Case Analysis Kmart

Marie Janz & Kris Ruth
Introduction Historical Overview
In 1987 Sebastian S. Kresge, the founder of Kmart opened his first five-anddime store. In 1962 Kresge had opened the first Kmart discount department, followed by 17 other Kmart stores that same year. (4) In 1966, Kresge died, leaving 735 Kresge variety stores and 162 Kmart stores with combined annual sales greater than $1 billion. Management replaced all Kresge stores with Kmarts and continued to build more Kmarts. (4) In 1977 Kmart Corporation was established with 95% of sales coming from Kmart department stores. In 1981, the 2,000th Kmart was opened.(4) (For other significant historical facts see Appendix 1.) Kmart Corporation began diversifying their business strategy in the early 1980’s by acquiring many different companies. (For a complete listing of Kmarts History of Diversification see Appendix 2.) Beginning with Antonini’s stay as CEO, president, & Chairman of the Board and continuing into this year, Kmart has been divesting these businesses. This divestiture strategy has left Kmart with only % shares of the shoe store that currently stocks their shoes (Kmart does not own the shoes it sells).

eliminating some brands in order to have shelf space for a wider variety of merchandise. products & competitors Kmart’s current customers include middle income families. 1998. promoting of PrivateLabel Merchandise. It is estimated that 180 million people shop at Kmart each year. eliminate stock-outs.000 and $50. improving image and appearance. The typical . Coca Cola and Sara Lee items on the menu. Super Kmarts are open 24 hours. The primary customer group is women between the ages of 24 and 45."(1) As of November 12. Under Hall’s direction Kmart has undergone a restructuring strategy. Tyson." Floyd Hall was appointed as CEO/President/Chairman of Board in March 1995.000 per year. The "pantry" is the central point with other items radiating out in terms of frequency of purchase.(2) Identifying customers. The Big Kmart is designed with a "pantry". improve customer service. and with household incomes between $20. (1. markets. they are closing down the smaller ones and remodeling the larger ones into Big Kmarts. For their current stores. which is like a convenient store set-up. Currently Kmart is undergoing a reconstruction strategy.160 retail outlets. Kmart is opening Big Kmarts at the rate of 600 stores per year. Big Kmarts will include Kcafes which will carry Little Ceasars.Kmart after several years of negative income have chosen to concentrate on their core business. Kmart has 2. near the registers. 2) "The Big Kmart format [ has] received the 1997 SPARC/3M (Supply Performance Award by Retail Category Program) award. (1) Mission Statement and strategic goals   "Kmart will become the discount store of choice for middleincome families with children by satisfying their routine and seasonal shopping needs as well as or better than the competition. This strategy includes constructing Super Kmarts to compete with Wal-mart’s SuperCenters and grocery stores. The goals of this strategy include: increasing the frequency of Customer visits. The quality ratings received from the mystery shopper account for 40% of the store managers’ bonuses. Commitment to Quality Customer Service Mystery shoppers make 24 visits to every Kmart & Big Kmart each year and 36 visits per year to Super Kmarts. with children at home. improve their inventory management.

toys. Procter & Gamble. (1) Kmart’s product lines also include on-line shopping. Jaclyn Smith women’s apparel. Nabisco. Puerto Rico. "category killers") in the retail industry.customer will shop and average 4. Total Selling Square Feet. Bench Top and American Fare. namely Wal-Mart and Target. Czech and Slavic markets.(1) Kmart’s main competitors are in the general merchandise segment of the retail industry. Kgro horticultural products. their image. etc. Their internal weaknesses include their inability to compete with Wal-Mart on price. Sara Lee. Mexican. Whirlpool appliances and Western Union services.a. "Kmart Solutions". Their markets exist in the United States.(1) Kmart’s main product lines include: Martha Stewart Everyday.3 times per month. Hallmark. Penske Automotive. and inability to implement goals and strategy. Fruit of the Loom. He saved them from near bankruptcy in January 1996. Usually spending about $40 during 95% of all visits. Kmart has pulled out of their Canadian. Guam. Total Stores and EPS. They also have to compete with department stores and specialized stores (a. Rubbermaid. 46 years old and almost half have children younger than 18. Sesame Street. 57% of customers are female. EBIT (Earnings Before Income Tax) Margin. Not only can you purchase items at their web-site. Kathy Ireland’s women apparel. Gillette. comparable sales growth. but they have just expanded their presence on the Internet with the launching of www. vendors and creditors not to force them into bankruptcy in spite of the junk bond rating they had received.musicfavorites. Company Analysis Strategic Performance Indicators The retail industry compares the leading companies in terms of sales per square foot. He negotiated with leaseholders. that allow for orders to placed. (2) SWOT Kmart’s internal strengths include their current CEO Floyd Hall and their current Restructuring plan. Floyd Hall has demonstrated himself to be of great value to Kmart.(2) They also carry market dominant brands such as General Electric. (2) In the Big Kmarts they have also set up on-line service Huffy.k.. and their . and the Virgin Islands. Route 66. items include flowers.

which has improved in both quality and value. The external threats facing them include Wal-Mart’s competitive pricing strategy. they will beat any price by 5%. Overseas Expansion is another opportunity for all companies within the retail industry. the retail industry has enjoyed positive growth. For the purpose of this analysis we examined Kmart in the general merchandise segment of the retail industry. Dayton Hudson Corp (who owns Target and Mervynn’s) ranks third with 10.757 in sales for 1997. Because in the recent past both GDP and disposable income have been increasing. warehouse clubs and others. This segment of the retail industry grossed $253 billion in sales in 1997. The external opportunities for Kmart are their private-label merchandise. Industry Analysis Identifying Competitors and Market Shares The discount retail industry consists of several segments: full-line discount stores. which is $32. when they are through restructuring. the consumer price index. (5) Dominant Economic Characteristics of Industry The retail industry’s dominant economic characteristics include growth in GDP. they will probably have other opportunities for global opportunities. Although Kmart has recently pulled out of some global markets and ventures. Also. in the . which is 3. Kmart’s image is so negative that 49% of Wal-Mart’s customers indicated in a survey that they drive past a Kmart to get to a WalMart. WalMart also has such strong supplier relations they are able to stronghold them into lower prices. they are still active in others.7% of the market. specialty discounters.958 million in sales.67 times larger than Kmart’s sales.9% market share and $27. Kmart currently ranks second in this segment with 12. growth in disposable income. However. and interest rates. These variables indicate the sales that can be expected. The leading competitor in the industry is Wal-Mart (who is currently "America’s largest revenue measured by total revenues" (1)) with 46.corporate culture.183 million of sales for 1997. There is overlapping for any store between the different segments. The reasons cited for perceiving Wal-Mart as better included the perceptions that Wal-Mart’s prices are cheaper and that their products are better both in quality and value. Wal-Mart will not be undersold.6% share of the market and $117.

This has dampened the export market and put a drag on the American economy. Consumer spending is approximately two-thirds of GDP. to buy more items in fewer trips. General Economic Conditions affecting Industry Other general economic conditions affecting the retail industry include. The convenience of the general merchandise store allows customers. The power of substitutes is very strong. (7) Porter 5-Forces Model The rivalry of the competition is incredibly fierce. then they risk losing their source of merchandise and will be driven out of business. because they can eliminate trips. then they need to focus on making shopping more "entertaining". The power of the buyers is also strong. The recent slow down in GDP can be related to the economic turmoil in Asia and Russia. for all segments include consumer confidence. We have 22-sq. The current trends in the retail industry indicate that consumers perceive shopping as a chore. The power of the suppliers is strong. Currently consumers find shopping to be a chore. The market is extremely easy to enter into. The recent reduction in interest rates by the Federal Reserve Board is an attempt to off set some of the adverse effects of the global economic slow down. This force includes the specialized discount stores. ft. Because consumers perceive shopping as a chore. if retailers want to get them in the door. GDP is also directly related to retail spending. The only real way to gain any significant share of the market is by under cutting the price of the competition. Consumers are shopping more at general merchandise stores. If their reputation is soiled with the suppliers.first and second quarter of 1998 the economy has slowed causing sales to slump. but it is hard to compete at the levels of economies of scale that the larger chains possess. This is also meant to help spur consumer spending and use of credit. changes in consumer’s demand and shopping preferences. of store space per person in our country. The trick is getting them to come to your store—a pleasant and entertaining atmosphere is the push today. it is no longer "fun" as in the 1980’s. Retailers must maintain good relations with their vendors. The Big Kmarts & Super Kmarts both will help minimize trips for the consumer. the "category killers". We currently our "over stored" as a whole. these stores are able to undercut the . Retailers are at the mercy of the consumer’s demand and preferences. The power of new market entrants is weak.

Kmart’s liquidity ratios. However. current ratio and quick ratio. ROE and ROA. . Kmart’s leverage ratios indicate that Wal-Mart has higher Debt-to-Asset ratios than Kmart. for 1997 and 1998. are greater than WalMarts. indicating that they have a better handle on their cash flows. the industry is also over stored. which is not surprising given the figures. The poor figures for 1993-the first half of 1995 is the reason Mr. are negligible compared to WalMart. in terms of cost-to-price ratios. In order for a new entrant to compete for any significant share of the market they will need to achieve economies of scale. Kmart was under the verge of bankruptcy. By January 1996. Kmart’s current ratios are sporadic. Ratio Analysis Kmart’s productivity ratios.prices of their items and simultaneously provide a wider variety of merchandise for their category. Kmart isn’t even a threat. However. Net Income and EPS growth over the last five years is not very good. Antonini resigned as CEO. Wal-Mart’s ratios are nice and even. Compared to the continual growth that Wal-Mart is experiencing. The other years were below $300 million. Performance Analysis Financial Trends Kmart’s five-year sales figures are relatively flat. For years 1993 and 1995. Kmart has higher Debt-to Equity ratios. Net Income for Kmart has been minimal. However. Kmart’s D/A & D/E ratios are both steadily declining. this amount is negligible. these figures were not measurable. Kmart’s overall Sales. His negotiating skills are what saved Kmart from bankruptcy. compared to Wal-Mart and Kmart’s own sales figures. consumer appeal —in terms of service and store appearance. In 1993 and 1995 the figures were negative. However. EPS growth trends for both Kmart and Wal-Mart parallel that of their Net Income. Sales for years 1993-1997 all came in about the $30 billion range. Industry Prospects and Overall Attractiveness The overall attractiveness of the industry is good. because it is relatively easy to enter. we see an obvious improvement from the efforts of CEO Floyd Hall.

1998. (1) The current P/E ratio indicates a hold position for the stock for the long-term investor who is risk tolerant.) Recommendations to Corporation For Kmart we recommend that they establish a sinking fund for retail technological advancements. Kmart Corporation’s stock price closed at 14-11/16 ($14. (There bond rating was upgraded to BB as of October 6. who works with technological research companies to test the technology. Our third recommendation to Kmart is for them to continue to improve their bond rating.69). given Kmart’s past performance. and low stock price. indicating that they are improving. (For actual Figures on Kmart see Appendix 3. 1998. Floyd Hall’s . Establishing a sinking fund will cut down the lag time for Kmart to also have the technology. We are currently seeing communication systems and teams being placed at the corporate and managerial levels. Thus allocating funds on an annual basis. which will also help to boost morale and overcome their current Corporate Culture. This is a good opportunity for the long-term risk tolerant investor to get in at a low price. This will allow them to compete with Wal-Mart. This allows Wal-Mart to be the first in the industry with the new technology if it is feasible. The P/E ratio is currently 20. This will allow all employees to be involved in the Total Quality Management and Strategic program. we will stretch our recommendation to a buy position given in light of Kmart’s current restructuring strategy. we recommend buying Kmart’s stock. for Wal-Mart see Appendix 4.Kmart’s Activity ratios indicate that Wal-Mart’s TAT & FAT ratios are both higher. But there is a steady increase in both TAT & FAT for Kmart. increase in sales for 1998. However. Stock and Investment Evaluation As of Tuesday. recent upgraded bond rating. that will allow them to purchase retail technology as soon as becomes available. Floyd Hall’s career history indicates that he likes to strengthen a company financially and move on to another. This is a faire historical market average for any given stock. Kmart’s stock price over the last year has both risen above and fallen below the S&P 500. For the risk-adverse investor. We recommend that they create a "trickle-down-effect" by having team meetings at the associate level. November 24.) Improving their bond rating will allow them to have access to better capitol for future endeavors.

6. 5. Concepts & Cases. Strategic Management. because Kmart should be out of financial trouble. Missouri . Wal-Mart. 10th edition. S & P Industry Survey. Inc. Joseph C. Historical Overview 1897 Sebastian S.Kresge Company 2nd largest chain of variety stores with 85 stores and >$10Mil Annual Sales 1929 S. 3. Bibliography 1. Industry Profiles: The Leading 100.kmart. 1998. Tennessee 1899 Dissolved Partnership 1912. Inc. 7. McGraw-Hill Companies.retirement should signal a buy Tardiff Editor. www.S. 1998. 2nd edition.S.Kresge Company expanded to Canada (19 stores) 1929.wal-mart. Kmart. www. US Industry & Trade Outlook ’98. Irwin McGraw Hill. Michigan Memphis. Kresge & John McCrory formed a partnership Detroit. First Suburban Shopping Center: Country Club Plaza in Kansas City. Thompson and Strickland. S. Standard & Poor’s/US Department of Commerce/International Trade Administration. U. Stockmaster. 4.

leaving 735 Kresge variety stores & 162 Kmart stores Management replaced Kresge stores with Kmarts. 1. Walden Book Company (Waldenbooks in 50 states) 2. which rose to 90% by 1991 5. and built more Kmart stores. Opened Sports Giant stores 3. 1977 Kmart Corporation was founded (95% of sales from Kmart) 1981 Opened the 2. both divested in 1986 1984. Pace Membership warehouse clubs 1988. 1984.1950’s Suburban Shopping Centers & full-line discount stores are growing 1962 Kresge opened 18 Kmart department stores 1966 Kresge died. 1. Sports Authority (10-store chain) acquired and integrated with Sports Giant 4. 1. Payless Drug Stores   1985 Bargain Harold’s Discount Outlets (Canadian retailers) 1988. Builders Square (warehouse-style home centers) 1. Office Square (warehouse-style office supply) 2. Inc. American Faire Hypermarts (household/apparel/supermarkets) 1988. (22 book superstores Midwest & Northeast) 6. 1992 13 discount store chain in Czech Republic &Slovakia .000th Kmart History of Diversification 1980 & 1983 2 cafeteria chains acquired. 1. Borders. Purchased 22% interest in Office Max.

1992 Bizmart (105 office supply stores) 1992 50-50 Joint venture with El Puerto de Liverpool to open 100 Kmart stores in Mexico 7. Joint venture with Metro Limited to open in Singapore (4) .

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