What About The KMart Scandal?

by Mark Scheinbaum

Once America's No. 3 retailer (behind Wal-Mart and Sears), there are genuine public and investor concerns about scandalous activity by both managers and regulators. Sure, it might not be what the lawyers call a de jure scandal, but it sure seems like a de facto scandal.

The macro view reveals a huge blemish in the system itself. The Securities and Exchange Commission rules over an antiquated stack of statutes and administrative rules which in cases such as Kmart are unfavorable to the little guy.

A few years back when Kmart was looking at ways to modernize and jazz up its stores and image, it lucked into some good managers at two spiffy divisions. One was a stylish, innovative, upscale, and money-making store called Borders Books. Before Borders reached South Florida I had accidentally come across one of their outlets in suburban northern Virginia, and was completely enamored of the staff, decor, inventory, and coffee shop. Kmart spun off Borders into a separate company with a separate stock issue.

The other division was called The Sports Authority. As a former soccer referee who could hardly find uniforms, whistles and red cards as local stores, here were two aisles of soccer related goodies. The stores were big and bold like their advertising. Again, The Sports Authority became a new company with new stock.

Kmart management created the management of the new entities, and when it was convenient and economically profitable for them as large shareholders, and to large mutual funds and institutional holders, the healthy parts were pruned, and the diseased corpse remained. If some small retail clients benefited from the spin-offs, and were smart enough to sell the parent Kmart stock near annual highs, all well and good, but remember, the spinoffs were management prerogative or necessity, not charitable grants.

Isn't it interesting that when Kmart declares bankruptcy, and large banks who are owed more than a half billion dollars want to be first in line in court, there is no requirement that Humpty Dumpty be put back together again? Frankly, unlike Continental Airlines which came out of reorganization successfully, I think Kmart will eventually end up like Ames, Bradlee's, Jamesway, Caldor, W.T. Grant, or Korvette's -- on the trash heap of retail history.

Wouldn't it be just as innovative if the SEC required the liquidation of Borders and the Sport Authority, including the sale of all buildings and real estate, to satisfy employees, shareholders, bankers, and vendors, before they are allowed to fade away? If manufacturers, unions, workers, and chambers of commerce were in danger of losing not one anchor store, but three in many communities, bankruptcy for the least profitable piece of the corporate pie -- in this case Kmart -- might not seem so attractive.

But on the personal level there is even more confusion and stupidity.

Don't be fooled by this largesse.

Doing a late night radio talk show five or six years ago, I used to get a few calls from the guys and gals in the 24-hour warehouse crew at Target's regional distribution center in South Florida. What I learned was actually impressive and exciting. I knew the callers were telling the truth because I checked their reports out in a number of Target stores.

While Kmart was trying to persuade a clientele and workforce which all-too-often spoke little or no English and looked like a fashion train wreck to embrace the Westport chic of Martha Stewart, Target had left them in the dust.

Target was using the latest Census abstracts and demographic reports; tracking buying habits by Zip Codes, hiring marketing consultants to detect age and lifestyle trends. Kmart was deciding how to turn ugly bi-level stores into ugly single level stores.

I particularly liked the move to the "Big" Kmart stores and the NASCAR tie-ins. I watched an elaborate and expensively publicized "road rallye" in which the Kmart parking lot was turned into a place to watch Red Necks in racing cars, and get kids involved in motorsports, dirt bikes, go-carts, and NASCAR memorabilia.

The only problem was that most of the customers that day were single male Mexican, Guatemalan, and El Salvadorian migrant workers who walked to the store or rode on rickety old bikes. Few had cars or were likely to purchase rebel flag decals for their Ford Mustangs. Kmart seemed to be clueless about its audience.

Don't expect to see much Kmart success in reinventing the Target game. Target has been at it too long, and made a discount store a fun place to visit.

Category leader Wal-Mart never made any pretension to replicate Kathy Ireland's buns, and Martha Stewart's ego. Value and price. Price and value. Returns with no questions asked. A human greeter with a smile at every door. Sale items stacked to the moon, and more where those came from. Funky and fabulous.

Kmart's more recent goofs included a decision to cut back or even eliminate much national advertising. Heck, even if it's just the price of film developing, I enjoy tossing the Sunday inserts around and checking Kmart versus Target versus Eckerd's versus Sears versus Walgreens and so forth. It takes money to make money. Cut off your advertising at Christmas time, and you cut off your traffic.

Don't be fooled by this largesse.

Kmart assured its suppliers that December's numbers would actually be a little better than doom and gloom post-September 11th forecasts. Yet one top Wall Street analyst, at Prudential Securities, crunched the numbers and said that Kmart was a loser, not a survivor.

As surety bonds which allow insurance companies to indemnify lenders and suppliers vanished after Arthur Andersen's creative accounting practices, Kmart found the folks who sold them canned goods and groceries asking for $78 million up front. The check is in the mail? Sorry. Not good enough.

Manufacturers who once fought tooth and nail for the lucrative and prestigious Kmart account, understanding that accounts payable often run 60 or 180 days late, now wanted cash on the line. Retreating into the protection of the bankruptcy code was the only choice remaining.

Kmart which had languished in a declining $10-$5 trading range, and was probably not as bad off as the Prudential analyst predicted, dropped to 66 cents. Amazingly, some positive press regarding reorganization last week almost doubled the stock back up to $1.24 per share.

How many schlock stores does each town in America need? Wal-Mart is cheap and reliable schlock. Target (pronounced Tar-zhay' in phony French) is spotless, bright, and fun schlock. Where does Kmart fit?