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Kmart, Circuit to revamp
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July 25, 2000: 3:40 p.m. ET
Discount, electronics retailers to fall below quarter forecasts from initiatives
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NEW YORK (CNNfn) - Faced with tightening competitive pressure, Kmart and Circuit City Tuesday each announced a major revamping of their stores to be completed in time for the December holiday season.
Kmart, the nation's No. 3 retailer behind Wal-Mart and Sears, plans to close 72 under-performing stores nationwide as part of its initiative. That's about 3 percent of its total stores.
Circuit City, meanwhile, is getting out of the appliance business as sales of those items continue to plummet in the face of new competition from Home Depot and Lowe's.
Kmart will miss 2Q target
Troy, Mich.-based Kmart Corp. (KM: Research, Estimates) warned Tuesday that its second-quarter earnings will fall as much as 75 percent below analysts' expectations as a result of the store closings and other initiatives.
Specifically, Kmart plans to shutter 66 Kmart and 6 Super Kmart stores, accelerate planned inventory reductions, and take a pretax $740 million charge during the second quarter, ended July 16.
Kmart officials said the company now expects to earn between 4 cents and 7 cents per share during the second quarter prior to the pretax charge. Analysts polled by research firm First Call Corp. were projecting a profit of 16 cents per share, a figure already 31 percent lower than the 26 cents per share it earned during the comparable period a year earlier.
Full-year earnings also likely will trail the $1.08 per share analysts were expecting, the company said.
 Kmart shares slipped 1/16 to 7 in afternoon trading Tuesday.
The moves are just what the board and investors hoped for when they appointed former CVS drugstore president Chuck Conaway, Kmart's new chairman and chief executive officer, little more than a month ago, analysts said.
"What we are looking at is very strong and very necessary steps as the first installment of a Kmart turnaround," said Kurt Barnard, president of Barnard's Retail Trend Report. "What he's doing right now is terribly important. It needed to be done, biting into the sour apple so to speak, in order to create a clear path for the future. I think Kmart is going to be customer-centric in the future, competitive in the market place and exciting to shop."
"A non-competitive customer experience, supply chain and store execution have ld to inadequate financial performance," Conaway said. "To make Kmart a stronger and more competitive business model, we must take swift and decisive action to improve our return on invested capital and create a heightened sense of urgency around asset productivity."
Kmart has been struggling with stores that are not fun to shop, are often poorly stocked and not well-maintained, analysts said. And that has not helped the company overcome its discount image as it tries to compete with Wal-Mart (WMT: Research, Estimates) and Target (TGT: Research, Estimates).
On May 31, Kmart announced that Conaway would succeed the retiring Floyd Hall, who helped turn Kmart around over the last five years by launching the Big Kmart and Super Kmart store formats.
"I believe that the previous management did not do as good a job at executing. They brought the company back from the brink of financial disaster, but they clearly needed somebody to get back their former success," said Jeffrey Edelman, an analyst with Paine Webber. "They've been making progress. However, they needed to go further. Maybe it needed some new blood to do it, to focus on customer service, ugly, dingy-looking stores, they needed to clean them up and provide a better shopping experience.
In addition to closing stores, Kmart also plans a series of clearance sales and liquidation sales at stores it plans to close in order to clear out certain inventories.
The company also plans to eliminate unnecessary computer hardware and systems while investing more than $600 million to install new scanners in all stores, speed up the check-out process add new registers to its busiest stores and other initiatives to improve technology.
Kmart plans to close stores in Alabama, Arizona, Arkansas, California, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Mississippi, Missouri, Montana, New Hampshire, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, Texas, Washington, West Virginia and Wisconsin.
Circuit City ditches appliances
Circuit City Stores Inc. warned Tuesday that its profit will miss Wall Street forecasts for the second and third quarters, as the company moves to get out of the home appliance business, remodel its stores, and focus more on consumer electronics and computers.
About 1,000 jobs will be eliminated as a result of the changes, the company said.
The national retailer said it now expects profit for its second quarter ending in August to ring in at about 32 cents a share, below the 35 cents a share it earned a year ago and the 43 cents expected by analysts polled by earnings tracker First Call Corp. For the fiscal third quarter ending in November, the Richmond, Va.-based company expects to earn 16 cents a share, less than half the 33 cents forecast by analysts.
 Circuit City (CC: Research, Estimates) said it will remodel all of its stores, close six distribution centers by the end of this year and another two over the following 12 months, and eliminate roughly 1,000 jobs. All of that should lead to a profit for the fiscal fourth quarter ending in February 2001 of 98 cents -- more than the 96-cent First Call average estimate -- as the company begins to see the benefit of its overhaul.
Still, it expects its 2000 earnings to total $1.60, including the charges, less than the First Call average estimate of $1.99.
"Continued strength of the consumer electronics and home office categories and the recent substantial weakness in major appliances accelerated our decision to reformat all existing superstores," said W. Alan McCollough, Circuit City's president. "The major appliance business carries high fixed costs and tends to be more cyclical than other retail categories," he said.
Circuit City, known for its white-on-red insignia and white on red store themes, has seen its stock price almost halved in the past 12 months, mostly because of lagging sales of its major appliance items. In June, the company warned that its gross profit margins would be narrower than expected, hurt by a decline in demand for major appliances.
The company said it expects to spend about $2.5 million to remodel each of its stores, though it said it should recoup roughly 30 percent of that per-store cost through increased traffic and higher sales. Circuit City has 573 Circuit City superstores and 43 mall-based Circuit City Express stores.
McCollough told analysts Tuesday that the company plans to replace the appliance departments in all of its stores with such "take-home" items as computer peripherals, games and software by November -- in time for the holiday season. He also expects sales of those items to fill the gap from lost appliance sales in the fiscal fourth quarter.
"I believe we have made an exciting announcement for the future of our company. It will strategically reposition our company to focus exclusively on consumer, home office and entertainment," McCollough told analysts during a conference call. "I am convinced the time to move forward is now."
Shares of Circuit City (CC: Research, Estimates) were off 6-15/16 to 25-11/16 in trading Tuesday afternoon. 
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