January 30, 2003, 12:00 AM

Kmart gets $2 billion—but not much of it is going to the web

Industry consultants are trying out different scenarios about future operations of Kmart.com as Kmart continues to slug its way out of Chapter 11.

Securing exit financing puts companies fighting to emerge from Chapter 11 bankruptcy one step closer to doing so, and last month Kmart Corp., which filed under Chapter 11 in January 2002, reported a commitment for up to $2 billion of it from GE Commercial Finance and others.

The package rolls over the existing debtor-in-possession financing and makes some cash available to pay administrative claims and unsecured creditors. Kmart also reported December results showing net income of $349 million on net sales of $4.71 billion, a significant upswing from last year.

The bigger news for consumers was that Kmart will close 326 more stores, leaving about 1,500. But absent from news of the deal released by Kmart, even in descriptions of the company’s business, was any reference to Kmart.com. “The announcement was about land-based store operations,” says a Kmart spokesman. “Kmart stays focused on e-commerce and Kmart.com as an excellent vehicle for selling items and a valuable marketing vehicle that supports Kmart’s stores and products.”

That said, industry consultants are trying out different scenarios about operations of the web site as Kmart continues to slug its way out of Chapter 11.

For major multi-channel retailers, notes Duif Calvin, a San Francisco-based retail analyst, the web channel isn’t providing more than at most 1% to 2% of sales, though retailers with a strong base in catalog operations are an exception. “A Kmart that has no mail order business, no catalog business, and whose core business is broken has other things to do right now, in terms of any new investment, so it comes down to: is it running well enough on what it’s got already,” she says.

The web, she adds, is less important to Kmart when it comes to reaching its core audience, the larger share of which is still not online. But brands that do very well for Kmart overall, such as Martha Stewart Everyday, Joe Boxer and Sesame Street, are also brands popular with the population that is online-a customer segment of interest to Kmart. If pressed to make further cuts in operating expenses, Kmart could consider limiting its web offering to the top brands or even outsourcing web operations to one of them that already operates a successful web site, she says.

Though Kmart says Kmart.com is holding its own after web operations were significantly tightened up over the past year, web operations will likely have minimal impact on Kmart’s fortunes upon emergence from bankruptcy, which the company has said could come about at the end of April.

When that happens, Kmart still faces the issues it did before filing Chapter 11, including stiff competition from Target Corp., Wal-Mart Stores Inc. and increasingly, Kohl’s Inc., says William Brandt Jr., CEO of bankruptcy and turnaround firm Development Specialists Inc. “Whether it finds them through the BlueLight specials, the web site or just getting more people through the door, Kmart needs to find more customers,” he says.

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