KMART SEES BLUELIGHT AT THE END OF THE TUNNEL

BARBARA THAU

NEW YORK -- Make way for Kmart, the comeback kid.

That was the message from a pumped-up Charles Conaway, chairman and chief executive officer of the $40 billion chain, who offered up a detailed assessment of his first 240 days as CEO.

Conaway chose the relaunch of the famous BlueLight Special at the trendy W Hotel here to outline a retail revival that started with a "deep dive" review of the business in June when he joined the lumbering giant.

To hear Conaway tell it, Kmart is in the midst of a comeback that would rival John Travolta's resurrection in "Pulp Fiction."

Conaway said Kmart is making good on his three-pronged strategy to achieve world-class execution (in-stocks are up from 40 percent to 90 percent, and store presentation resets are now done 80 percent on time, for example); create a customer-centric culture; and forge an emotional bond with consumers.

The retailer, which has been hammered for having a murky marketing message, especially when compared to the clear-cut identities of archrivals Wal-Mart and Target, has finally seized upon a defined focus: "We have to be the authority for mom, kids and home," said Conaway, and "Martha Stewart is [mom's] personal interior designer." Conaway said Wal-Mart is clearly the low-price leader, and Target "has done a great job of delivering style and a value proposition." But "what's wide open is that nobody is really talking about the customer."

Key improvements at Kmart include technology upgrades in the supply chain that have resulted in a "dramatically improved" in-stock position. Last year, the retailer had 15,000 trailers of merchandise behind stores. Today there are zero, Conaway said.

As a result of a more efficient operating model, Kmart will cut advertising expenses by $200 million.

But evidence of Kmart's turnaround is in the store traffic and financial performance. Conaway said this year, 89 percent of shoppers visiting Kmart made a purchase, compared with 79 percent last year.

He added that Kmart has closed the gap with key competitors Meijer, Target and Wal-Mart, and has increased comparable-store sales by 50 percent.

Conaway, who held his first meeting with suppliers recently, said vendors have been reinspired. "We've disappointed them in the past."

In keeping with his mantra to boost customer service and store-level execution, Kmart recently kicked off a new Super Service Rewards Program that rewards store associates for providing "world-class" customer service.

"We're spending over $1 billion in overdoing the whole infrastructure," he added.

That money has funded tools to speed the shopping task, such as faster scanners. Also, Kmart stores will soon be equipped to scan a consumer's basket of items while the customer is in line.

Looking ahead, the retailer is targeting supercenters for growth (buoyed by its $4.5 billion supply-chain deal with Fleming Cos.), moving to improve the flow of goods and working toward the turnaround of 250 underperforming stores.

At least one analyst is not doling out effusive praise just yet.

Shelly Hale of Banc of America Securities said Kmart still has a lot more work to do. "They're shoring up their infrastructure and getting rid of inventory, but comp-store sales have been growing at the expense of gross margins," said Hale, adding that Kmart still has significant inventory reductions to make.

Regarding stock perfomance, Conaway admitted that "we have a long way to go."