Kmart cuts nearly 700 more jobs, most at corporate headquarters

Experts fear that chain may be unable to survive

April 01, 2003|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

By eliminating nearly 700 jobs yesterday, troubled discounter Kmart Corp. positioned itself to emerge from bankruptcy but not necessarily to survive long-term, retail and turnaround experts said.

The Troy, Mich.-based retailer, which filed for Chapter 11 bankruptcy more than a year ago and plans to emerge by April 30, said it needs fewer workers at its corporate headquarters - where most of the layoffs occurred - to support a shrinking store base.

The chain is to close 317 stores in the next month, including Maryland stores in Catonsville, Westminster and Joppatowne.

But experts yesterday said Kmart's efforts to downsize and close money-losing stores appear to have come too late to save the 103-year-old discount retailing pioneer, which has lost favor with American shoppers.

"Kmart, to me, is still in the business of selling [when in stock] lousy merchandise at noncompetitive prices in dingy stores staffed by rude clerks," said Peter A. Chapman, president of Bankruptcy Creditor's Service Inc. in Trenton, N.J. "That's no recipe for long-term success."

James V. McTevia, chairman of McTevia and Associates, a consulting firm located in Eastpointe, Mich., not far from Kmart's headquarters, said he believes the company waited too long to respond to a crisis, as sales dipped, debt mounted and competition intensified.

"Chapter 11 just buys time, and the company is still losing money coming out of a Chapter 11," McTevia said.

Kmart officials, though, said the layoffs, including about 400 at corporate headquarters, 123 at locations around the country and another 137 unfilled positions, will put the company in a stronger competitive position. The cuts were across the board in all departments, such as accounting, purchasing, advertising and merchandising, the company said.

"We continue to take the necessary actions to create a financially healthy, cost-effective organization that is positioned to compete in the discount sector," said Julian C. Day, Kmart's president and chief executive officer. Day said the downsizing reflects the "new" Kmart's disciplined and low-risk approach to operating its stores.

While emerging from bankruptcy - as most experts believe it will - leaner and more efficient, Kmart still will be facing the double whammy of tough competition from top discounters Wal-Mart Stores Inc. and Target Corp. and a difficult economy.

No silver bullet

"The plan of reorganization does not represent a silver bullet to save the company; cost cutting alone will not solve the company's problems," said Marty Zohn, a bankruptcy expert with Proskauer Rose LLP in Los Angeles.

"The retailing and merchandising decisions are yet to be made. ... They're ready, at the starting line ready for the gun, and how they run that race will depend upon how good the product is on the shelves. They need more customers purchasing more products, and right now Wal-Mart and Target have those customers."

Powerful competition

Even if Kmart emerges from bankruptcy fairly secure financially, "can it stave off the competition from Wal-Mart and Target in its marketplace?" wondered Jeffrey Kucera, a partner in the bankruptcy department of Ferrell, Schultz, Carter, Zumpano and Fertel in Miami.

"The real question is whether it can do that with a diminished presence."

The Chapter 11 has allowed Kmart a way out of leases at unprofitable stores, he said. The chain had closed 283 stores and laid off 22,000 employees before announcing another round of 317 store closings and 37,000 layoffs in January. The post-bankruptcy chain will be one-third of Kmart's former size.

The reorganization also has benefited trade creditors - vendors who supply the stores' products.

The creditors "are the primary focus of any reorganization effort," Kucera said.

Had the company closed its doors and liquidated, "unsecured trade creditors would have lost a customer and had no chance of making money. Now they have Kmart alive, and they're getting paid on current invoices and some payment of old invoices."

New investors

The reorganization plan has allowed the chain to bring in new investors, ESL Investments, run by wealthy investor Edward S. Lampert of Greenwich, Conn., who will hold more than 40 percent of the stock, and Third Avenue Value Fund, which will hold another 10 percent, according to court documents.

They plan to invest $352 million to rescue the company. Under the plan, Kmart's bankers would be paid, in cash, at about 40 cents on the dollar, while bond holders and creditors would get stock in the new Kmart. Shareholders would get little, if anything.

But many believe that Kmart is destined to continue losing market share and closing stores and may end up once again in Chapter 11, or even a Chapter 7 liquidation.

Projections questioned

Chapman, for one, said he expects Kmart to miss its projections of profits a year after emerging from bankruptcy and to file another Chapter 11 two or three years from now.

"When you look at where Kmart is today, they've got hundreds of stores losing money, yet they claim they're coming out of Chapter 11 in April," said Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting firm in New York.

"They went in as a cadaver and they're coming out as a cadaver. You have to have some sort of fundamental change to get folks coming into the stores."

McTevia, the Michigan-based consultant, said that for Kmart, the missing ingredient has been the consumer.

"The consumer is not there today," he said. "They are scared to death, out of money and out of credit."

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