Kmart is back, but will customers care?

Kmart is profitable again and its stock price is rising.
ROSEVILLE, Mich. (AP) -- A year after emerging from bankruptcy, Kmart Holding Corp. has managed to regain its financial health and the confidence of investors. The hardest part of its recovery is yet to be achieved: winning back shoppers.
Kmart, which in March posted its first profitable quarter in three years, has impressed Wall Street with a more efficient operation and its ability to amass $2.1 billion in cash. Shares in the reorganized company have nearly tripled over the past year to $44.
Customer defection
But customers, who have turned away from the Michigan-based company over the past decade, are still defecting to Wal-Mart Stores Inc., Target Corp. and smaller competitors. Same-store sales, which compare business at stores open at least a year and are considered the best measure of a retailer's health, have extended their decline, dropping 13.5 percent last quarter.
Reversing that trend is the crucial next step, analysts say.
"They've actually come out of bankruptcy in better shape than most big companies coming out of bankruptcy," said Richard Hastings, retail analyst at consulting firm Bernard Sands. "The concern is that they're not gaining market share in any category at a time when competitors are getting bigger and stronger."
Marisa Lenhard, a retail analyst at Southfield-based Sigma Investment Counselors, said now that the company has swung to a profit, investors are going to be eager to see same-store sales improve.
"You can only cut costs for so long," she said.
Marketing mystery
So far, Kmart has said little about how it intends to woo back customers. It has been remodeling stores, but there has been no announcements or even hints of ad campaigns or image overhauls that would point to a definitive new marketing direction for the company.
It does fall back on nostalgia to some extent -- at a store in Roseville, in suburban Detroit, signs say, "Welcome back," and "Support an icon -- shop at Kmart."
In public statements, the company tends to emphasize its improved balance sheet.
"Today, Kmart is a financially strong company," Kmart chief executive Julian Day said in a brief statement timed for Thursday's anniversary. "All of us at Kmart are pleased with the responses of our customers and vendor partners to our commitment to service and product quality."
Kmart's long-term viability will depend on whether it can distinguish itself from similar stores, analysts have said. On price, it can't compete with Wal-Mart, which has enormous buying power. Target, meanwhile, has the edge on style.
Ken Bernhardt, a marketing professor at Georgia State University, said Kmart's best bet is to cast itself as the premier store for a few particular categories -- finding its own niche in the discount market.
"If they can develop some departments where they really excel, particularly in merchandising and providing great value for consumers, then they can get them in the store," he said.
Bernhardt noted that Kmart has been able to do that in the past, with the Martha Stewart Everyday brand. Even though Stewart has been convicted for lying about a stock sale, home furnishings carrying her name still do well at Kmart.