SEARS EXPANDS GRAND CONCEPT IN PURCHASE OF KMART STORES 2004-07-05 (2)

JON SPRINGER

HOFFMAN ESTATES, Ill. -- Sears, Roebuck & Co. here said last week it would acquire 54 Kmart stores and seven locations from Wal-Mart Stores, Bentonville, Ark., and convert them to an off-mall food and general merchandise format similar to that of Sears Grand. Three of the acquired Kmart stores will re-open under the Sears Grand banner, while the remaining locations will trade under the Sears name but feature a product mix and design similar to Grand, said Alan J. Lacy, Sears' chief executive officer. The Sears Grand concept, which debuted in two locations last year, includes convenience food items in addition to apparel and home merchandise, in a single-level "racetrack" design with exit cashiering. Those stores, Lacy said, have exceeded management's sales expectations by 30%, generating more frequent visits from a tighter trade area than Sears' mall-based stores.

Sears did not disclose specific locations of stores to be purchased but said around 60% of them are located in the 15 largest U.S. markets. Sears will pay $620 million in cash for the assets. Earlier last month, Kmart, Troy, Mich., said it would sell 24 of its locations to Home Depot for as much as $365 million as it works to generate cash after emerging from Chapter 11 bankruptcy protection.

"These are stores that were worth more to us than to Kmart," said Lacy in a conference call discussing the agreement. The stores are primarily in urban markets with 80,000 households within five miles and average incomes of $55,000, Lacy said, adding that he did not expect their performance would interfere with Sears' mall-based stores.

While Sears boosted its off-mall presence, Kmart continued to shrink its asset base. The company will operate 1,420 stores after the sale to Sears but will receive nearly $1 billion between the sales of stores to Sears and Home Depot. "Both transactions represent opportunities to realize value, which can be utilized to improve the remaining store base and strengthen the company," said Julian Day, Kmart's chief executive officer, in a statement. Kmart is not in discussions to sell additional stores but "we will continue to evaluate opportunities as they arise," Day said.

Kmart declined to specify last week how many of the stores it is selling are Super Kmarts offering full grocery departments. The company operates about 60 such stores, after closing dozens in its bankruptcy reorganization.

Sears expects to convert and open three or four of the acquired stores by the end of the year, with 55 more to be completed next spring and two in 2006, Lacy said. The company said it would invest around $200 million to convert the stores.

The three largest stores acquired will be converted to the Sears Grand format. Currently, Sears operates Sears Grand stores in Salt Lake City and Gurnee, Ill., with additional locations set to open later this month in Las Vegas and this fall in Rancho Cucamonga, Calif. Along with Sears Grand stores in the 2005 pipeline, Sears expects to have 12 to 14 Grand stores open by the end of next year.

Around 15% of the floor space at the newly acquired stores will be devoted to consumables and transactional items, Lacy said. Much of the food offerings at Sears -- which include staple pantry items, dairy, lunch meats and frozen foods -- will be supplied by local direct-store delivery, he added. Sears will promote the product selection differences between its mall-based stores and the new off-mall locations with inserts in its circulars.