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COMPANY NEWS; Wal-Mart Stores to Buy PACE Warehouse Clubs
The Kmart Corporation said yesterday that it was abandoning the brutally competitive warehouse club business, selling 91 of its PACE Membership Warehouses stores, all PACE inventory and its membership list to its rival, Wal-Mart Stores Inc.
Kmart said it would close or sell the rest of its PACE stores or convert them to other uses.
The company did not disclose the sale price, but analysts estimated that Kmart's net receipts from the sale would be $300 million in cash, or roughly PACE's tangible book value, once it has paid suppliers for the inventory Wal-Mart buys. PACE Is Latest Victim
PACE is the latest victim of a battle that has bruised all warehouse club operators, forcing mergers and store closings and eating into razor-thin profit margins. Warehouse clubs sell merchandise in bulk quantities at cut-rate prices to customers who pay a membership fee.
"This industry has gone basically from four big players to just two in less than six months," said Peter J. Siris, a retail analyst at UBS Securities.
The winnowing process has left Wal-Mart, with its Sam's Wholesale Club warehouses, and Price-Costco Inc., with its Price and Costco warehouses, as the dominant national players confronting a handful of regional operators. Dominance Has Been Costly
But both chains have paid dearly for their dominance. Sales in Sam's stores open at least one year, or same-store sales, slipped 4 percent in September, while Price-Costco's same-store sales declined 5 percent in the four weeks that ended Oct. 24, according to analysts.
Some of the 41 PACE stores Kmart is keeping are under construction or contract. Kmart estimated that closing existing stores and stopping work on PACE stores under construction would require a $450 million charge against pretax earnings in the fourth quarter. Bruce A. Quinnell, PACE's executive vice president, said the company would try to sell some of the 41 stores to regional warehouse club operators like B. J.'s Wholesale Club.
Walter F. Loeb, president of Loeb Associates Inc., a retail consultant, said the write-off, about 90 percent of which was for good will, would shave about 60 cents a share off Kmart's fourth-quarter earnings.
The sale of PACE, which is subject to Government antitrust approval, had been rumored for some time, so yesterday's announcement had a minimal affect on the price of Kmart shares. On the New York Stock Exchange, the shares gained 12.5 cents each, closing at $24.875. Management Caught by Surprise
Nonetheless, it took PACE's management team by surprise, Mr. Quinnell said. "It wasn't finalized until a very short time ago, literally just hours ago," he said yesterday in a telephone interview from PACE's headquarters in Englewood, Colo. "To the vast majority of people, it was a big surprise."
PACE employees who work in the stores Wal-Mart is acquiring will become Sam's employees, but the fate of the management team that Kmart installed last February is unknown. "I guess that's up to Kmart," Mr. Quinnell said.
The sale, which is expected to be completed in January, is the first step Kmart had taken toward restructuring its business to focus on reviving its flagging discount store operations, which account for about 70 percent of its $37 billion in revenues. It is also completing the sale of its Pay Less Drug Stores chain to Leonard Green & Partners, a Los Angeles-based merchant banking firm.
In shedding PACE, Kmart will be ridding itself of a company that had an operating loss of $63 million in the first six months of this year. The sale will help Kmart save much needed cash to pay its dividends, invest more in renovating its discount stores and roll out more Super Kmarts, the combination grocery-discount stores that have shown promise.
Wal-Mart will convert the PACE stores it buys to Sam's Clubs and add about $3.5 billion in sales to that division, which analysts expected to have sales of about $15 billion this year. The additional stores will give Sam's market dominance in certain territories, as well as entree into the lucrative Los Angeles area where PACE had about 15 stores.
"The deal served both companies' purposes," said Monroe H. Greenstein, an equity analyst at Lazard Freres & Company.
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