Kmart’s Q3 net loss has more than tripled to $224 million. The alarming Q3 results come in stark contrast to recent positive news from rivals Wal-Mart and Target. To ensure its long-term survival, Kmart must realize that even the best-laid plans must be backed up by co-ordinated and concrete execution processes. And given its recent financial woes, this is a lesson that Kmart must learn quickly.
Kmart (KM), the US’ second-largest discount retailer, is in the midst of a two-year restructuring effort following customer defections to lower-priced rivals such as Wal-Mart (WMT) and Target (TGT). As part of the plan to lure back customers, Kmart has permanently slashed prices on 38,000 items while increasing investment in store employees to boost customer service. Early in September, it announced a plan to spend $195 million during the next three quarters to streamline and modernize its outdated supply chain network.
The latest financial results are far from encouraging. Despite an improvement in gross margin of 20.6% of revenues, Kmart’s loss (excluding special charges of $94 million related to its supply-chain initiatives) widened to $127 million compared to $77 million a year earlier. Overall sales slipped 2.2% while same-store sales fell 1.5%. Most worrisome, Kmart’s October same-store sales, the latest data available, dipped 4.4% while its
rivals reported robust sales – Wal-Mart’s and Target’s same-store sales for October increased 5.9% and 4.1%, respectively.
So, what went wrong? While the plan scores high in terms of its ambitious goals, execution so far has lacked commitment and focus. For example, despite a $25 million marketing effort, the ‘BlueLight Specials’ campaign has in many ways failed. Several newly discounted items have been out of stock, while individual stores have often reneged on planned programs.
Furthermore, according to a survey by investment research firm Sanford C. Bernstein, Kmart’s prices on many consumable items are still around 11% higher than Wal-Mart’s even after the BlueLight program.
Even before the latest poor results, investors were already closely watching Kmart’s cash flow, which was a negative $154 million in Q2. The latest announcement dragged Kmart shares down 5.1%, compared with a 0.9% decline in Standard & Poor’s index of general merchandisers. Kmart not only needs to accelerate its turnaround initiatives, but also make sure that each step is supported by solid company-wide execution to achieve targeted objectives.
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