KMART STILL INTERESTED IN FINDING A GROCERY PARTNER

TIM MORAN

DETROIT -- Kmart, Troy, Mich., remains interested in a deal with a "grocery partner," but it has not yet found a suitable candidate, Floyd Hall, chairman, president and chief executive officer, said, here.

Speaking at the company's annual meeting, Hall said partnering with a supermarket-industry chain of national stature would help boost the company's business. Kmart retails food in its supercenter and Big K formats.

"A grocery partner could not only aid in pricing and distribution, but could take the burden off Kmart of providing high-cost retail equipment such as freezer aisles and specialty display cases," he said.

Kmart last year was reportedly trying to secure self-distribution by pursuing a merger with an existing retailer or wholesaler. Hall told the meeting last week that no deal is imminent.

"We have no national chains in the nation at this time," he noted. "And we have none that sees the marriage, at this point, being the right thing. We will always be open to any proposal we feel will enhance the shareholders' value."

He said the company remains committed to its grocery business, which increases store visits and aids in boosting per-visit sales -- both key strategies for Kmart as it moves from being a turnaround company to one entering a new phase of aggressive growth beginning this year.

Kmart in 1998 reached sales per square foot of $220 in its Big K stores, an all-time high for the company. Its gross margin rate was 21.8%, and sales, general and administrative expenses dropped to a low of 18.5% of sales. With the first quarter of 1999, the company achieved 12 successive quarters of improved earnings and has once again been rated as investment quality by the three major debt-rating agencies.

The company believes it holds a 9% share of what Hall termed the $368 billion discount-retailing market. That share positions Kmart between Wal-Mart, with 23%, and Target, with 6%.

"The source of our confidence remains the opportunities that we see out there that we're leveraging on the operational and merchandising fronts. We will continue to improve the productivity of our existing store base by increasing shopping frequency and the size of each transaction," Hall said.

That will be accomplished in part by the continued rollout of the new, 140,000-square-foot Super Kmart prototype designed to fit better into smaller sites and within smaller communities. The majority of Super Kmarts contain 180,000 square feet of space; the biggest Big Kmart reaches 110,000 square feet.

"The smaller floor plan gives us a store that fits more markets, absorbs less investment and requires lower volumes to produce an acceptable return," said Hall.

Super K stores averaged $330 per square foot in sales in 1998; the chain has 102 of the biggest stores and expects to roll out 15 to 20 Super K's in 2001.

The new, smaller Super Ks will have a "rebalanced" merchandise mix, which will contain the same categories as existing Super Kmarts, but fewer choices within each category, said a company official. The new stores might offer ten types of loaf bread, where existing Super Ks might offer 12, she said.

Hall said business growth is expected to come not only from an increase in store numbers, but from a customer base with a stronger affinity for the discount channel.

"The discount retail industry is projected to continue to grow about 8% over the next few years," he said.