Kmart Loses Conaway as Revamp Continues

Time is up for Chuck Conaway.

Kmart (KM Quote) said Monday that Conaway was leaving his post as CEO of the bankrupt retailer, along with Chief Financial Officer John McDonald, as part of a widely expected overhaul of top management. The announcement comes just three days after Kmart announced it would fire 22,000 workers and close almost 300 stores.

James Adamson, who was appointed chairman in January and given the task of overseeing Kmart's restructuring, is the new CEO. Conaway, who took the top job in June of 2000, will leave the company and its board of directors.

The company named Julian Day, formerly chief operating officer and executive vice president of department store chain Sears (S Quote), as president and chief operating officer. Albert Koch, chairman of turnaround management firm Jay Alix & Associates, was named CFO, while Ted Stenger, also of Jay Alix, was named treasurer.

Most observers had assumed that Adamson would eventually bring in his own team, and in recent days, rumors circulated that Conaway's departure was imminent.

"The writing was really on the wall when they brought Adamson on board as chairman," says Jeff Stinson, who covers the company for Midwest Research. (He has a neutral rating on the stock and his firm does not have an investment banking business.)

Supply Chain?

Adamson is well-regarded for his record of turning around retailers, such as drugstore chain Revco and Advantica Restaurant Group, which operates the Denny's chain. Most recently, he was president and CEO of Burger King. At Advantica, Adamson engineered a turnaround that eliminated more than $1 billion in debt. Adamson, 54, has been a board member at Kmart since 1996 and has also held high-profile positions at Target (TGT Quote) and Gap (GPS Quote).

"He has a very impressive roster of experiences," says Kurt Barnard, a retail consultant and publisher of the newsletter Barnard's Retail Trend Report.

Still, despite the plaudits most give the new management's experience, the company has said little about how it hopes to attract new customers. In a conference call Monday, executives expounded on getting back to the basics of retailing, such as simplifying the supply chain and sprucing up the stores.

"But that's sort of taken for granted," Barnard says. "I clearly would have liked to have a seen a stronger commitment to creating a marketing compaign to create a niche for Kmart."

Last week the debt-heavy retailer unveiled a plan to close 284 underperforming stores and slash 22,000 jobs. Kmart said it would take a charge of $1.1 billion to $1.3 billion to cover the costs of the moves, which are expected to increase cash flow by $550 million this year.

The number of stores being closed fell far below the expectations of analysts, who had expected 500 to 700 store closures. "It was definitely a lower number than I thought we'd see," Stinson says, who adds that he expects another round of store closings.

Like most analysts who still follow Kmart, Stinson is awaiting some guidance from the company on how it hopes to revive its fortunes. The company desperately needs to find a new market niche, one that gives consumers a reason to shop at Kmart over Wal-Mart (WMT Quote) or Target, its two main competitors.

Sotto Voce

Kmart shares rallied Monday, up lately 8 cents, or 6%, to $1.37. Investors have been eager to bid up shares on each incremental bit of news in the wake of the late January bankruptcy filing. The shares have more than doubled since hitting a low of 66 cents immediately after the filing.

Yet buying shares in bankrupt companies is mainly speculation, a bet that someone else will scoop them up at a higher price before they are worthless, more than an investment in Kmart's turnaround hopes, many observers say. Even if Kmart were to emerge from bankruptcy and become successful again, the stock could still be worthless. Existing common stock is typically cancelled in bankruptcy proceedings, and new stock is given to creditors and other court-approved investors.

But this is not a certainty, and shareholders hope to have a seat at the table. A group of institutional holders of Kmart stock have retained Saybrook Capital, a California banking firm, and the Chicago law firm of Goldberg Kohn Bell Black Rosenbloom & Moritz to ask the bankruptcy judge to appoint an equity committee. A decision could come as early as early as this week, says Jonathan Rosenthal, a principal at Saybrook.

"It would certainly give a clear signal to shareholders that they have a voice," Rosenthal says.