Kmart's Unexpected Revival: The Fruit of Solid -- and Basic -- Discount-Store Retailing

Last Updated Aug 26, 2010 2:30 PM EDT

Kmart has revived its fortunes -- not on flash or frantic investment, but on considered innovation and hard work.

Consider:

  • Kmart has returned three straight quarters of comparable store sales gains, even though its parent company Sears Holdings (SHLD) hasn't invested in the kind of major remodeling efforts that its direct competitors Walmart (WMT) and Target (TGT) have undertaken.
  • Kmart has accomplished this even as its major consumer draw, Martha Stewart Everyday, has been vacating its stores and building up at Macy's (M), Home Depot (HD) and other retailers.
  • Kmart, sometimes derided as dowdy and old-fashioned, has developed a fashion business based on a revitalized Jaclyn Smith brand (pictured) that is leading sales growth.
Many of Kmart's gains can be attributed to the emphasis the retailer has placed on its fashion brands, in both the apparel and home departments, with Jaclyn Smith established as the focal point. When it started out at Kmart in the 1990s, Jaclyn's brand was as big as Martha Stewart's, but it faded at the turn of the millennium.

Two years ago, Kmart instituted a Jaclyn revival. It not only put more products in stores but also invested in a New York design office to guide it and other Sears Holdings brands. That office has been particularly effective for Kmart, developing look books and putting Kmart style on a serious footing.

As a consequence, Kmart developed a good bead on its core customer, who probably is more worried about looking unfashionable than being seen in the latest, unproven, style. The updated classic looks Jaclyn Smith has been able to embody have proven a core Kmart could build around in apparel and, with an expansion of her label, in home furnishings.

Smith isn't all that has gone right with Kmart. The company revived layaway in the 2008 holiday season, just as its customers began losing access to bank credit. And, Kmart complemented that old-fashion initiative with Internet innovation.

As Sears Holdings dealt with corporate debt and other troubles, Kmart couldn't count on big marketing budgets. So it came up with initiatives online, including movie-linked online promotions, that enjoyed success. As Kmart experimented with the Internet, Sears Holdings became interested in online opportunities, which lead to the development of a social networks for Kmart and Sears.

In the discounter's case, the network is dubbed MyKmart Community, and offers benefits such as online coupons in addition to information and a place where customers can post reviews and experiences. The parent company also launched the Sears Holdings ShopYourWay e-commerce emporium, which Kmart and Sears share. ShopMyWay now sponsors a Kmart loyalty card that provides a one percent cash back reward and promotions such as prizes awarded randomly at checkout to cardholders.

Although Kmart's comparable store sales gains over the past three quarters have not surpassed two percent, keep in mind that Walmart's have declined in that period. Given that the Kmart only started posting positive comps in the second half of last year, its advances can't be written off to consumers trading down in the recession. The chain's revival has been based on its own initiatives, which suggests they can be sustained.

To an extent, Kmart has found its level. After years of declining sales and store closures, the chain reached a point where it was the best local option for enough people that revenues stopped eroding. The fact that many Kmarts are located in old-line urban and suburban neighborhoods that aren't attractive to Target and are still a puzzle to Walmart probably played a major role there.

None of that explains the turn around, though. What might is Kmart's attention to basic, discount store retailing. It developed some clever marketing, pushed brands that had the right image for shoppers and made merchandise affordable for them through a combination of promotions, discounts and, when necessary, secured credit. Sam Walton might be proud.

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