As outlined in “Private Equity May Be The Only Way To Save Sears,” as restructuring and turnaround advisers and investors, we here at ACM Partners are often asked about the big retail “stories of the day” (meaning companies on the brink of distress). GAP, Tiffany & Co., and now Sears and Kmart are the most recent “big cases” we’ve received the majority of inquiries about.
Here, then, is our take on what’s in store for Kmart (which hedge fund manager Eddie Lampert officially took control of in 2003, post-bankruptcy):
Do we need Kmart anymore?
While “during the early years, Kmart was the fastest-growing of the “big three” discounters (Kmart, Wal-Mart and Target), easily outpacing their key competition,” Kmart, like its parent-company Sears (which acquired the discount retailer in 2005), has lost significant market share through a combination of poor market strategy and by being “squeezed out” by “sexier” (ie Target) or more affordable (ie Wal-Mart) competitors.
In short, “Kmart is trapped between Wal-Mart and Target, becoming the merchandiser in the middle — and ultimately, the discounter in the muddle.” On the consumer side, it’s difficult to say Kmart would be particularly missed – since the retailer provides few unique product or experiential offerings – except in geographic areas particularly dependent on the retailer.
On a personal note, while I worked at a Kmart as a teenager, I don’t believe I’ve stepped foot in one in more than decade (nor would have any particular reason to). I do, however, visit Target almost monthly.
If yes, can Kmart be turned around? What does the executive team need to do?
Here, then, it’s a question again of “Where did Kmart go wrong?” Let’s take a look at some core areas in which Kmart could generate a turnaround.
- Strategy, Strategy, Strategy: Kmart failed to see the writing on the retail wall before initially filing bankruptcy in 2002 (and, some would argue, continues to ignores it). All retailers, even discount ones, must have a coherent pricing-and-product strategy in order to appeal to core consumers. As the brand stands now, Kmart offers very little in terms of “must-have” items for any particular consumer segment.
- Management “Expansion”: By all accounts, Kmart is an exceptionally insular company, meaning very few outsiders have been brought in to “refresh” the store’s brand. Consequently, errors in judgment and purchasing have been magnified by continued mismanagement, while fights and fiefdoms have prevented the company from moving forward into the 21st century. Instead of squeezing every last penny from the dying brand, Lampert must insist on reviving both methods and management if Kmart is to reassert its relevance.
- Logistics: As a discount player, Kmart has lost nearly every round of the logistics game, from management of its supply-chain to in-store sku measurements. For instance, because Kmart measured potential profitability by gross margin percentages rather than by sales-per-square, the retailer has and continues to stock higher-margined goods in place of faster-moving products, leading to a decrease in inventory turn-over. Furthermore, inefficient ordering and supply-chain management means everything’s cost more and arrives later than at Kmart’s competitors. Combine these factors, and you get a dying retailer on the brink of disappearing from the American landscape.
Like we outlined in “Private Equity May Be Only Way To Save Sears,” “With a market cap of only $3.45 billion, it wouldn’t be tough to get the financing for a going-private transaction” for Sears Holdings Corporate. In short, the market is not going to allow a $40B+ asset-based retailer simply disappear. Ergo, once again, private equity may end up being the only answer for what ails these dying retailers.
Margaret Bogenrief is a partner with ACM Partners, a boutique crisis management and distressed investing firm serving companies and municipalities in financial distress. She can be reached at [email protected]
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