FINALLY: The Economist has the skinny on what Kmart did wrong and what Wal Mart and Target did right:

[Kmart] has traditionally specialised in promotional retailing: using low-cost newspaper supplements and advertising circulars to tout loss-leaders, such as its famous “Blue Light” specials, in order to draw in the crowds. Although this worked well for years, it also put a strain on merchandising and distribution systems, because orders for particular items came in sudden waves. This meant that Kmart's shelves were occasionally empty—being fully stocked only 86% of the time. Wal-mart's shelves, by comparison, are almost always fully stocked. Promotions also forced costs up at Kmart's suppliers, as they could not reliably predict manufacturing runs. This meant that Kmart could never consistently beat Wal-Mart's prices.

The article says that Kmart is going to have to reinvent itself to survive --apparently that's how Target flourishes, by having a distinctly "trendy" identity. The Economist also confirms the Kmart, city mouse and Wal Mart, country mouse dichotomy, but then says Kmart started to flounder once Wal Mart entered urban areas.

UPDATE: Eve Kayden points out that as Kmart goes bankrupt Amazon finally turns a profit.