While Kmart plots a comeback for 2003, analysts hedge their bets

Melissa Wells and Maria Garcia decided to stop at the Kmart at Northeast 122nd

Avenue and Sandy Boulevard this week for a reason bound to make any retailer flinch: The parking lot was almost empty, and they figured the store wouldn't be crowded.

But after a quick look around, they were heading to Wal-Mart, their original destination Ñ and the store both women prefer over Kmart. 'When I started shopping there,' says Wells of Wal-Mart, 'it just seemed I got a better deal on everything.'

Analysts say that's just one of the issues that Kmart must address if it is to battle its way out of bankruptcy.

With century-old roots in the S.S. Kresge five-and-dime stores, 40-year-old Kmart this week became the largest U.S. retailer ever to file for bankruptcy protection.

The chief executive of the Troy, Mich.-based discounter said he expected the company, which now has about 2,100 stores, to emerge from bankruptcy in 2003 somewhat scaled back, operating efficiently and more appealing to shoppers.

For that to happen, Kmart is going to have to find a new identity, one that stands up against the determined low pricing of Wal-Mart, the world's biggest retailer, and Target, whose 'cheap chic' appeal, vibrant Mossimo clothing and catchy advertising helped it climb over Kmart to become the second-largest discount department store in the United States.

Reinventing Kmart is not going to be easy, and some analysts question whether it's even possible.

'Wal-Mart is a monster, Target is a monster, Kmart is third man out,' says Don Wrenn, managing director of U.S. Bancorp Piper Jaffray. 'Basically, Kmart is a company that existed in a previous life. As the marketplace changed for retail, their stores were not able to change fast enough. Consequently, Target and Wal-Mart ate (Kmart's) lunch.'

Old Christmas trim not cheap

Kmart officials say they have no immediate plans to close any stores, but it's expected that, nationwide, 250 to 700 stores could be shuttered. It's hard to say if any of Oregon's almost 20 Kmarts Ñ which include metro area stores at Jantzen Beach and in Parkrose, as well as in Beaverton, Gresham, Milwaukie, Oregon City and Tualatin Ñ might fall into the danger category, either because of age or bad sales performance.

Certainly some of the outlets look to be in need of remodeling. A few convey the look of a retailer in trouble.

At the entrance of the Gresham Kmart, for example, there's a messy display of Christmas merchandise, mostly wrapping paper, still marked down just 50 percent. Elsewhere in the dark and disorganized store, there are gaping spaces on the merchandise shelves. A grumpy clerk staffs the help desk near the computerized checkout counters, where customers are supposed to scan, pay for and bag their purchases.

Portland retail consultant Burton Nudelman says still having Christmas trim in January sends its own message. 'What they're saying is, we prefer you don't buy these. Every other store has marked this down at least 75 percent, and it's gone. The public's got more brains than that.'

Nudelman, however, isn't surprised at where Kmart finds itself, and he doesn't think its chance for survival is much better than Montgomery Ward, another longtime retailer that lost its way and went out of business last year.

Of Kmart, he says, 'their stores are very poorly laid out, extremely crowded, there's not room to walk in the aisles Ñ if those are aisles. I'm usually not cynical, but I am about this. I just am not a bit surprised.'

He says that even the grouchy clerk sends a message: 'What she's saying is, 'We're not a friendly store, don't test me.' ÉÊI never heard them say they don't like customers, but I think that could be one of their underlying problems.'

Kmart's troubles, some analysts say, could drive customers into the fold of competitors. At a time when Kmart might be shrinking, both Wal-Mart and Target are growing. Target, for example, is opening three new Portland stores in the near future: one at Mall 205, one in the former Montgomery Ward store in Jantzen Beach and another in Fairview Village.

Sanford Bernstein retail analyst Emme Kozloff this week raised her investment rating on Wal-Mart, saying the long-term possibility that Kmart will disappear is increasing, and Kmart's demise would free up a market share that accounts for nearly $40 billion in sales.

Duncan Kretovich, associate professor in Portland State University's business administration department, feels more hopeful about Kmart's survival chances.

He bases his confidence on Kmart's new management team, headed by two former executives with the Advantica Restaurant Group, who helped lead the successful restructuring of the Denny's restaurant chain.

Kmart could be a victim of the strong economy, he says. 'People were doing so well they didn't want to go to Kmart, they wanted to go someplace nicer. Kmart is where their parents went. Kmart didn't evolve like Target did.'

Unlike Wal-Mart, Kmart employees had little opportunity to rise from store jobs into management, even corporate, positions. That could be part of the reason, Kretovich says, why 'at the store level I still find the people borderline hostile.'

In leased stores that weren't always kept up, 'the whole thing just got kind of grubby,' he says.

But he expects Kmart will emerge from bankruptcy by late 2003, much the same size, 'but a financially stronger firm, more dynamic in their store layouts, advertising, marketing and product selection. Eighteen months should give them enough time to develop a true image. At the moment, it's kind of hard to know what they are.'

Then there's the Martha Stewart factor. Since 1997, Kmart's most successful line has been housewares and linens Ñ and, more recently, baby items Ñ sold under the Martha Stewart Living Everyday label.

Stewart, analysts agree, is vital to Kmart's survival. Stewart's contract with Kmart allows the doyenne of domesticity to pull away in the event of bankruptcy, but Stewart says she's committed to Kmart.

Analyst Wrenn is not convinced she will stay. Kmart, he says, was a means to an end for Stewart, who he describes as 'one of the hardest-working, toughest-minded businesspeople you'll meet. She's a gonzo.'

He says, however, 'Martha Stewart is not stupid; if someone shows her a better deal, she'll be out of there in a heartbeat.'

Laura Dickerson, who likes the Stewart line, jokes that she started shopping at Kmart 'because I was incredibly poor. É When you need odds and ends, if you want toilet paper or a lemon zester and don't want to pay a whole lot ÑÊI kind of discovered Kmart. It actually isn't bad stuff. I don't know I would ever buy clothes there, but for housewares items, it's OK.'

Judi Jorgensen, shopping at the Parkrose Kmart with her daughters, Rebecca, 19, and Abigail, 9, is more inclusive. She says, 'I would buy anything here.'

The quality of Kmart's merchandise has improved over the years, Jorgensen says. 'You can actually get good quality things. I've got many things in my closet that are Kmart.'

It's a good place to buy wardrobe staples, such as jeans and underwear, she says. 'We come here every weekend; they do have deals.'

And, she says, 'I would be very upset if it closes.'

Contact Jeanie Senior at

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