James Adamson, chairman of the board, will replace Conaway, effective immediately. Adamson is a longtime Kmart board member and a turnaround guru.
Kmart filed for Chapter 11 bankruptcy protection on Jan. 22, following lower-than-expected holiday sales, downgrades by several credit rating agencies and a stock dive.
"While I have been contemplating this departure for some time given my family needs and professional goals, it was critical that the transition go smoothly," Conaway said in a statement.
Conaway, who was replaced as Kmart chairman by Adamson days before the bankruptcy filing, is a former president and chief operating officer of CVS.
He signed a five-year contract with Kmart in May 2000, replacing Floyd Hall. As part of his compensation package Kmart is to forgive a $5-million loan it made to Conaway last year, according to bankruptcy court filings. The agreement also called for him to receive $6.5 million on July 31, 2003, or sooner if he was fired.
John T. McDonald, Jr., formerly executive vice president, chief financial officer, also is leaving Kmart. He is being replace by Albert A. Koch, chairman of Jay Alix & Associates, a turnaround management firm.
Kmart also named Julian C. Day president and chief operating officer. He is the former executive vice president and chief operating officer of Sears, Roebuck and Co.
Conaway won many fans on Wall Street as the No. 2 executive at Woonsocket, R.I.-based CVS, where he helped build the drugstore chain into an industry powerhouse with more than 4,100 stores and annual sales topping $18 billion.
Under his watch, CVS developed its Internet strategy. He also oversaw the drugstore chain's distribution systems — getting products from suppliers into its stores.
At the time he was named Kmart CEO, analysts said one shortcoming was Conaway's lack of experience in fashion. Kmart has struggled to keep pace with retail chains like Old Navy that offer trendier items.
Kmart, the No. 3 discount retailer, long has struggled to compete with lower priced Wal-Mart Stores Inc., and more fashionable Target Corp.
Prior to the Chapter 11 filing, Conaway closed unproductive stores, reintroduced the BlueLight Special, and made other changes to help the discount retailer become more productive and more efficient.
Among Conaway's initiatives: Kmart said it would replace two aging distribution centers with two modern facilities and would overhaul its product-delivery software in an effort to improve the flow of goods to its stores. Kmart has been criticized for having understocked stores.
The BlueLight Special returned to Kmart in April 2001 under Conaway's watch. The marketing tool, first introduced in 1965 and retired in the 1990s, offers customers lowered everyday prices on more than 30,000 items.
In other moves, Ted Stenger, also with Jay Alix & Associates, was named treasurer. He has served as a turnaround and restructuring advisor at Allied Holdings, Fruit of the Loom, FINOVA Group Inc., and The Leslie Fay Companies.
Janet G. Kelley was promoted to executive vice president, general counsel, from senior vice president, general counsel.
James E. Defebaugh was promoted to senior vice president, chief compliance officer and secretary, from vice president, associate general counsel and secretary.
Lori A. McTavish was promoted to senior vice president, communications, from vice president, communications.
By Alexandra R. Moses