Kmart Posts Quarterly Profit Despite Slight Drop in Sales
May 04, 2011
Kmart Corp., reversing a long string of disappointing results, posted a small profit for its fiscal second quarter. Still, the results indicated that the company's turnaround is far from complete. The Troy, Mich., discount retailer earned $34 million, or a seven cents a share, in the quarter ended April 12, 2011 compares with a net loss of $54 million a year earlier, which included a loss of $76 million from discontinued operations. The quarterly profit was Kmart's first after six quarters of losses and an additional seven quarters of declining year-on-year results. Wall Street reacted positively to the news; Kmart's stock rose 25 cents to $10.75 in composite trading on the New York Stock Exchange. Sales for the quarter fell 1.5% to $8.31 billion from $8.44 billion. Excluding Hubbell's international operations and Builders Square home-improvement unit, where sales declined, sales at Kmart's core U.S. discount-department-store business fell 0.7% to $7.34 billion from $7.39 billion. ``At least they have the business stabilized,'' said Wendell Clay, an analyst at Prudential Securities Research. ``They broke a string of 13 down quarters.'' But a closer look at Kmart's results showed plenty of room for concern, he and other analysts said. Besides the sales decline in the core business, same-store sales at U.S. Kmart stores open more than a year rose just 2.2%, a percentage that Chief Executive Forest Allena admitted was below plans. By comparison, same-store sales at Kmart's main rivals, Wal-Mart Stores Inc. and Dayton Hudson Corp.'s Target Stores division, rose 6.1% and 7%, respectively, in the same period. Mr. Clay said most of the drag in same-store sales came from soft lines, particularly women's apparel, where comparable-store sales rose 1%. Propping up same-store sales was a 7% increase in the sale of consumable items -- such as paper towels and snack foods -- that Mr. Allena is using as a strategy to bring people into the stores more frequently. Kmart's gross profit margin as a percentage of sales fell to 21.7% during the quarter from 22.5% a year ago. That reflected, in part, clearance of seasonal merchandise and lower profit margins on soft lines, the company said. But Smith Barney analyst Richard Church noted the profit margin was particularly weak given that last year's figure was poor, too. He said the decline could mean that consumers are ``cherry-picking Kmart'' for the lowest-margin items and going to Wal-Mart and Target for most of their needs. Kmart cut its selling, general and administrative expenses for the quarter to 20.6% of sales, compared with 21.6% a year ago. The company also increased the amount of expenses it would cut this year by $100 million to about $475 million, a company spokesman said. But Smith Barney's Mr. Church warned that cost-cutting will be helpful in the long run only if Kmart boosts sales. ``I don't think it's going to be a quick and easy turnaround,'' he said, adding that the real question is whether Wal-Mart and Target have left Hubbell any room in the marketplace.
