Originally created 05/06/04

After regaining financial footing, Kmart must now woo customers



ROSEVILLE, Mich. -- A year after emerging from bankruptcy, Kmart Holding Corp. has managed to regain its financial health and the confidence of investors. The hardest part of its recovery is yet to be achieved: winning back shoppers.

Kmart, which in March posted its first profitable quarter in three years, has impressed Wall Street with a more efficient operation and its ability to amass $2.1 billion in cash. Shares in the reorganized company have nearly tripled over the past year to $44.

But customers, who started turned away from the Troy-based company over the past decade, are still defecting to Wal-Mart Stores Inc., Target Corp. and smaller competitors. Same-store sales, which compare business at stores open at least a year and are considered the best measure of a retailer's health, have extended their decline, dropping 13.5 percent last quarter.

Reversing that trend is the crucial next step, analysts say.

"They've actually come out of bankruptcy in better shape than most big companies coming out of bankruptcy," said Richard Hastings, retail analyst at consulting firm Bernard Sands. "The concern is that they're not gaining market share in any category at a time when competitors are getting bigger and stronger."

Marisa Lenhard, a retail analyst at Southfield-based Sigma Investment Counselors, said now that the company has swung to a profit, investors are going to be eager to see same-store sales improve.

"You can only cut costs for so long," she said.

So far, Kmart has said little about how it intends to woo back customers. It has been remodeling stores, but there has been no announcements or even hints of ad campaigns or image overhauls that would point to a definitive new marketing direction for the company.

It does fall back on nostalgia to some extent - at a store in Roseville, in suburban Detroit, signs say, "Welcome back," and "Support an icon - shop at Kmart."

In public statements, the company tends to emphasize its improved balance sheet.

"Today, Kmart is a financially strong company," Kmart chief executive Julian Day said in a brief statement timed for Thursday's anniversary. "All of us at Kmart are pleased with the responses of our customers and vendor partners to our commitment to service and product quality."

Kmart's long-term viability will depend on whether it can distinguish itself from similar stores, analysts have said. On price, it can't compete with Wal-Mart, which has enormous buying power. Target, meanwhile, has the edge on style.

Ken Bernhardt, a marketing professor at Georgia State University, said Kmart's best bet is to cast itself as the premier store for a few particular categories - finding its own niche in the discount market.

"If they can develop some departments where they really excel, particularly in merchandising and providing great value for consumers, then they can get them in the store," he said.

Bernhardt noted that Kmart has been able to do that in the past, with the Martha Stewart Everyday brand. Even though Stewart has been convicted for lying about a stock sale, home furnishings carrying her name still do well at Kmart.

Kmart does have loyal shoppers, and they were evident recently at a suburban Detroit Super K - a 24-hour Kmart that includes a grocery.

Roger Palmer said he'd noticed some changes at Kmart - customer service had improved - but unlike many other shoppers he hadn't become disenchanted with the retailer during its decline into bankruptcy. He has long viewed Kmart as a convenient and pleasant place to shop with good value.

"Some of the (clothing) styles - you pay a low price, but they look the same as the designers," the retired auto worker said. "At Wal-Mart, it's still a low-priced shirt, but it looks like a low-priced shirt."

Carol Williams said she sometimes looks for better deals at Wal-Mart, but Kmart's quality, service and history keep her coming back. "All my life I've been shopping at Kmart," she said.

But at a nearby Wal-Mart and Target, customers explained why they weren't at Kmart.

Wal-Mart has lower prices and more variety than Kmart, said April Fitzgerald. "This is my very first stop," she said.

And at Target, Mary Charrette said shopping there was more pleasant than at Kmart. "It's a more inviting environment," she said.

Charrette's negative assessment of Kmart is apparently shared by many Americans - and illustrates the obstacles still facing the retailer. In an annual University of Michigan survey of customer satisfaction, Kmart remained at the bottom among major retailers this year.

On the Net:

Kmart Holding Corp.: http://www.kmartcorp.com