Kmart files Chapter 11 bankruptcy

No. 3 discounter cites weak economy, tough competition

`Couldn't pay the bills'

Swift move surprises

$2 billion loan to aid firm's reorganization

January 23, 2002|By Bill Atkinson | Bill Atkinson,SUN STAFF

In the largest bankruptcy filing by a retail company, Kmart Corp. sought protection against creditors yesterday after suppliers cut off shipments.

Kmart, the country's third-largest discount retailer, which made the "blue-light special" a household phrase for millions of American shoppers, filed for Chapter 11 protection in U.S. Bankruptcy Court in Chicago. The Troy, Mich.-based firm listed $17 billion in assets and $11.3 billion in liabilities.

Kmart had been struggling for months as it faced intense pressure from competitors who have taken away market share. Although investors and Wall Street analysts expected the bankruptcy, they were surprised by the swiftness of yesterday's filing.

"The whole suddenness ... surprised a lot of people," said Eric M. Beder, a retail analyst at Ladenburg Thalmann & Co. in New York. "It is just amazing how quickly [the problems] rolled through. At the end of the day, they just couldn't pay the bills."

Although Kmart's bankruptcy is large, it pales in comparison to the largest bankruptcy in history, filed last month by Enron Corp. The troubled Houston-based energy company listed $49 billion in assets and $31.2 billion in debts.

Despite the bankruptcy, all 2,114 Kmart stores will remain open for now, and the company's credit cards, checks, gift certificates and store credit will be honored, the company said. Kmart's 250,000 employees will continue to be paid and to receive benefits.

Kmart operates about 20 stores in the Baltimore area.

The company said it filed for Chapter 11 protection because of a variety of factors, including competitive pressures and the poor economy, and that it hopes to emerge from bankruptcy next year.

"We are committed and determined to complete our reorganization as quickly and as smoothly as possible, while taking full advantage of this chance to make a fresh start and reposition Kmart for the future," Charles C. Conaway, Kmart's chief executive, said in a statement.

"After considering a wide range of alternatives, it became clear that this course of action was the only way to truly resolve the company's most challenging problems," Conaway said. "I am confident ... Kmart will emerge from this process as a stronger, more dynamic, more profitable enterprise with a well-defined position in the discount retail sector."

Kmart stock, which has fallen sharply in recent months, fell $1.05 yesterday, to close at 69 cents a share.

The Chapter 11 filing will give the cash-strapped company time to reorganize operations. Kmart said that it plans to slash annual expenses by $350 million through job cuts, store consolidations and by "re-engineering the organization."

The company also expects to save $250 million by terminating leases at about 350 stores it had previously closed or now leases to other tenants. Company officials said the performance of every store will be evaluated and that weak units will be shuttered to increase cash flow.

Analysts expect Kmart to close as many as 400 stores across the country.

Kmart said yesterday that it had secured $2 billion in financing from a group of financial institutions. The company plans to fund operations and pay employees and vendors. While crucial to Kmart's survival, the loan remains subject to bankruptcy court approval.

The financing "allows their suppliers to breathe a lot easier," said Mike Porter, a retail analyst at Chicago-based Morningstar Inc. Vendors "now can say, `OK, we are going to get paid. We don't need to worry so much about that.'"

Kmart, which started in 1899 and opened its first store in Detroit, is known for selling inexpensive merchandise and recently reinstated its trademark "blue-light specials" to attract customers to sale items.

The company is also recognized for selling several popular lines of products endorsed by Martha Stewart, Disney Co. and Sesame Street. Martha Stewart products alone represent Kmart's biggest revenue-generating label, with annual sales topping $1 billion.

But poor inventory control, the slumping economy and intense competition from Wal-Mart Stores Inc. and Target Corp., the No. 1 and No. 2 discount retailers, respectively, have sliced into profits.

"The other guys have been turning in great numbers," Porter said. "That just says they are stealing market share from Kmart. That has been going on for a long time."

Porter said Kmart's bankruptcy filing is the "easy way out, to some degree."

"I think they could have done it without filing for bankruptcy," he said. "I didn't think it would come so soon. They were taking some steps so it wouldn't happen."

Kmart's problems began to spiral out of control this month when company officials announced that 2001 performance would be flat because of lackluster holiday sales.

Last week, Fitch Inc. downgraded the company's debt and said Kmart was likely to file for bankruptcy. Standard & Poor's took Kmart off of its 500 stock list, forcing mutual funds that mirror the index to dump the stock.

Compounding Kmart's problems, Scotts Co., a lawn and garden supplier, said last week that it would delay shipments. On Monday, Fleming Cos., Kmart's primary supplier of food and consumables, cut off most shipments, saying the company owed $78 million.

"They lost the confidence of their vendors; that is ultimately the reason they filed," said Kevin M. Gale, an analyst at McDonald Investments Inc. in Cleveland. "Once they lost the confidence of their vendors, that just made the snowball turn into an avalanche. Fleming was the dagger in the heart that did it to them."

Despite Kmart's problems, analysts are optimistic that the company can recover, but say the form in which it will emerge is unclear.

"They will emerge as a leaner company, a much smaller company," Gale said. "A lot of people still like shopping at Kmart."

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