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A shareholders' revolt is brewing at Kmart Corp., where profits are down and customers are defecting to rivals Wal-Mart and Target.

At Kmart's annual shareholders' meeting Friday, a number of institutional investors say they will vote to oust five directors up for re-election to the 13-member board.They also plan to oppose a corporate plan to sell only minority stakes in retail subsidiaries. The dissident shareholders believe the smaller companies should be sold entirely and Kmart should focus on its floundering discount stores.

Jim Severance, portfolio manager for the State of Wisconsin Investment Board that is leading the fight, doubts the opposition effort will succeed.

The exact number of dissident shares is unknown, but Serverance said it probably equaled only a fraction of the majority of shares needed to beat the Kmart proposal and oust the five directors.

More than 400 million shares are estimated outstanding at Kmart. The Wisconsin board owns about 3 million shares.

Still, Severance said he hopes to send a message.

"I think they need to do some real soul-searching. This company is going down the wrong track," Severance said.

"I think we've got to sell the specialties, get them out of there and concentrate on Wal-Mart exclusively if we're going to save the Kmart franchise."

The Wisconsin board placed an advertisement in The Wall Street Journal last month urging fellow investors to rebel against the partial spinoff plan and eject five board members.

Since then, the Florida State Board of Administration, Ohio State Teachers Retirement System, College Retirement Equities Fund and the Amalgamated Clothing and Textile Workers Union, among others, have joined the dissident group.

Kmart, meanwhile, has been trying to turn itself around. It's renovating some older stores and closing some of the smallest ones. It sold PayLess Drug Stores and PACE Membership Warehouse and is stocking higher quality merchandise.

But sales and profits at the Kmart discount chain have failed to keep pace with rivals. Kmart lost $974 million in fiscal 1993, largely due to costs of its store updating efforts. In the 1994 first quarter, it made $18 million - a 22 percent drop from the 1993 first quarter.

Over the past 12 months, the Kmart stock price has dived to about $15 a share from $25 a share.

"Kmart recognizes that we need to take swift action to improve sales and profits in the U.S. Kmart core division," company spokeswoman Shawn McGee Kahle said Wednesday.

One element of that action, she said, is to sell 20 percent to 30 percent of specialty stores Sports Authority sporting goods, OfficeMax office supplies, Borders-Waldenbooks book stores and Builders Square building supply.

Poor performance of the flagship Kmart discount stores has dragged down the stock value of the profitable specialty stores. Kmart contends that by selling partial stakes in them, stock prices will rise. It would also generate millions in cash.

Dissident shareholders aren't buying it.

"Our decision to withhold support for Kmart directors is based on this (stock) proposal, but more tellingly, the company's significant long-term decline in market share, profitability, operating earnings and share price," said James Martin, executive vice president of the College Retirement Equities Fund in New York. The fund plans to vote its 1.14 million shares against the Kmart plan.

Directors up for re-election are: Joseph A. Califano Jr., Enrique C. Falla, David B. Harper, J. Richard Munro and Joseph R. Thomas.