Kmart (NYSE: KM), the second-largest discount retailer in the United States, announced today that it's upping its financial interest in BlueLight.com. The e-commerce venture, 60% owned by Kmart, will receive an investment of $80 million. Kmart will contribute $55 million of that, with SOFTBANK Venture Capital and SOFTBANK Capital Partners kicking in the additional $25 million.
Kmart and SOFTBANK Venture Capital founded BlueLight.com as Kmart's online arm in December 1999 with an initial investment of $62.5 million. Martha Stewart Living Omnimedia (NYSE: MSO) also owns about 5% of the company. The site expects to be fully operational this fall, and has been selling stuff until now through its "preview" site. It's also been providing "Totally Free Internet Service" for the past seven months.
"With more than three million free Internet accounts and over 100,000 products already available for purchase online on its preview site," said chairman and chief executive officer Chuck Conaway, "we continue to see tremendous potential. Our additional investment reinforces our desire to maintain Kmart's majority interest in BlueLight.com."
Unsurprising Q2 results
Today's news follows Kmart's announcements last week of its second-quarter earnings, as well as some new strategies designed to drive long-term growth at the troubled retailer. Conaway just joined the company in May, and he has already taken some steps -- including the announced closing of 72 stores -- toward fixing what ails the retailer.
Kmart's second-quarter earnings were no surprise. Operating profits fell 83% to $0.05 a share versus $0.26 for Q2 last year. Sales increased moderately from $8.78 billion to $8.998 billion. Conaway attributed the disappointing operating results to "soft sales" in apparel and other seasonal goods, which led to markdowns, and higher distribution costs of grocery merchandise.
"Strategic imperatives" to fix what's wrong
Conaway also announced three "strategic imperatives" the company will focus on as it moves forward: Excellent execution, customer-centric service, and improved marketing and sales will guide the company from here on out. (One wonders what the company was focusing on before Conaway took the wheel.) Along those lines, Kmart plans to invest nearly $2 billion in infrastructure between now and August 2002. Two of the first steps will be updating the scanners in its stores and opening a new Customer Service Center that will handle complaints and concerns 24-hours a day every day of the week. Both of these improvements are scheduled for October.
Turnaround within 24 months?
"We know that our timeframe is short," said Conaway, "in that the turnaround we must achieve in fixing the fundamentals of the business, establishing a new emotional bond with our customers and preparing for growth must be achieved during the next 24 months." If Conaway proves capable of pulling the turnaround off, investors could stand to profit handsomely. Kmart currently has a forward P/E of about 8x estimated 2001 earnings, well off the 20x and 35x multiples afforded its stronger competitors Target (NYSE: TGT) and Wal-Mart (NYSE: WMT).
Watching and waiting for improvement
The long-range story for Kmart is still unwritten, but Conaway's openness and honesty about the company's problems is encouraging. He has definite plans for improvements and he's laid out a timeframe for investors to judge those improvements by. Today's announcement that the company will be increasing its online focus alongside the improvements planned for the "real-world" stores seems to fit in with the company's total strategy.
Interested investors should watch the company's operational results after the store closings and implementation of improvements this fall. If the company is to succeed, sales should improve along with margins starting next year. Keeping an eye on the success of the full launch of BlueLight.com this fall will also be important, though probably less so.
Your Turn:
Is Kmart a steal here? Do you think that under Conaway's guidance the retailer will make a comeback? Talk it about it with other Fools on the Kmart discussion board.
Suggested Links:
Kmart's Closing Some Doors, News, 7/25/00
Kmart Inches Forward, News, 3/6/00
Kmart Snares Chief From CVS, Fool Plate Special, 5/31/00
