Kmart’s blue light is flickering. Once the ultimate destination for bargain hunters, the shopping icon is suddenly on the brink of bankruptcy. Late last week Kmart’s board shook up management, elevating one of its own, James Adamson, to chairman and ousting the company’s president. But Adamson, who revived the Denny’s restaurant chain and Revco Drug Stores, is just the latest “turnaround expert” to spin through Kmart’s revolving door. The challenge is tougher than ever now that Kmart’s longstanding identity crisis–the chain’s pricier than Wal-Mart, dowdier than Target–has morphed into a financial crisis. After disappointing holiday sales and a Wall Street analyst’s warning of a possible Chapter 11 filing, its stock dropped 68 percent in three weeks. The nation’s second largest discounter is desperately trying to line up life-saving loans from its bankers. And Martha Stewart, namesake of Kmart’s hottest name brand, is getting nervous and tells NEWSWEEK that bankruptcy would not be a good thing for her tony housewares (following story).
Making matters worse, Kmart is silent on its survival plans, rattling the chain’s suppliers, who have stopped shipping goods to Kmart out of fear that they won’t get paid. It’s a potentially deadly cycle: no spring merchandise means no spring sales. “Everybody is wondering what the hell’s going on,” says one supplier. Company insiders say chairman Adamson and CEO Chuck Conaway won’t talk until they have a turnaround strategy. They each declined interview requests. “By maintaining radio silence, employees are worrying about their jobs and not minding the store,” warns Prudential Securities analyst Wayne Hood.
Kmart’s recent troubles began when Conaway brought back the BlueLight Special in April. The boyish 41-year-old CEO, who arrived in May 2000 from the CVS drugstore chain, decided to shine the blue light on the entire store and slashed prices on 38,000 items. He promoted the “BlueLight Always” strategy in a splashy $25 million ad campaign with disco-dancing cartoon blue lights. And he drastically cut back on Kmart’s costly Sunday advertising circulars, but the strategy backfired. Wal-Mart, the “Everyday Low Price” king, undercut Kmart from toothpaste to VCRs. The result: Wal-Mart’s sales soared this fall, while Kmart’s slumped. “Kmart waging a price war on Wal-Mart is like Luxembourg declaring war on the U.S.,” scoffs retail consultant Kurt Barnard. By late November, Conaway admitted to Wall Street that the strategy was a “huge misstep.” But it was too late to save Christmas. Kmart’s December sales fell, while Wal-Mart’s and Target’s rose 8 percent.
As punishment, the board stripped Conaway of the chairmanship last week (though he remains CEO) and ousted his right-hand man, president Mark Schwartz. Conaway is hardly the first executive to be confounded by retailing’s hardest job. Before him, turnaround artist Floyd Hall couldn’t reverse Kmart’s slide, despite the exclusive deal he cut with Martha Stewart. Prior to Hall, CEO Joe Antonini was bounced by the board after he failed to improve Kmart’s fortunes with an ill-fated diversification scheme into book selling and home-improvement stores. Now analysts are skeptical the defrocked Conaway can mount a comeback. “Chuck’s lost credibility with everybody,” says Hood. “I’d be surprised if he’s around in a year.”
Kmart’s new chairman, Adamson, is an old hand at bankruptcy. As CEO of Advantica, owner of Denny’s restaurants, and marketing chief of Revco, Adamson navigated both companies through Chapter 11. “Adamson is like Winston Churchill,” says retail consultant Burt Flickinger III. “His darkest hours are his finest.” To some, Adamson’s rise to chairman–he’s been on Kmart’s board since 1996–makes a bankruptcy filing seem more likely. Proponents of that strategy say it would allow Kmart to close up to 500 unprofitable outlets and get out of $373 million in leases on shuttered old stores. But others fear the stigma of bankruptcy would scare shoppers and jeopardize Kmart’s ties to Martha Stewart. “If Martha Stewart pulls out, that’s the kiss of death,” says Barnard.
If Kmart is to have a future, it needs more marquee names like Stewart. Already, the retailer has cut deals with Disney, Joe Boxer and Sesame Street. But to lure shoppers, Kmart also needs to fuse more full-service grocery stores onto its big-box retail outlets. Those “supercenters” generate three times more business than a regular Kmart. “Kmart has got to get people to come into the store to buy milk and then buy a blouse,” says retail analyst Eric Beder of Ladenburg, Thalmann & Co.
It’s hard to believe any strategy will return Kmart to the days when it was as groovy as the Brady Bunch. Just ask Jody Rodriguez, 32, who shops the Kmart near her Manhattan apartment. She’d be sorry to see Kmart go bankrupt, but she prefers a dash of style with her discounts. “I love Target,’’ she gushes. Attention, Kmart chairman: That’s an image problem that can’t be solved by a bankruptcy judge.
