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. Last Updated: 07/27/2016

Kmart Cuts Jobs in Face of Losses




NEW YORK -- Seven weeks after Charles Conaway took over as chairman and chief executive of Kmart Corp., the company announced that it would take a $740 million pretax charge for inventory clearance and 72 store closings and indicated that a substantial investment in technology would be key to future growth.


Kmart also warned Tuesday that excluding this write-off, second quarter earnings would miss expectations by a mile. Actual second quarter results will be announced Aug 10. The company is also expected to announce major management changes in the next several days.


The retailer, based just outside Detroit in Troy, Michigan has struggled against its highly competitive discount rivals Wal-Mart Stores and Target Inc., but bad news reported Tuesday indicated problems ran even deeper than previously revealed. For example, Kmart said it now expected second-quarter earnings from operations to be in the range of 4 cents to 7 cents a share, down from 26 cents a share for the quarter a year ago. That is 75 percent less than the analyst consensus estimate of 16 cents a share, as tabulated by First Call/Thomson Financial.


A $290 million charge for inventory reduction throughout the chain also puts a new light on the tenure of Floyd Hall, Kmart's previous chief executive. Until the first quarter of this year, Hall was able to boast of 12 straight quarters of earnings growth, but apparently that did not fully reflect a great deal of merchandise that had been piling up and would eventually have to be disposed of as a loss.


In another potentially worrisome sign, the retailer said of the 72 stores it expected to close, six were the Super K format. Kmart had said previously that the Super K format stores, which are extra large and sell groceries as well as apparel, were key to future growth.


Conway denied the closing signaled a change in this particular aspect of Kmart's strategy. "Not all Super K's are painted equal," he said. "These are older stores that are not even close to our vision for the future."


As stores close, the company said, about 5,000 jobs, accounting for almost 2 percent of its 278,000 employees, will be eliminated. Some of those affected may find jobs at other Kmart stores, the company said. Kmart will take a pretax charge of $300 million for the closings, plus pretax charges of $75 million to write off the inventory in the closed stores.


The new chief executive said his basic focus was to force Kmart to demand a "higher return on all its assets" from real estate to inventory. As a result he said the company was closing stores that were profitable, but not profitable enough.


Conaway, who moved from his role as president of CVS and took the helm of Kmart on June 1, has yet to articulate the full details of his vision to make Kmart more competitive, but in its early outlines it appears to rely heavily on technology. The company has said it will spend a total of $460 million to upgrade its information systems.


Major initiatives under way, the company said, are the installations of new scanners in all stores, new registers in the company's 300 highest volume stores, and new systems to help Kmart's merchants monitor and manage inventory. The company will also take a $75 million charge for replacing outmoded computer systems.


It also expects to spend $210 million to improve its distribution and logistics network.


In interviews and with analysts he has given some hint of how he hopes this technology will make Kmart's sales perk up. "He is aghast that he deals with technology that is 10 years old when his competitors have technology that is two years old," said Kurt Barnard, president of Barnard Retail Trend Report. "He wants to create a system where every buyer is completely informed every moment on how the purchases are doing and then really hold their feet to the fire."


Conaway added that the systems would also dictate all sorts of decisions made by human managers, like when to mark down merchandise. For example, he said, this spring after two weeks of unusually cool weather hurt sales, store buyers chose to wait to mark down a lot of apparel items, and they eventually had to take bigger cuts to match competitors.