General Motors. I.B.M. Westinghouse. Eastman Kodak. Is Kmart next?
Take one look at the once powerful discount chain, and it is easy to see why Joseph E. Antonini, Kmart's chief executive, might soon become the next corporate chieftain to be ejected in a board room coup. All over the country -- everywhere the company's relentless archrival, Wal-Mart, has gone -- Kmart has lost ground.
The company's piddling sales gains have come only at the cost of squeezing profit margins so much that operating earnings have fallen for more than two years. Haunted by high costs, poor inventory management, too many shabby stores and no strategy to speak of, Kmart's stock, adjusted for splits, is trading about where it was 10 years ago.
And despite several attempts, Mr. Antonini has yet to show he can turn Kmart around.
To the outside world, directors of the company, based in Troy, Mich., seem to be standing by their man as the board prepares to convene on March 28. Indeed, Mr. Antonini's job seems secure for at least the next few months. But behind the barricades, Kmart's directors are starting to split internally over what course to take, according to people close to the company and to directors. At least four board members, fearing shareholder lawsuits, are leaning toward finding a face-saving way to ease Mr. Antonini out.
The board's quandary is one that directors all over Corporate America face: when a company gets in trouble, how far should they go to change management, and how fast? The answer is never easy. Indeed, when asked if Kmart's board was doing enough to please its investors, an outside director, Willie D. Davis, president of All Pro Broadcasting, drew in his breath. "Let me ask you," he said, "what's enough?"
To many of Kmart's disgruntled investors, the 11-member board has not done nearly enough. Directors took one step in January, stripping Mr. Antonini of the chairman's title and giving it to an outside director, Donald S. Perkins. But in this era of outspoken shareholders, that has not mollified many of them. "We are going to continue to keep Joe's and the board's feet to the fire," said James Severance, executive vice president of the State of Wisconsin Investment Board, one of Kmart's largest holders.
Most of Kmart's directors did not return telephone calls in connection with this article, and Mr. Antonini declined to comment. But people close to the company say that Kmart's board is breaking into three factions. Mr. Perkins, a retired chairman of the Jewel Companies who was instrumental in elevating Mr. Antonini to chief executive in 1987, remains a strong backer. Most supportive is F. James McDonald, a retired president of General Motors, who even opposed Mr. Antonini's January demotion. David B. Harper, a St. Louis banker and consultant, also lines up behind Mr. Antonini.
Leaning against him are the four board members who are internally called "the New York contingent" because they sometimes fly in together from there for board meetings. They include Joseph A. Califano, a prominent lawyer who was a Cabinet member under President Jimmy Carter; Lilyan H. Affinito, former vice chairman of the Maxxam Group; J. Richard Munro, former co-chief executive of Time Warner, and Joseph P. Flannery, chairman and chief executive of Uniroyal Holding. They are, a person close to the board said, "embarrassed, unnerved, scared about being on the hot seat."
Three others are sitting on the fence. Enrique C. Falla, chief financial officer of Dow Chemical, is said to be growing increasingly uncomfortable about Kmart's deterioriating condition. As a talented numbers cruncher, his thoughts could tip the balance one way or the other. Mr. Davis, once a star Green Bay Packer defensive end, and Gloria M. Shatto, president of Berry College in Georgia, are also undecided but are less influential in the board room.
If shareholders keep demanding new leadership, any one or more of the 11 board members may prove to be Kmart's Trojan horse. "This thing has got to turn around in the next quarter or two -- in terms of profits," asserted one director, who insisted on not being identified.
That would be a tall, probably impossible, order under normal circumstances. The uncertainty surrounding Mr. Antonini makes it even tougher. Employees say that Mr. Perkins, who lives in Chicago, is now in Troy two or three days a week, asking questions and often challenging Mr. Antonini. Morale among Kmart's rank and file, already low, is sinking further. "Everybody is waiting for the other shoe to drop," one top executive said.
The conundrum is giving directors plenty to think about. "You couldn't be around Kmart today and not be concerned that the company is not where we want to see it be," Mr. Davis said.
Unfortunately for Kmart shareholders, the board is following an all-too-common pattern. First, there was the half-a-loaf solution -- Mr. Antonini's January demotion -- followed by the creation of a lower-level "platform team" of newcomers under Mr. Antonini's supervision. But these actions have done little to improve the situation.
Traditionally, directors often delay for months, if not longer, before taking more decisive action. "Typically, you see material stock-price underperformance for at least two years before anything happens," said Joseph A. Grundfest, a former member of the Securities and Exchange Commission who now teaches at Stanford Law School.
General Motors, for example, lost sales to competitors for years before directors rose up. Even then, before ousting the chief executive, Robert C. Stempel, the board first named John G. Smale, the former chief executive of Procter & Gamble, to be chairman of the executive committee. Only nine months later, as Mr. Stempel stuck to a go-slow recovery strategy, did the board promote Mr. Smale to nonexecutive chairman and bring in John F. Smith Jr., who managed G.M.'s turnaround in Europe, as chief executive.
Similarly, I.B.M., Kodak and Westinghouse languished for years before John F. Akers, Kay Whitmore and Paul Lego were forced to leave. Often an external catalyst -- an inability to raise cash or a takeover threat -- is needed to tip the balance. Morrison Knudsen's board dismissed its chief executive, William J. Agee, last month only after the company had violated its loan covenants and its creditors had run out of patience.
By almost any measure, Kmart is overdue for a board room coup, and the anger among investors is palpable. "You never hear Kmart say, 'This is how we're going to get ahead of the curve,' " a disgruntled institutional holder said. "What you hear is, 'This is how we're going to be better than we were.' That's a failing retail strategy."
The shareholder uprising began in earnest almost a year ago. At last June's annual meeting, shareholders voted down management's proposal for partial spinoffs of the company's specialty retailers -- the Office Max office-supply stores, the Borders-Waldenbooks bookstore group, Sports Authority and the Builders Square home-improvement chain.
Instead, investors wanted total spinoffs, to force the company to focus on its troubled discount stores. Failing to win approval for its plan, management soon capitulated to shareholders' demands, spinning off two of the specialty units last fall and preparing a third, Borders, for an initial public offering expected any day now. Soon thereafter, the outside directors hired their own legal counsel and financial advisers to get independent advice.
Since then, however, directors have bungled nearly every effort to save the company without changing the leadership. An attempt to hire a strong No. 2 went awry. Some highly regarded merchandisers refused offers to work under Mr. Antonini. Robert Ulrich of the Target discount-store chain used an offer from Kmart to win a promotion to the top job at Dayton Hudson, Target's parent. Other candidates, including Michael Bozic, a former Sears president, said they would not consider joining Kmart unless Mr. Antonini left.
As for Kmart's plan to close weak stores, cut costs and centralize inventory management, it is not stanching the bleeding. In 1994, Kmart sold more than $2.5 billion in assets, using the cash to pay down debt and finance capital spending and depreciation.
Admittedly, no one has a magic solution for Kmart's woes. Still, nothing Mr. Antonini has tried on the operating front so far seems to have worked. The introduction of combined grocery-discount stores did not prove profitable and has been scaled back. A plan to bolster sales by offering a better mix of apparel backfired, costing Kmart hundreds of millions of dollars in markdowns.
All told, sales climbed a modest 5.9 percent, to $34.03 billion, in the year that ended Jan. 31, and the company's operating profits fell 89 percent. In contrast, Wal-Mart -- with roughly the same square footage as Kmart -- had sales of $82.49 billion, a 22 percent increase from the previous year. Target's sales climbed 16 percent and its operating profits jumped 11 percent.
Kmart's share of the discount store market was 34.5 percent in 1987 when Mr. Antonini moved into the executive suite, according to estimates by Tactical Retail Solutions. Last year, it was 22.7 percent and it is still sliding.
Mr. Grundfest of Stanford, who called many of the steps Kmart's board took "classic errors," noted that "situations where a C.E.O. is gradually eased out rarely succeed."
Mr. Antonini may yet survive the shareholder revolt; a few lucky chief executives have. Edward A. Brennan, chief executive of Sears, Roebuck & Company, for example, faced down disgruntled shareholders for years, though he eventually took many of the steps they favored.
But Kmart has an even more troubled outlook. The slide at Sears was buffered by a robust sales environment that allowed the company to widen profit margins where necessary. Nowadays, shoppers are stingy and skilled bargain hunters who insist on the best prices in town, which are usually found at Wal-Mart and Target stores, many of which are cleaner and nicer than Kmart's.
"The competitive landscape is much more pressured than it was five years ago," said Karen J. Sack, a retailing analyst at Standard & Poor's. "There's not the margin for error that there was when Sears was failing."
And even if Mr. Antonini had a credible strategy, he needs time. "The truth is that you don't get into this problem overnight," Mr. Davis said. "And you don't get out of it overnight. Kmart could get a lot of things right, but it's going to take some time to make all of this work."
Directors may buy a little more of that precious commodity in the next few weeks when they add two directors to the board. If the new directors are viewed as strong independents, and if Mr. Antonini can quickly produce some positive note, however small, Kmart may muddle along for a bit longer. If not, the next annual meeting, on May 23, will probably be one raucous show.