Kmart's Thrift Ill-Timed

One of the country's biggest retailers might have gambled and lost in October.

With U.S. consumers keen on deals and discounts in a rapidly declining economy, department stores that sell merchandise on the cheap showed generally strong growth in October. Same-store sales for the group rose 5.3%, making discounters the second-strongest retail segment for the month, after drugstores.

But for Kmart(KM), the month was a different story. The No. 2 discount retailer in the U.S. behind Wal-Mart(WMT), Kmart saw sales decline 4.4% in October vs. the previous year to $2.42 billion, a worse result than analysts had forecast.

Kmart has lagged behind other discount retailers for years because of a comparatively high cost structure and inefficiencies in inventory management. The company is still cleaning up after falling behind Wal-Mart and skirting bankruptcy in 1995.

Tough Comps

Year-over-year comparisons were particularly tough for the company in October, because a year earlier, liquidation of some $52 million in discontinued inventories accounted for 2% of sales. Under its BlueLight Always program, some 38,000 items it sells are also going for reduced prices vs. 2000, as the company tries to stay competitive. Another factor contributing to weaker sales, analysts said, was an aggressive lightening of promotional inserts, or "circulars," at the wrong time.

As part of a plan to reduce its spending on advertising, Kmart cut the number of pages in its promotional inserts for Sunday newspapers by 50% in October vs. a year ago. Wal-Mart spends 0.75% of sales, or $1.4 billion, on advertising, but Kmart was spending 2.5% of sales on advertising, or $1 billion, and the company set out to reduce ad spending by $200 million. About $60 million of that came out of sponsorship of Kmart's Nascar racing team. The rest was plucked from distribution of circulars.

In a slow economy, the effort may have backfired.

"A lower page count just means less items, less traffic and less sales," said Daniel Binder, analyst at Buckingham Research Group. "Everybody else is getting more promotional, and they got less," he said.

Ulysses Yanas, analyst with Buckman, Buckman & Reid, said the drastic reduction in circulars might have cost the company 1% to 2% in sales for the month, and suggested Kmart was rash.

"They should have reduced these circulars more gradually, especially those in The New York Times Sunday supplement" Yanas said. "The theory was, 'We have the lower prices [from BlueLight Always]. We don't need to tell people about them.' But the circular was getting people in the store, especially at a time when people want deals," he said.

Kmart spokesman Jack Ferry said it's hard to say what impact the reduced number of circulars might have had on sales, and said he couldn't immediately comment on how much sales of products promoted in the circulars grew or declined for the month. But the product mix was healthier this year, he said, with sales of BlueLight Always products up 10% in October. Ferry attributed the decline in sales wholly to last October's inventory liquidation and to the release of the company's toy catalog in October of last year. This year, the company waited until November to distribute the catalog.

Thriving Competitors

The company's performance looks all the worse when compared with that of Wal-Mart, which posted robust October sales growth for the month of 6.7%, beating growth estimates of 5.2%. Super-cheap discounters such as Dollar General(DG) and Family Dollar(FDO) also showed strong sales growth for the month: 8.5% and 6.2%, respectively, both beating analyst estimates.

Elsewhere in the sector, wholesalers Costco(COST) and BJ's Wholesale(BJ) showed growth of 6% and 1.9%, respectively, for the month. Discounter Target(TGT), which focuses more on apparel than other discount stores do, had sales growth of 2%.

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