The new top executives, led by president and CEO Julian Day and chairman Edward Lampert, are given high marks for their roles in the company's quick escape from the ranks of the bankrupt. The hands-on approach of Lampert — a hedge-fund manager whose firm, ESL Investments, owns more than 50 percent of the company's shares — reportedly played a big part in the company's swift emergence.
But was the fast track too fast? "There's speculation that they could have benefited from a longer period in bankruptcy" to have more time to plot strategy, thinks Nancy Aversa, a research analyst with Victory Capital Management in Cleveland. She also questions whether Kmart's closing of about 600 stores during the bankruptcy was enough to "rationalize its base." If Kmart were to undertake a second round of closings, even of fewer stores, the public perception might be even more damaging.
Another potential problem is the vacancy where the CFO should be. In its complaint against Montini and Hofmeister, the SEC noted that the men were able to freeze out a key finance official — Montini's direct report — from the vendor-allowance negotiations with American Greetings. If the company doesn't come up with a strong replacement for Koch, whose role as interim CFO concluded when Kmart emerged from Chapter 11 in May, questions could arise about the company's ability to enforce its internal controls.
To be sure, a fair number of Kmart watchers now see the accounting scandal as a one-off occurrence with no lasting impact on the company's core business. But if the government investigations become prolonged, and "Kmart's name keeps coming up in a negative way," that would hurt its ability to attract loyal customers, thinks Ruffing. The former Kmart vice president, by the way, is now a now a senior director at BBK Ltd., a Southfield, Michigan-based firm specializing in turnaround advice.
Shopping — especially bargain-hunting — may be a favorite American pastime. But fail to restore a company's good name, says Ruffing, and customers might well come to ask, "Why should I shop somewhere where people are taking advantage?"
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