call that the decreases were due in large part to higher comps in lower-margin categories vs. categories with more favorable margins, such as apparel.