Kmart stocks soar on profits forecast

DETROIT -- Kmart's stock jumped more than 26 percent Monday after the retailer said it expected net income exceeding $250 million for the key months of November and December despite a 13.5 percent drop in its same-store sales.

Troy-based Kmart Holding Corp., which emerged from Chapter 11 bankruptcy in May, said that strong inventory management and the reduction of unprofitable promotions were behind the improved performance in the first two months of its fiscal fourth quarter.

It said income before interest and income taxes for November and December is expected to top $350 million, excluding gains on real estate transactions of about $75 million.

After taxes and interest, earnings should exceed $250 million, including about $50 million from gains on real estate deals.

Kmart said its same-store sales for November and December were about $5.1 billion, compared with $6.9 billion in the same period of fiscal 2002.

"In a nutshell, (Kmart) is saying, 'We're becoming more cost efficient,' which is good," said Theresa Williams, a retailing expert at the Kelley School of Business at Indiana University. "The next thing you want to see is some kind of increase, or at least stability, in same-store sales."

Kmart earlier reported losing $23 million, or 26 cents per share, in its fiscal third quarter ending Oct. 29. Its predecessor company, Kmart Corp., lost $383 million in the same quarter of 2002.

"Kmart's inventory position has been appropriately managed through the holidays, ending the month of December at a level below $3.5 billion," down more than 20 percent from a year earlier, president and chief executive Julian C. Day said in a news release. "The prudent management of our inventory has not only improved our cash position but has allowed us to reduce the large markdowns required in prior years and improve profitability."

The company sought protection from its creditors under Chapter 11 in January 2002 following a disastrous Christmas sales season, an inability to borrow and a plunge in share prices.

Kmart shares climbed $6.12, or 27 percent, to close at $29.12 on the Nasdaq Stock Market.

Focusing on daily costs and profit margins "is the secret to both short-term performance and long-term competitiveness," said Comerica Bank chief economist David Littmann.

He said Kmart also should benefit from improvements in the overall retail economy.

"They'll be selling into a better environment," Littmann said.

Kmart said it expects to have more than $1.8 billion in cash and cash equivalents and about $470 million in long-term debt when its fiscal year ends Jan. 28. It reports its fiscal 2003 results on March 18.

But analysts expressed concern about what they said was Kmart's failure to articulate and implement a clear retailing strategy.

"They had claimed that they were going to reposition themselves as the neighborhood store, . . . but I have seen no evidence that they have actually repositioned themselves," said Arun K. Jain, a management professor at the State University of New York at Buffalo.

"Wal-Mart and Target are so well-positioned," Jain said. "I wonder if in the long run, Kmart will be able to sustain themselves."

The company has about 1,500 stores in 49 states and employs 170,000 people.

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