KMART TURNING DISCOUNT STORES INTO 'SUPERCENTERS'

DAVID GHITELMAN

TROY, Mich. -- Kmart Corp. here said last week it is so pleased with its newest store format, which it calls the "in-the-box" supercenter, that it plans to roll out an additional 20 in the next year.

The roughly 100,000-square-foot supercenters are traditional Kmart discount stores converted into units that devote roughly half of their floor space to supermarket offerings and the offer half to general merchandise, Chuck Conaway, Kmart chairman and chief executive officer, said during a conference call with analysts following the release of the company's results for the third quarter and 39 weeks ended Oct. 31. This contrasts with the company's current Super Kmart prototype, a 140,000-square-foot store devoted 30% to food and 70% to general merchandise.

"I'm real excited about the 'in-the-box' supercenters," he said, adding that the company opened 10 such supercenters in the third quarter.

Conaway also used the conference call to announce that Kmart is expanding its distribution agreement with Fleming, Dallas, to include ethnic and specialty foods.

He also addressed concerns about the company's financial performance. In the 13-week quarter, Kmart's sales declined 2.2% to $8 billion and same-store sales decreased 1.5%, leading the company to experience a net loss of $224 million, compared with a loss of $67 million in last year's third quarter. The loss per share was 45 cents, compared with a 14-cent loss last year.

The quarter's results included a charge of $148 million related to the restructuring of its supply-chain operations.

For the first 39 weeks, sales were down 0.1% to $25.3 billion and same-store sales grew 0.4%, while the company experienced a net loss of $344 million, compared with a loss of $493 million in the previous year's third quarter. The loss per share was 70 cents, compared with $1.

Conaway reminded analysts the company "is only one year into its turnaround" and management is "addressing Kmart's liabilities first," with sales and profits expected to follow.

Industry analysts told SN they accepted this line of reasoning. Deborah Weinswig, a food and drug chain analyst for Bear Stearns, New York, said, "I view the third-quarter results and the outline for fourth-quarter initiatives as strong progress toward the restructuring effort, and the large opportunity for operational improvement seems increasingly attainable."

Eric Beder, an analyst at Ladenberg Thalmann, said, "They're making significant progress, but you're not going to see it in the income statement."

Conaway explained that the "in-the-box" stores are created by taking existing discount stores and converting them to supercenters without expanding them, hence the "in-the-box" label. The conversion process involves no major construction, he noted, and involves "about a $5 million incremental investment" per store. "We just need to invest in new grocery fixtures and some electrical."

The resulting 90,000- to 110,000-square-foot store features "more offerings and better pricing than a traditional grocer and more convenience than a traditional supercenter," Conaway said.

"Since conversion, stores have doubled their sales," he noted, adding that the one "in-the-box" store that has been open for a full year is "exceeding all expectations."

The decision to expand its agreement with Fleming, Conaway noted, was a key part of Kmart's efforts to "fix our food business."

Conaway said the expanded agreement "allows us to consolidate purchasing power and speak with one voice to the vendor community."

Kmart's relationship with the vendor community was another topic of the call. As previously reported, the relationship has been contentious recently, with some vendors claiming that Kmart has been attempting to change terms and conditions midway through contracts. They have also charged the company with falling behind in payments.

In the call, John McDonald, Kmart executive vice president and chief financial officer, attributed the probems to computer glitches and the company's trimming of its supplier base by 25% last year.

"We had some communications issues," said McDonald. "And we heard a lot of noise from a small group of suppliers, mostly from the 25% that we cut."