Although Kmart appears to be making progress in some measures of customer satisfaction, such as in-stocks, and inventory flow and working capital metrics are improving, these have yet to result in stronger profitability and cash flow, S&P researchers say.

Kmart chairman and CEO Chuck Conaway report a net loss of $224 million, or $0.45 per share, for the quarter ended Oct. 31 against a net loss of $67 million, or $0.14 per share, for the 13-week period ended Oct. 25, 2000. "We have made considerable progress, but have a lot more work to do," he adds. "During this past quarter, we completed all of our store resets, launched BlueLight Always everyday low pricing for our frequency categories and installed self-checkout registers in more than 1,000 stores."

For the third quarter, Kmart opened two supercenters and two discount stores, closed four discount stores and converted ten discount stores into supercenters. As of Oct. 31, Kmart operated 2,113 stores, down 50 from last year.

Kmart had improved operations in the 1995 through 1999 period by converting its stores to the high-frequency Big Kmart prototype as well as through exclusive product line expansions. Yet key operating measures continued to lag the performance of major competitors. In addition, the initial sales boost from the store conversions quickly tapered off.

Although the aggressive steps being taken by new management have potential to improve operations, efforts are being hampered by a slow economy and intense and growing competition from Wal-Mart Stores Inc. and Target Corp. Kmart store growth in fiscal 2002 will be very modest while management focuses on improving existing operations, S&P officials believe.