By Brigid Sweeney, Crain News Service
CHICAGO (Oct. 14, 2014) — Believe it or not, Sam Walton — founder of the world's largest company by revenue — once was green with envy over Kmart Corp.
“I used to go to stores with Sam 40 years ago, when Wal-Mart was a little variety store and Kmart was a monster,” said Howard Davidowitz, a retail consultant and chairman of New York-based Davidowitz & Associates Inc. “Kmart was the dominant discounter in America by far.”
How times have changed.
As concerns mount regarding Sears Holdings Corp.'s troubling cash burn, it's worth noting that much of the company's distress lies with Kmart, creator of the “Blue Light Special.”
The once-venerable retailer had been foundering for years when Sears CEO Edward Lampert plucked it out of bankruptcy in 2002 and merged it with Sears in 2005. But the chain's performance has worsened in recent quarters because of increased competition and Mr. Lampert's refusal to pump money into Kmart's 1,077 stores. That represents about half of Sears Holdings' total store count and soon will account for more, as Sears sheds most of its interest in 430 Canadian locations.
Kmart's sales will sink to around $12 billion this year, compared with about $18 billion at Sears stores, according to estimates by Gary Balter, a New York-based analyst at Credit Suisse. (Hoffman Estates-based Sears does not break out revenue figures for its divisions.) Some perspective: In 2000, Kmart Corp. had nearly $36 billion in sales, while Sears Roebuck & Co. generated $40 billion.
Sears Holdings' operations are declining across the board, but its namesake stores are clinging to a better, if slipping, share of the appliance market. Kmart has lost its onetime dominance in grocery and household goods and has “become a second-thought convenience store location rather than a destination at which to fill an entire basket,” Mr. Davidowitz said.
No match for Wal-Mart
Kmart's inability to win customers from Wal-Mart Stores Inc., Target Corp. and dollar stores weighs down the company even as Sears' namesake stores witness a slight resurgence. Sears stores eked out a 0.1-percent increase in comparable same-store sales in the most recent quarter, but Kmart's 1.7-percent decline dragged the company's comps into the red. Sears Holdings lost $573.0 million in the most recent quarter and $1.37 billion in fiscal 2013.
Kmart and its sibling chain share a larger struggle: a lack of relevance to the American shopper, who associates Wal-Mart with the lowest prices and Target with cheap chic. “This is not a two- or three-year issue,” said Matt McGinley, a New York-based analyst at International Strategy & Investment Group L.L.C.
Analysts and company data trace the roots of Kmart's downfall to the late 1980s, when it ran nearly twice as many stores as Wal-Mart and boasted 60 percent more revenue. But Kmart didn't invest in the computer systems that Wal-Mart implemented to restock inventory efficiently. By 1990, Wal-Mart surpassed Kmart in sales despite having significantly fewer locations.
Today, Kmart's prices are routinely 15 to 20 percent higher than Wal-Mart's, according to Mr. McGinley. And it's far less efficient. “Wal-Mart does over $400 (in sales) per foot, while Kmart does well under $200,” he said.