Kmart CFO: Increasing Customer Traffic Key Challenge

NEW YORK - In a recent interview with Dow Jones Newswires, Kmart's CFO Al Koch said the bankrupt retailer's new management team is facing one of its biggest challenges to date: empty aisles.

While the discount retailer has made an effort to neaten stores and stock shelves this summer, it still awaits the return of customers who fled amid the bankruptcy's disruptions, Koch told Dow Jones Newswires.

Koch declined to comment specifically on Kmart's recent sales, and the company won't report July and August sales until mid-September. But since the beginning of the year, Koch said, customer traffic at Kmart stores has been off 10 percent from a year ago. In recent months, customer traffic "hasn't declined" further, he said. "But what it hasn't done is improve as anticipated.

"One customer group we do understand we've had a loss on is mothers with young children," said Koch. In the weeks surrounding Kmart's bankruptcy filing, vendors yanked shipments of many key items, including diapers and baby wipes, he said. Mothers who felt let down by the empty shelves may be among the hardest for Kmart to win back, he Koch added.

Kmart staged a "Welcome Back" sale in early June, having finished a chainwide cleanup, and early results were positive, Koch said. Same-store sales, or sales at stores open at least a year, increased 4.3 percent during the opening weekend of the sale. The trend, however, quickly reversed itself after that, and June same-store sales dropped 8.7 percent, following declines of 11.4 percent and 16.4 percent in May and April, respectively.

After a series of meetings in late June and early July, top executives at the company decided to cut operating costs with the goal of achieving break-even cash flow at year end, he said. Last week, the company announced it was firing 450 corporate employees, eliminating 100 open positions and phasing out 130 contract positions. The moves will save Kmart $66 million this year, and $130 million annually, the company said.

The job cuts followed 23 firings at corporate headquarters a week earlier. During the previous month, Kmart eliminated 35 jobs at its accounting division. Those cuts followed the closing of 283 stores and laying off of 22,000 store employees this spring.

Kmart has finished the bulk of this year's cost cutting, and "you can't save your way to prosperity," said Koch. Kmart won't need a "huge improvement" in top-line sales to break even this year, but it will need some, he said.

Late last week, Kmart dropped an earlier request to expand its debtor-in-possession financing ahead of the holiday season, adding that it expects to have $1.1 billion in cash and available credit at the peak of its inventory buildup. Nonetheless, Kmart later this week will seek approval from the bankruptcy court to amend its debt covenants to allow a greater loss for the fiscal year.

Kmart also hopes to break even by improving profit margins. Having cleared out excess inventories from stores, the company has made conservative bets on the fall and holidays, and will buy inventory according to need as the season progresses. Kmart also is tracking inventory better, though it's still struggling with shrinkage, Koch said.

Advertising circulars will continue to play a key role, albeit a smaller one, Koch said. Kmart has created a smaller, midweek circular that has been shoring up store traffic, he said.
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